The Impediments Faced by Oracles in DeFi Adoption: BIS Report Reveals Challenges to Real-World Integration
Summary:
The need for oracles in decentralized finance (DeFi) is identified as a hindrance to its real-world adoption, according to a report by the Bank for International Settlements (BIS). The report highlights practical and principled issues with oracles, noting that their centralized nature compromises decentralization and trustlessness. Decentralizing oracles introduces complexity, diminishes efficiency, and raises concerns about trust and governance. The article also discusses the challenges in identifying bad actors in oracle manipulation and the absence of regulatory solutions. Chainlink is mentioned as a company providing oracle solutions, albeit relying on certain centralized infrastructure. The future of DeFi in its purest form appears uncertain due to these challenges.
According to a recent report from the Bank for International Settlements (BIS), the need for an oracle in decentralized finance (DeFi) is seen as a significant obstacle to real-world adoption. The authors of the report highlighted practical and principled issues with oracles, making it difficult to find a way around them. Oracles, which provide real-world data to or from a DeFi protocol, are centralized by nature and compromise the decentralized nature of the protocol, ultimately undermining trustlessness. This poses a fatal flaw when it comes to use with real-world assets. Decentralizing oracles could involve verification, a reputational system, and multiple sources, but this approach would lead to increased complexity and reduced system efficiency. Trust and governance issues would still persist. Furthermore, the anonymous nature of DeFi makes it challenging to identify bad actors in cases of oracle manipulation. Increased regulation and supervision, although an apparent solution, contradicts the ethos of decentralization that underpins crypto DeFi, and is not currently in place. Additionally, the irreversibility of transactions in DeFi introduces more risk into the system. Oracle manipulation hacks are not uncommon, as witnessed in the recent Magnate Finance rug pull. Companies like Chainlink offer solutions to the oracle problem with their network of decentralized oracle networks, which incorporate tailored security measures for each use case. However, it should be noted that Chainlink's Cross-Chain Interoperability Protocol relies on the centralized messaging infrastructure of the Swift network to connect with clients. With these challenges in mind, the future of DeFi in its purest form appears uncertain.
Published At
9/7/2023 9:34:50 PM
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