In light of recent events, Chainlink creator Sergey Nazarov reiterated the need for oracle flexibility in decentralized finance (DeFi). According to Nazarov, today’s protocols should stop utilizing exchanges, no matter how many, for sourcing prices. Instead, DeFi developers should think of employing decentralized oracles for the same job.
On Thursday, a massive liquidation event on Compound led to the loss of $103 million in collateral. As the price of the DAI stablecoin increased to $1.3, every user who borrowed assets did not have enough cryptocurrencies in collateral to back the loan. The main problem that led to the liquidation was the use of a single price source.
For DAI, Compound tracked the stablecoin’s price solely on Coinbase. After the asset’s price increased by 30% for unknown reasons, the event massively influenced all borrowers on Compound.
Following the liquidation event, Sergey Nazarov took the time to remind developers of what duty they have as creators. If the Compound team were to utilize a decentralized oracle network or at least numerous exchanges, their users would have never been liquidated.
Chainlink is a decentralized oracle provider that offers price feeds for a large number of cryptocurrencies, including stablecoins. As a matter of fact, the platform hosts a DAI/USD price feed which DeFi protocols could finally start using. But what makes Chainlink’s solution a far safer option compared to simply copying an exchange’s trading pair price?
Sergey Nazarov explains how Chainlink brings oracle flexibility
To host a price feed that reports data such as prices, Chainlink employs a number of nodes that team up to form an oracle network. Such an oracle network can contain multiple nodes, currently, most price feeds have around 10 nodes in total. Their goal? To provide reliable, transparent data in a completely decentralized way.
By doing so, these nodes are able to provide consistently accurate financial data. Even in the case that one node fails to report the correct price, the other nodes will be able to form a consensus on prices on their own. On that account, it would take considerable effort on the network’s part to provide bad data.
In fact, not even external malicious actors could affect the network as Chainlink’s decentralized oracles are Sybil resistant.
Chainlink CEO Sergey Nazarov linked the company’s blog post which discusses ‘Data Quality for DeFi Smart Contracts’ in a new tweet. Published on July 31, 2020, the blog proposed numerous ideas and methods for improving the quality of data that smart contracts gather.
In one section, the team educates developers on the importance of oracle flexibility. Effectively, Chainlink urges DeFi developers to not rely on single-source oracle designs.
As they rely only on a single data point, it is easy to create significant security risks. With DAI and Compound, we had a chance to see what a lack of flexibility can result in.
Spencer Noon: Chainlink is the best oracle for DeFi
At the time of writing, Chainlink remains to be the ultimate decentralized oracle provider. So far, there is no other project which provides accurate and transparent data in a completely decentralized way. Creating a reputable brand over the past few years, the company managed to set itself as the dominating force in this market niche.
We can see the quality of the oracle provider’s products based on the praise that the team receives. Spencer Noon, the founder of the crypto investment fund DTC Capital, made a positive remark yesterday. According to him, it is becoming clear that Chainlink is the best oracle provider for DeFi protocols.