How to Become the Worst Oracle in DeFi
date
Oct 14, 2024
slug
worst-oracle-defi
status
Published
tags
Blockchain
summary
type
Post
Charlie Munger, the legendary investor and thinker, has long fascinated me with his mental models. Among these, the inversion principle stands out as a powerful tool for problem-solving and decision-making. Munger's iconic talk, "How to Guarantee a Life of Misery", brilliantly demonstrates this approach by outlining the surest path to an unhappy life.
Inspired by Munger's ingenious use of inversion, I've decided to apply this mental model to the world of decentralized finance (DeFi). Specifically, let's explore how one might achieve the dubious honor of becoming the worst oracle in the DeFi space. After all, understanding how to spectacularly fail can often illuminate the path to success.
If you're aspiring to set a new low as the most unreliable oracle in DeFi, you're embarking on a journey that requires a special kind of negligence. This guide will show you how to undermine the very fabric of DeFi, wreaking havoc on lending protocols, derivatives platforms, liquid restaking tokens, and more. By following these steps, you'll not only fail spectacularly but also provide a cautionary tale for the entire industry.
1. Deliver Rock-Bottom Prices to Trigger Mass Liquidations
Begin by consistently providing asset prices that are significantly below their actual market values. This will cause automated systems in lending protocols to liquidate users’ collateral unnecessarily. Investors will see their assets seized, not due to genuine market movements, but because of your inaccurate data. Derivatives platforms relying on your feeds will misprice contracts, leading to substantial losses. Liquid restaking tokens, which depend on accurate oracles to extend their utility, will find their tokens undervalued, discouraging adoption and undermining user confidence. It’s a surefire way to destroy trust and bring down any platform that depends on you.
2. Inflate Prices to Create Unsustainable Debt
Conversely, occasionally supply your clients with grossly inflated asset prices. This entices users in lending platforms to borrow more against their collateral than is prudent. When the market corrects, these platforms will be left holding bad debt. Traders in derivatives markets will take on excessive leverage based on faulty data, leading to catastrophic liquidations. Liquid restaking tokens that use oracles to promote their token’s utility will appear overvalued, misleading users into overextending themselves and eventually facing significant losses. Pushing your clients toward insolvency or personal financial disaster becomes an effective strategy.
3. Be Easily Manipulated by Flash Loan Attacks
Make no effort to secure your price feeds against manipulation. Allow attackers to use flash loans to momentarily spike or crash asset prices, exploiting protocols that rely on your data. Lending platforms will face sudden defaults, derivatives contracts will be settled at manipulated prices, and liquid restaking tokens will experience volatility that erodes trust and hampers their spread. Being the weakest link that enables widespread fraud is indispensable in your quest to be the worst.
4. Provide Glacially Slow Price Updates
In markets where timing is critical, ensure that your oracle updates prices with significant delays. By the time your data reaches clients like lending platforms, derivatives exchanges, or liquid restaking services, it’s as useful as last week’s news. Users will make decisions based on outdated information, resulting in poor executions and financial losses. Lending protocols won’t adjust collateral ratios in time, leading to unnecessary liquidations. Liquid restaking tokens will fail to reflect current staking yields or asset values, discouraging participation and hindering their adoption. This is an excellent way to frustrate users and tarnish your clients’ reputations.
5. Fail During High Market Volatility
Design your systems to be least reliable when they’re needed most—during periods of high market volatility. Let your oracle crash or your data feeds freeze when everyone is desperate for real-time information. Lending platforms won’t be able to assess risks accurately, derivatives markets won’t price contracts correctly, and liquid restaking tokens won’t reflect true market conditions, stalling their growth. It’s like having a lifeline that snaps when you’re dangling over a cliff; utterly useless when disaster strikes.
6. Use Centralized and Unreliable Data Sources
Undermine the decentralized essence of DeFi by sourcing your data from a single, unreliable exchange. Create a sole point of failure ripe for exploitation. When that exchange faces issues or manipulations, your clients across lending platforms, derivatives markets, and liquid restaking services will receive flawed data. Problems in one area will ripple throughout the entire system, magnifying the damage and impeding the spread of liquid restaking tokens.
7. Ignore Low Liquidity and Suspicious Exchanges
Include price data from low-liquidity or questionable exchanges without any scrutiny. This makes it easier for prices to be manipulated with minimal trading activity. Attackers can exploit these weaknesses to drain funds from lending pools, manipulate derivatives contracts, or skew the perceived value of liquid restaking tokens, hindering their adoption. It’s akin to leaving the gates wide open in a fortress situated in hostile territory.
8. Lack Transparency in Price Calculations
Keep your methodologies shrouded in secrecy. Offer no clarity on how prices are determined, making it impossible for clients—whether they are lending protocols needing to manage collateral risks, derivatives platforms requiring precise pricing, or liquid restaking tokens using oracles to broaden their utility—to verify accuracy or fairness. In an industry built on transparency and trustlessness, being opaque is a guaranteed way to sow distrust and invite chaos.
Conclusion
This exercise in inversion, inspired by Charlie Munger's mental models, provides valuable insights into the critical role of oracles in the DeFi ecosystem. By exploring the path to becoming the worst oracle, we've illuminated the importance of reliable data provision in decentralized finance.
The steps to failure we've outlined serve as a roadmap of pitfalls to avoid. They underscore the far-reaching consequences of unreliable oracles in the interconnected world of DeFi, where inaccuracies can cascade through lending protocols, derivatives platforms, and innovative solutions like liquid restaking tokens.
Ultimately, this inversion exercise reminds us that in the complex landscape of DeFi, the quality of foundational services like oracles can significantly impact the stability, security, and evolution of the entire ecosystem. By understanding what not to do, we can better appreciate the crucial role that reliable data plays in fostering trust and enabling the continued growth of decentralized finance.