Analyze the potential of Uniswap V3 as an oracle from the ecological structure of DeFi


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Uniswap V3 shows the potential as a cornerstone market. DeFi will reduce the dependence on CEX quotations and form a set of UNI-based ecological structure.

Original Title: “The World After Uni Becomes An Oracle”
Written by: Cerebrobacter

God V has observed that many protocols now use ETH/USDC as price anchors and continuously feed prices through oracles. Although the oracle is decentralized, the price anchor used by the protocol is centralized. Once USDC has problems, the foundation of the DeFi building will be shaken. The market has been worried about the crisis of Oracle, but what is more dangerous is the price anchor used by Oracle. What should we do?

Native stablecoin + Uni_Oracle

Extended reading: ” Vitalik Buterin: UNI should become an oracle token

Current DeFi Ecological Structure: Distributed Quotation of Oracles

Figure A is the method of using oracles in the current Lending protocol in the market. In order to determine the value of the collateral, we need the price ratio between Collateral and USD, but since there is no direct exchange between the on-chain Token and the off-chain legal currency, we use the on-chain Approximate fitting of the price ratio, the common one is TokenA/USDC. In the process, we will ask the oracle to feed the price of TokenA/USDC. Each node of the oracle will feed back to the oracle. Each node will obtain the price through Dex and Cex’s Api, and then feed it back to the agreement. The agreement gets the value of the collateral.

In this process, there are two biggest risks: one is the risk of USDC. Once USDC has a problem, the entire DeFi world will be at risk. Although the entire price-feeding mechanism is decentralized, the price anchor of the price-feeding is still centralized. The entire Crypto world is still exposed to gunfire, making it difficult to be independent. Another problem is the source of the quotation of the quotation node. When the oracle asks the node for the price of TokenA, the node will obtain the quotation of each Cex/Dex. Then the core factors that determine the stability and robustness of the oracle node’s quotation are the market depth and participant structure of Cex, as well as Dex’s capital utilization efficiency. The deeper the Cex market, the richer the participant structure, the more representative the price obtained, and the more difficult it is to commit evil and manipulation. When the Cex trading depth is insufficient, it faces problems such as trading evils, market manipulation, and so on. For Dex, before UniV3, the constant product model had a low capital utilization rate and a large slippage. If you use Dex as an oracle machine The source of the price, small amounts of funds can bring huge price deviations and are prone to attacks.

With the emergence of V3, Uni has demonstrated its potential as a cornerstone market. We will reduce our dependence on Cex quotations and form an ecological structure based on Uni.

UNIV3 transaction price + Uni_Oracle + native stable currency is the solution for the future

Ideal DeFi ecological structure: Uni_Oracle single quote

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As shown in the figure, we believe that the Token price required by the lending agreement can be obtained directly from the Token/Native Stable_Coin price in UniV3. The price (collateral or algorithm) required to govern Stable_Coin is the ratio of the Stable_Coin collateral on the chain to the USD off the chain, which will be determined by the oracle quotation. Due to the increase in the utilization rate of V3 funds, the market depth increases and the slippage becomes smaller. The stablecoins traded in Uni have a stronger market representation, and their prices are more difficult to manipulate. Therefore, choosing Toekn/Stable_Coin as the price anchor will be better than Toekn/USDC. At the same time, the Collateral quotation of Stable_Coin relies on the independent judgment of the oracle node. We can say that the basis of the quotation in the DeFi world is no longer USDT/USDC, but the robustness of the oracle quotation node.

Although there are still risks in the oracle’s quotation, it is worth noting that this type of risk is in the hands of Crypto itself and depends on the robustness of the decentralized mechanism itself, allowing Crypto to be self-determined. Even if there is a problem with USDC, it will not impact the normal order of the DeFi world.

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Under this market structure, ordinary oracle requirements will be directly realized through Uni_Oracle, with lower costs and faster updates. The price of Token/Stable_Coin is obtained through Uni_Oracle, and the price of Stable_Coin is based on the distributed oracle protocol. Different Stable_Coin will choose different oracle mechanisms according to their needs. Since the high-frequency and timely oracle demand is shunted by Uni_Oracle, for Stable_Coin, a more credible, more robust, and safer oracle mechanism is needed. This will cause certain changes in the future market structure.

There are currently two types of oracles on the market, one is the node quotation type (such as Link), and the other is the Schelling point game type (such as UMA). The former is faster and more scalable, but the confidence is relatively low; the latter is slower and weaker, but the confidence is higher. (Real money betting is more reliable) The latter will have further development in the future.

to sum up

  1. Transaction depth and transaction authenticity are the key to price anchors. UniV3 has huge advantages.
  2. A stable coin with a single day’s consensus has a positive effect on the entire system. We don’t need so many centralized stablecoins (60 billion, 80% of the current stablecoins are centralized) The price anchor formed by UniV3+ single native stablecoin will greatly improve the stability of the current DeFi system. In the future, Dai and Lusd have great potential to challenge USDT/USDC.
  3. Uni has stronger value capture capabilities. In the future, Uni_Oracle will gain greater confidence and voice in the oracle market, and Uni may also capture greater value. In addition to the commissions you can enjoy as an LP, the sales income of data assets will also belong to LP.
  4. In the future, the demand for latency (latency) will be reduced for the oracle, and the importance of whether the oracle is fast or not will be weakened, because it is impossible for an oracle to be faster than Uni’s data. The core performance that determines the oracle machine becomes security and scalability.
  5. Crypto self-determination. On-chain and off-chain interactions are indispensable. If someone must make a ruling, it is best for the Crypto circle to judge by themselves. Using USDC as the price anchor of the oracle will allow DeFi to be built on the sand dunes forever. Therefore, in the future, the nodes of the oracle need to undertake important tasks, and the development of the nodes of the oracle needs more incentives and norms. The oracle node is equivalent to the Libor of the entire Crypro, and must be undertaken by important members of the system with a sense of responsibility. The selection and supervision of this member requires a decentralized and reasonable mechanism.
  6. Use the Token/Stable_Coin native stable currency as the price anchor, and obtain the market quotation of the trading pair in Uniswap through Uni_Oracle. This method will replace the use of Token/USDC as the price anchor, and obtain the trading pair through the oracle, and the market in various Cex. The main reasons are: 1) Uniswap has deeper trading depth, more real trading, and wider trading participants. 2) USDC has a huge centralization risk and cannot put the Crypto world under gunfire.

Appendix: Enlightenment of Libor’s Reform

The London Interbank Offered Rate (LIBOR) was once the most widely used interest rate benchmark in the world. Since 2005, several large financial institutions have participated in LIBOR price manipulation and obtained improper benefits from it. Later, ICE reformed Libor, and the Financial Stability Board (2014) made two recommendations on reforming the benchmark interest rate: one is to reform the existing systemically important benchmark interest rates, including LIBOR, to maximize the formation of benchmark interest rates Based on actual transaction data, reduce the possibility of manipulation; the second is to find and develop an approximate risk-free reference interest rate to replace LIBOR. On February 1, 2014, with the approval of the British Financial Conduct Authority (FCA), the British Bankers Association (BBA) formally transferred the management authority of LIBOR to the Intercontinental Exchange (ICE). The reform of LIBOR took a fundamental step. step.

ICE’s reform of LIBOR is mainly divided into three aspects.

First, reduce the variety of quotations. The 150 interest rate quotations (15 terms in 10 currencies) included in LIBOR were reduced to 35 (7 terms in 5 currencies), making the pricing process more focused on terms and currencies commonly used by buyers and sellers. In terms of currencies, Australian dollars, Canadian dollars, New Zealand dollars, Swedish krona and Danish kroner were deleted; in terms of expiration, 4 months, 5 months, 7 months, 8 months, 10 months, Quotation for an 11-month period.

Second, increase quotation agencies. Increase the number of LIBOR quotation banks from 16 to 20, and ensure that the number of member banks quoting in 5 currencies is 11-16 respectively.

Third, improve the quotation method and adopt waterfall quotation. The reformed LIBOR requires the quotation of the quotation bank to be based on three types of data. The first type is real transaction data. The eligible transaction types include unsecured deposits, commercial papers and time deposit certificates. Qualified counterparties include banks, sovereign wealth funds, and multinationals. For the six categories of companies and government entities, the closer to 11:00, the greater the weight of the data. The second category is transaction-derived data, including time-weighted historical transaction data adjusted according to market changes and linear interpolation. The third category is based on the judgment of experts based on market and other transaction data, the rate at which the quotation bank is willing to provide unsecured wholesale funds at 11:00. Only when the current type of transaction data is insufficient, ICE will accept the next type of data. ICE requires quotations to be supported by clear and recorded transaction data to prevent false quotations, quotation manipulation and collusion.

From the perspective of LIbor reform, there are several experiences:

  1. Minimize the use of anchors as much as possible. Use single, consensus, and highly liquid assets as price anchors.
  2. Decentralization of information sources. For a decentralized combination of trusted sources.
  3. Transaction data> Fitting data> Expert judgment. Choose falsifiable and traceable information sources as much as possible.
  4. Avoid conflicts of interest with Oracle Node

Note: In recent years, the size of the unsecured lending market has been shrinking. LIBOR can no longer truly reflect the financing costs of banks, and the reference value of LIBOR has been declining. In July 2017, the British Conduct Authority (FCA) announced that from 2021, LIBOR quotation banks will no longer be required to make quotations, and the LIBOR indicator will withdraw from the market.

Analyze the potential of Uniswap V3 as an oracle from the ecological structure of DeFi


V God: Uni should be an oracle token

Jiang Chao: The road to reform of LIBOR: process, influence and enlightenment (Haitong fixed income Jiang Chao, Zhou Xia, Li Bo)

Linda_Xie: Overview of DeFi Oracles

Decentralised Oracles: a comprehensive overview

Making Sense of Price Oracles in DeFi

Huobi DeFiLabs: Price Oracle – A Must-Have Infrastructure


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