Move Over Chainlink, UNI Might Offer a Better Oracle
DeFi needs a reliable price oracle to reach its full potential. And UNI may be perfectly placed to do it.
- UNI tokens could be used to relay a secure price feed for ETH/USD due to Uniswap’s high market cap.
- A higher market cap means acquiring enough UNI tokens to create an oracle attack would be too expensive for hackers.
- Vitalik Buterin said Chainlink’s current incentive system is not perfect and Chainlink is better used on more complex issues.
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The co-founder of Ethereum argued for the necessity of a centralized price oracle with a high market capitalization to make any attack prohibitively expensive. In this case, he drew UNI as an example.
Protecting DeFi From Oracle Attacks
At the heart of DeFi, there is ETH.
The native currency of the Ethereum network is used as gas to facilitate transactions and as a reserve currency. Most pairs on Uniswap, for example, use ETH as the second asset.
To secure any application running on Ethereum, DeFi needs a reliable price oracle for the ETH/USD pair to protect it from oracle attacks. Knowing the real-world value of ETH/USD isn’t as easy as simply looking at the ETH/USDC price on Uniswap, nor an average of ETH/USDC, ETH/USDT, ETH/GUSD as that would only improve the security of the ETH/USD price slightly.
Currently, Chainlink is the leader in oracle networks, but Buterin argues that Uniswap could build a better alternative with a stronger incentive system to ensure reliable price feeds.
While Chainlink is striving to develop a complex oracle network capable of providing reliable on-chain information to smart contracts, Buterin argues that a more minimalist alternative would be best for the price of ETH/USD.
UNI would be a great candidate as the market capitalization of the DeFi token is currently around $22 billion, making any attack extremely costly.
While the efficiency might not be at the level of Chainlink yet, the real challenge is building a reliable oracle lies in its security. The value of UNI would be used to guarantee the price feed of the oracle, in essence requiring a certain amount of UNI to force the price feed into relaying fake information. The cost of assembling enough UNI tokens to provide a fake price for ETH/USD to create an opportunity for an oracle attack would be prohibitive and discourage any hackers.
The idea is also a testament to the growth of DeFi and the broader Ethereum ecosystem. Instead of a technical solution, Buterin has revealed the power of tightly aligned economic incentives.
Disclaimer: The author held ETH and several other cryptocurrencies at the time of writing.