Uniswap's UNI should become an oracle token, says Vitalik Buterin
May 12, 2021, 9:10AM EDT · 2 min read
- Vitalik Buterin has proposed that Uniswap’s UNI should become an oracle token for a successful DeFi ecosystem.
- Chainlink is “great,” but there is room for an alternative solution, according to Buterin.
Ethereum creator Vitalik Buterin has proposed that Uniswap's UNI should become an oracle token for a successful decentralized finance (DeFi) ecosystem.
Posting the proposal on Uniswap's governance forum on Tuesday, Buterin said several areas of DeFi, including algorithmic stablecoins such as DAI, synthetic assets, and collateralized loans, depend on a price oracle, and Uniswap and UNI should step in to provide such an oracle.
Price oracles are data feeds that connect Ethereum to off-chain, real-world information so that data can be incorporated into smart contracts. Data is needed for DeFi protocols to function correctly. For example, prediction platforms may run a market that asks users to bet on the next president of the U.S. They will need an oracle to confirm the outcome and pay out to the winners.
Chainlink is the most famous oracle in the market currently. Buterin said Chainlink is "great," but there's room for an alternative solution.
Chainlink's incentives, for instance, are not as clean as they are in Augur, a decentralized oracle, said Buterin. Specifically, Chainlink doesn't have an automated mechanism by which participants who provide incorrect data get penalized, he said.
So Buterin has suggested that Uniswap models its oracle after the Augur or UMA design for more robust data.
Overall, it seems "desirable to complement Chainlink with a more minimalist alternative that’s more laser-focused on optimizing incentives and maximizing cost of attack," said Buterin.
Why UNI would be a suitable token
UNI is in an "excellent position" to be a token for a decentralized oracle, according to Buterin, because of its high market capitalization.
A decentralized oracle must be based on a token with a large market cap, said Buterin, because that would make attacks costlier. Put simply, if the market cap of a token is high, getting the necessary amount of tokens to launch an attack becomes extremely difficult. UNI's current market cap is nearly $22 billion, according to CoinGecko.
"Efficiency of an oracle is not important," said Buterin. "An inefficient oracle can always be augmented with a game where one party claims a value and only if another party disagrees is the oracle actually called." Cost of attack, on the other hand, "is absolutely essential to maximize, and thus market cap is key," he said.
In all, the move would also benefit Uniswap, according to Buterin.
"Uniswap heavily benefits from the existence of a more robust stablecoin ecosystem," he said. "Uniswap v3 is heavily optimized toward ultra-high capital efficiency for stablecoin <-> stablecoin trades, and is likely to earn very high amounts of fee revenue from these trades."
"If we start to also see high-volume and robust synthetic assets emerge on-chain, then this is even more valuable for Uniswap," Buterin concluded.
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