Thread by @hal2001

1/ Today @UMAprotocol is publishing our design for a Data Verification Mechanism (DVM), a blockchain oracle with **economic guarantees** around the cost of corrupting the system.

We're ALSO releasing our v1 code + deploying it to Kovan!

Read on for why this is needed...

2/ Code is here: github.com/UMAprotocol/pr…
White paper is here: github.com/UMAprotocol/wh…
Kovan deployment is here: kovan.etherscan.io/address/0x16aB…

3/ Here’s our bold claim: **every** blockchain oracle is corruptible, which means any smart contract relying on off-chain data is corruptible and manipulatable **for some price**. This means that your DeFi smart contract could be at risk.

4/ The logic behind this claim: on a public blockchain like Ethereum, there are no rules or laws against bribes or corruption. And since every oracle system has an operator or set of operators, there is **some bribe** that can be paid to corrupt those operators.

5/ Because of pseudo-anonymity, this scales to be a big problem. Say Bob enters 10 contracts where he could steal $500k/contract by bribing the oracle used to value them. That's a $5mm incentive to bribe the oracle! Now say you have 100 contracts, 1000 contracts etc, etc.

6/ Our solution is it introduce a simple "Cost of Corruption" (CoC) vs "Profit from Corruption" (PfC) framework. So long as it costs Bob more to corrupt an oracle than he can earn in profits, the oracle is **economically** secure. In other words, we need CoC > PfC.

7/ This CoC > PfC framework requires three things:

1. Create a system to measure the Cost of Corruption (CoC)
2. Create a system to measure the Profit from Corruption (PfC)
3. Design a mechanism to keep CoC > PfC and prove it will work

8/ Read the white paper to find out how we do this! The math is easy, promise.

For those desiring something shorter, here are slides I used at #ScalingETH to introduce the concept: docs.google.com/presentation/d…

9/ Interesting side note: the voting token has a simple formula to calculate its fundamental value—the token should reflect market expectations of growth in usage of the system. This means that the system can be **costless** to use during periods of expected growth!

10/ What's next? A framework for writing scalable decentralized financial contracts using these economic guarantee concepts (coming soon)!

We think this is critically important. We believe that we cannot move trillions of $$ into #DeFi smart contracts without economic guarantees

11/ Thanks to our friends for their valuable feedback! @alexhevans @_alekslarsen @cburniske @_charlienoyes @ChrisTonetti @CremeDeLaCrypto @danrobinson @danielque @jessewldn @jillruthcarlson @Iiterature @njess @teempai @_regc @rawfalafel @cmatthewcrice @rozstengle @allilulllc

Also @karl_dot_tech @ben_chain @jinglanW @VitalikButerin check out our proposed solution to "tax evasion" (or parasitic usage) in section 8.1 of the white paper. Would love feedback!