Thread by @ChainLinkGod

1/ Vitalik recently created a proposal on the Uniswap governance forum that they should shift focus and create a human-based token-weighted voting oracle mechanism to provide algorithmic stablecoins with USD-paired price data

Here's why I think this is not a practical proposal

2/ What is suggested is that Uniswap copy the Augur/UMA model where $UNI token holders are asked what the price of an asset is against USD, it is voted upon, and then multi-day/week dispute rounds are initiated as needed that can ultimately result in a token fork

3/ To note, this proposed oracle mechanism has nothing to do with Uniswap's existing on-chain TWAP oracle that I explored in this blog post below

It uses a fundamentally different oracle model, so the points being made here are different
smartcontentpublication.medium.com/twap-oracles-v…

4/ The primary issue I see is that a token-weighted human voting-based oracle mechanism is simply not suitable for providing algorithmic stablecoins the price data they require due to the extreme latency of disputes periods which can take days to weeks and beyond to resolve

5/ Collateralized stablecoins like $DAI $RAI need to be able to liquidate undercollateralized positions within a timely manner for the protocol to stay solvent, otherwise, the peg of the stablecoin can break when collateral is less than the debt/stablecoins minted

6/ Imagine a flash crash where the price of a collateral asset drastically falls during a period of Ethereum network congestion. Will $UNI holders be incentivized to put the price on-chain in a timely manner when gas fees are 1000+ gwei? Time delays lead to user funds being lost

7/ A dedicated oracle network consisting of nodes whose sole aim is to provide reliable data are highly incentivized to post data during these conditions as their revenue depends on their performance and the value of the native token on the performance of the network as a whole.

8/ Vitalik's counterpoint was "a stablecoin that depends on timeliness for its security is not stable at all"

The reality is that all existing decentralized stablecoins with liquidity rely on timely and accurate price oracle updates, we can't look at this proposal in a vacuum

9/ Building an oracle solution that doesn't meet the specifications of what protocols needs today and that is only suitable for theoretical stablecoin models seems like prioritizing idealism over pragmatism, resulting in little benefits to users, developers, and token holders

10/ Ultimately what it comes down to, creating a new oracle system requires a lot of resources for research, development, monitoring, and support, which would siphon resources away from the development of the Uniswap DEX

A monumental undertaking with little benefit for end-users

11/ Vitalik notes "Chainlink is really valuable for many oracle use cases, but it is also a complex system with many features. Incentives are not as clean as they are in eg Augur....there is not an automated mechanism by which participants who provide wrong answers get penalized"

12/ Chainlink is a framework for building decentralized oracle networks that aim to achieve maximum tamper-resistance, you choose the features you need in your deployment

As a parallel, Ethereum is also a complex system, but that doesn't mean it's not suitable for DeFi

13/ In regards to cryptoeconomic security, Chainlink is secured today using the incentives of a native token

Because each Chainlink node holds and is paid in $LINK (from both user fees and subsidy), there is a strong economic incentive for nodes to uphold the value of LINK

14/ We see this same dynamic today in both the Bitcoin and Ethereum networks

Ethereum miners are paid in $ETH and they operate the protocol faithfully because a corrupted network would result in the devaluation of $ETH due to the destroyed trust/reputation of the network

15/ A successful collusion attack on a Chainlink Price Feed that results in tens of billions of dollars in the DeFi ecosystem being stolen would completely destroy any trust in the network and lead to a major devaluation of $LINK as the value proposition is now gone

16/ This economic principle of native token incentives is why networks like Bitcoin, Ethereum, and Chainlink continue to operate as designed using an honest majority assumption

The assumption is backed by economic incentives and penalties based on the value of that token

17/ In addition, the recent Chainlink 2.0 Whitepaper introduced Explicit Staking, a mechanism that achieves a super-linear staking impact where the cost of attack is quadratically greater in the number of nodes than the sum of deposited stake
research.chain.link/whitepaper-v2.…

18/ This leverages a two-tier oracle network model with a low-cost optimistic first tier and a maximum security second-tier consisting of the most reputable, performant, and profitable Chainlink nodes who have the greatest financial exposure to $LINK

19/ The first-tier explicitly stakes $LINK while the second-tier resolves disputes with slashing as they have the strongest economic incentive to faithfully resolve disputes to uphold the value of their $LINK holdings, future revenue (also denominated in LINK), and reputation

20/ There is much more nuance to this, including the use of cryptographic proofs, so I would recommend reading section 9 of the Chainlink whitepaper to get the full context on Explicit Staking if curious

https://twitter.com/ChainLinkGod/status/1387191832002584576?s=20

21/ The summary here is that the Chainlink Network has been designed from day one to achieve the maximum level of tamper-resistance for high-value smart contracts by leveraging cryptoeconomic incentives and penalties in order to raise the cost of attack as high as possible

22/ In my opinion, the best equilibrium, where development resources are not wasted, is to use Chainlink as an oracle and Uniswap as a DEX

Due to Chainlink's existing economies of scale, users are already provided the highest quality oracle infrastructure at the lowest cost

23/ Given the current landscape and future evolution of both the oracle ecosystem and the DeFi economy, this proposal just doesn't seem practical to me

The Chainlink Network and its cryptoeconomic security will continue to evolve alongside the growing smart contract economy