How Do Oracle Price Feeds Impact Liquidation on a DEX?
Oracle price feeds are essential for a Decentralized Exchange (DEX) as they provide reliable, external price data to the smart contract. Since a DEX does not have a centralized order book to determine a fair mark price, it relies on oracles to feed a secure, aggregate price for calculating unrealized PnL and triggering liquidations.
A compromised oracle can lead to incorrect liquidations.
Glossar
Calculating Unrealized PnL
Computation ⎊ Calculating Unrealized PnL involves determining the theoretical profit or loss on open derivative positions based on the current market price relative to the entry price, excluding transaction costs or funding fees.
External Price Data
Source ⎊ External price data refers to the off-chain market information, such as the spot price of a cryptocurrency, that is required to determine the value and settlement of on-chain financial derivatives, particularly options and perpetual swaps.
Oracle Price Feeds
Attestation ⎊ Oracle price feeds represent a critical infrastructural component within decentralized finance, functioning as bridges between on-chain smart contracts and external, real-world data sources.
Decentralized Oracle Networks
Architecture ⎊ Decentralized Oracle Networks (DONs) represent a robust infrastructure designed to provide reliable external data to smart contracts without relying on a single, centralized entity.