How Do Price Oracles Work and Why Are They a Central Point of Failure?

Price oracles are services that provide external, real-world data, such as asset prices, to blockchain smart contracts. They typically work by aggregating price data from multiple sources (e.g. exchanges) and reporting it on-chain.

They are a central point of failure because if the oracle provides inaccurate or manipulated data, the smart contract will execute based on false information. This can lead to catastrophic outcomes, such as wrongful liquidations in a lending protocol or the complete breakdown of an algorithmic stablecoin's pegging mechanism, which relies on accurate price feeds.