How Does the Use of a Fallback Oracle Mitigate Risk?
A fallback oracle is a secondary, independent data source that a smart contract is programmed to switch to if the primary oracle fails to provide an update or provides a data point that is significantly outside a pre-defined range of reasonableness. This redundancy ensures that the smart contract can continue to operate with verified data, preventing a liveness failure or a single, drastically incorrect data point from causing an unfair liquidation or settlement.
Glossar
Unfair Liquidation
Mechanism ⎊ Unfair liquidation in cryptocurrency derivatives, encompassing options and perpetual swaps, denotes a scenario where a position is forcibly closed at a price substantially deviating from prevailing market rates, resulting in disproportionate losses for the trader.
Fallback Oracle
Contingency ⎊ A Fallback Oracle within cryptocurrency derivatives represents a pre-defined mechanism activated when a primary data source, typically a price feed, becomes unavailable or unreliable.
Smart Contract
Code ⎊ The contract is fundamentally self-executing code deployed on a distributed ledger, embodying the terms of the agreement in an immutable format.