What Are the Consequences of an Oracle Providing Incorrect Data to a Smart Contract Settling a Financial Derivative?

Incorrect data from an oracle can have catastrophic consequences for a financial derivative smart contract. It could trigger premature liquidations, cause incorrect settlement payouts, or fail to execute a contract at the correct time.

For example, a faulty low price feed for an asset used as collateral could trigger a wave of wrongful margin calls, leading to massive, undeserved losses for one party and gains for the other. Since the smart contract executes automatically based on this data and the transactions are irreversible, these losses are often permanent and without easy legal recourse.