What Are the Risks Associated with a Single, Centralized Oracle Provider?
A single, centralized oracle provider introduces a single point of failure and a high risk of manipulation. If the provider's server is compromised or maliciously provides incorrect price data, the smart contract will execute based on false information.
This can lead to incorrect liquidations, unfair settlements, or massive financial loss for users. This reliance undermines the core tenet of decentralization and introduces a trust requirement into a trustless system.
Glossar
Single Point of Failure
Concentration ⎊ In crypto derivatives, this risk materializes when excessive collateral or governance control resides with a small number of entities, such as a few large liquidity providers or key developers.
Centralized Oracle Provider
Data ⎊ A Centralized Oracle Provider is a single entity responsible for sourcing, validating, and feeding external market data, such as spot prices or volatility metrics, into on-chain smart contracts for derivatives settlement.
Centralized Oracle
ExternalDataReliance ⎊ A Centralized Oracle represents a single, non-decentralized entity responsible for fetching, verifying, and reporting external market data, such as spot cryptocurrency prices, to on-chain smart contracts.