What Are the Risks of a Centralized Oracle in a Decentralized Derivatives Platform?
The primary risk of a centralized oracle is a single point of failure and potential for manipulation. If the single entity providing the price feed is compromised or acts maliciously, they can intentionally feed an incorrect price to the derivatives platform.
This manipulated price can be exploited for massive profit, such as triggering favorable liquidations or incorrect settlements. A centralized oracle also makes the platform vulnerable to regulatory pressure or downtime.
Glossar
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.
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.