What Is a Price Oracle and How Does It Prevent Manipulation in DeFi?
A price oracle is a third-party service that provides real-world data, such as asset prices, to smart contracts on the blockchain. Since blockchains are closed systems, they cannot access external data directly.
Oracles act as a bridge. To prevent manipulation, they often use a decentralized network of nodes to source data from multiple reputable exchanges and sources.
By aggregating this data and using mechanisms like weighted averages or medianizers, they create a single, reliable price point that is resistant to manipulation from a single source.
Glossar
Reputable Exchanges
Criterion ⎊ Reputable Exchanges are distinguished by a stringent set of criteria, including consistently high trading volume and demonstrable market depth across major crypto pairs.
Decentralized Network
Architecture ⎊ Decentralized Network describes a system where computational nodes are distributed geographically and organizationally, ensuring no single entity has unilateral control over data validation or transaction processing.
Weighted Averages
Calculation ⎊ This mathematical concept assigns differing levels of importance, or weights, to individual price points when determining an average price for an asset or derivative.
Smart Contracts
Function ⎊ Smart contracts are self-executing agreements with the terms of the agreement directly written into lines of code, residing on a decentralized ledger.
Reliable Price Point
Reference ⎊ A Reliable Price Point serves as the definitive, trustworthy reference value for a digital asset, crucial for the accurate calculation of margin requirements, collateral valuation, and the settlement of crypto derivatives contracts.
Price Oracle
External Data Bridge ⎊ A Price Oracle is a decentralized service that securely feeds real-world asset prices, typically derived from traditional exchanges or aggregated crypto venues, onto the blockchain so that smart contracts can execute financial logic based on current market valuation.