What Is the Financial Incentive for Setting a High Deviation Threshold?
The primary financial incentive for setting a high deviation threshold (e.g. 5% instead of 0.5%) is to drastically reduce the number of on-chain oracle updates.
Fewer updates mean significantly lower gas costs for the protocol and its users. This cost saving is balanced against the risk of operating with stale data, as the protocol will not receive a price update until a large price movement has occurred.
Glossar
Deviation Threshold
Constraint ⎊ Deviation Threshold functions as a critical constraint within oracle systems, defining the maximum permissible percentage difference between the current on-chain price and a newly calculated aggregate off-chain price.
Deviation
Variance ⎊ Deviation, within cryptocurrency, options, and derivatives, represents the squared difference between an observed value and its expected value, quantifying the dispersion of potential outcomes around a central tendency.
Incentive
Mechanism ⎊ Incentive structures within cryptocurrency, options trading, and financial derivatives function as engineered protocols to align the interests of diverse participants, influencing behavior and mitigating agency problems.
Threshold
Barrier ⎊ A threshold, within cryptocurrency derivatives and options trading, fundamentally represents a price level that must be breached for a contract to become active or trigger a specific outcome.
Financial Incentive
Incentive ⎊ A financial incentive is a monetary mechanism, such as yield farming rewards, staking returns, or discounted trading fees, strategically deployed by crypto protocols to influence user behavior and bootstrap network effects.