What Is the “Oracle Problem” in the Context of DEX Price Discovery?

The oracle problem refers to the challenge of securely and reliably bringing off-chain data, such as real-world asset prices, onto the blockchain. DEXs use their internal token ratio for price discovery, but this internal price needs to be kept in sync with external markets via arbitrage.

If a DEX were to rely on a faulty oracle, it could lead to incorrect pricing and exploitation.