Chainlink Co-Founder Sergey Nazarov explains why a decentralized oracle network is needed to ensure trust in the DeFi ecosystem.
Chainlink Co-Founder Sergey Nazarov believes that increasing the decentralization and scalability of oracle technologies are key to ensure trust in the DeFi ecosystem.
Oracles play a key role in the correct functioning of DeFI protocols by connecting them to real-world data.
However, the trustworthiness of oracles becomes compromised in instances where they rely on a single data source to retrieve information. For instance, according to Nazarov, excessively centralized oracles enabled five recent flash loan attacks, which resulted in DeFi protocols losing around $40 million.
Flash loans, a form of loan that does not require any collateral, can be used to manipulate the price of an asset and steal funds from a DeFi protocol.
“You don’t want to just take one exchange [as a price discovery source] and hope for the best, because if that one exchange becomes thinly traded or if somebody gets a flash loan, (…) then you’re in a position where somebody controls the outcomes in your DeFi protocol”.
According to Nazarov, the only way to prevent such attacks is making sure that the protocol’s price discovery mechanism relies on multiple data sources. That is why Chainlink focuses on building decentralized oracle networks.
“We are sourcing data from many different data providers connecting us to hundreds of exchanges and therefore, wherever volume shifts, Chainlink can properly represent the accurate global price”, he pointed out.
According to Nazarov, a properly functioning oracle network should be able to scale accordingly with the size of the value locked in the DeFi protocol.
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