Introduction of Decentralized price oracle network, NEST
An oracle that connects inside and outside the blockchain
When developing and using blockchain technology, it is necessary to incorporate information from outside blockchain (real world) into blockchain. For example, a decentralized lending protocol that executes a clearing process based on real-world price information, or a prediction market that bets on the outcome of real-world elections or sports games, will not function properly without accurate information from outside blockchain.
The service and technology used to collect and utilize such off-blockchain information needed in the blockchain ecosystem is called “oracle”. The oracle plays a bridging role between the inside and outside of the blockchain, reflecting a variety of information in the blockchain, from prices and rates to weather and geographic information.
One of the projects that is developing technology to provide this Oracle service in a decentralized way without a centralized management mechanism is NEST.
What is NEST?
NEST is a project to develop a Distributed Price Oracle Network on Ethereum blockchain. A “distributed price oracle network” is literally a network that provides price information off the blockchain in a decentralized way, with no single point of failure and no single governing body.
The NEST network is built on a proprietary price reference system called “Quotation Mining,” in which anyone can participate, and NEST tokens, which act as economic incentives within the network.
Due to its open and decentralized nature, in which anyone can participate, it is expected to be widely used in DeFi (decentralized finance).
Price Acquisition Mechanism
The NEST network consists of contracts or accounts that wish to obtain prices, called “Price Callers,” as well as Miners and Verifiers that provide prices. Miners and Verifiers obtain prices from external sources according to the following flow, and guarantee the accuracy of the prices.
Provided by NEST
1. quotation mining
The process of obtaining prices in NEST begins with network participants called miners submitting quotations (transaction rates to be offered to counterparties) to the contract. One of the differences between NEST and other Oracle projects is that in this quotation mining process, miners are required to lock their target assets into the contract.
For example, let’s assume that a miner believes that the current price of ETH is “1 ETH=1,000 USDT,” and wants to offer a quotation of ETH versus USDT, the miner will need to actually deposit the ETH and USDT pair into a contract on the NEST protocol in the quotation that he is quoting. quotations. In other words, 1 ETH=1,000 USDT or 2 ETH=2,000 USDT will be locked on the contract as a pair.
At this time, the miner needs to pay 1% of ETH as a fee, but can receive NEST tokens as a reward. The ETH paid as a fee will be returned to the NEST token holders every week, so even if they pay ETH, they are incentivized to contribute to the protocol as miners and earn NEST.
2. price verification
The quotations proposed by miners are verified by network participants called verifiers. During this verification phase, the verifier explores whether there are any arbitrage trading opportunities in the quotations submitted by the miner. Like miners, anyone can participate in this price verification process as a verifier.
If the 1ETH=1,000USDT quoted in the aforementioned example differs from the actual market price, the verifier can take advantage of the difference and perform an arbitrage trade. If an arbitrage trade is made, the miner who initially locked the ETH and USDT may incur an Immediately Loss. Therefore, to avoid this risk, miners will be incentivized to quote the most accurate price possible.
The period during which a verifier can trade arbitrage is called the “price verification period”. Quotations that do not result in arbitrage transactions during the price verification period are considered “Effective Quotations” and are recorded in the blockchain.
As soon as the verification period ends, the miner can retrieve the locked assets at any time. 3.
3. price chain
If the quotation submitted by a miner is not approved as an effective quotation
If the quotation submitted by the miner is not approved as a valid quotation, i.e. an arbitrage transaction is conducted, the verifier who conducts the arbitrage transaction (referred to as “Verifier A”) must submit a new quotation to replace the quotation originally submitted by the miner. The rule is that the verifier A must lock a larger amount into the contract than the amount initially locked by the minor. This mechanism prevents the verifier from cheating.
The quotations presented by verifier A are verified by another verifier (verifier B) during a certain price verification period, just like the quotations by the first miner. If Verifier B wants to execute an arbitrage trade, he needs to lock his own assets, just as he did for Verifier A. The amount that verifier B locks must be greater than that of verifier A.
In this way, the presentation of quotations by the verifiers will continue in a chain-like sequence until they are considered as valid quotations. If the submitted quotation is inappropriate, it can be used to produce profits from it in arbitrage transactions as many times as necessary. On the flip side, a quotation that is determined to be a valid quotation is so accurate that there is no opportunity for arbitrage.
4. block price
The prices determined in the above process are recorded in the blockchain. The price recorded in each block is used to determine the “Effective Price” for that block based on an algorithm. If the most recent block does not have an effective quotation, the price is obtained from the most recent block with an effective quotation.
What is a NEST token?
NEST tokens are tokens used as economic incentives in the NEST protocol, and are issued on Ethereum in accordance with the ERC-20 standard (Ethereum’s token issuance standard). The token is issued on Ethereum in accordance with the ERC-20 standard (Ethereum token issuance standard). The maximum number of tokens that can be issued is set at 10 billion NEST, but it is unique in that it is not issued in advance and can only be issued through quotation mining by miners.
Miners will be able to submit quotations and receive NEST as a reward for contributing to the protocol. The fees collected by ETH when presenting quotations will be returned to the NEST holders. Therefore, users will be incentivized to hold NEST.
In addition, users who wish to use the price information calculated by NEST (mainly DeFi protocol) need to pay a fee in ETH. A part of this fee will be returned to the NEST holders as well as ETH collected from miners. Therefore, the more users the protocol has, the more fees will be returned to NEST holders.