NEST Protocol: A New Paradigm of Game Theoretic Oracle
Blockchain innovation defined the major part of the last decade, with cryptocurrency disrupting centralized systems, particularly in the global financial market. Decentralized systems, such as blockchain, function due to their transparent, open, and trustless systems It is crucial that there is no external or third-party influence in order to put up a truly decentralized system. It is critical to highlight that any external influence in blockchain transactions invalidates the blockchain’s fundamental principle of decentralization.
According to CoinTelegraph, Smart Contracts enable trusted transactions to be carried out on the blockchain without the involvement of a central authority or a third party. It is worth mentioning that it aids in the automation of tasks that would ordinarily necessitate the use of an intermediary or “Central Authority.” The idea of smart contracts is that they automate transactions, ensuring transparency and openness for all parties involved.
Despite the efficiency of smart contracts, real-time off-chain data is required for transactions to be completed. Oracles enter the picture when there is a need for real-time off-chain data. According to Cryptopedia, Oracles are protocols for smart contracts in the blockchain industry to interact with external data. Oracles can be used to gain access to various data for smart contracts to act on. However, the existing Oracle structure violates the core principle of no third-party system since oracles might influence transactions due to the sensitive market information they provide to smart contracts. In this article, we will discuss the necessity of openness for Oracle protocol and how the NEST protocol is working to establish a decentralized Oracle structure.
The TERRA storm is still ongoing, causing damage not only to its own ecosystem but also to others. According to Venus Protocol and Blizz Finance, both protocols lost assets as a result of Chainlink halting the price feed for LUNA at critical times. “Today, we became aware of incorrect price behavior for LUNA on Venus Protocol,” said the Venus Protocol in an official statement. Following an examination, it was discovered that Chainlink had suspended the price feed due to extraordinary market conditions.” Venus protocol lost up to $11 million as a result of the price feed pause.
The underlying issue with centralized protocols is that they cannot assume complete responsibility. When everything goes smoothly, centralized protocols reap the benefits (much more than they deserve given the current level of risk); when things go wrong, they refuse or are unable to accept full responsibility, placing users at risk.
Centralized Oracles, such as Chainlink, must accept responsibility for the information they provide to their users as a centralized oracle protocol. As a matter of fact, they have several different types of censorship that have been introduced.
Chainlink censors which tokens can join its quotation system; for example, it is difficult for a starting protocol to obtain Chainlink’s service because Chainlink may consider the early-stage protocol too risky, or simply because the token of this early-stage protocol is not listed on any exchange, and thus there is no reliable off-chain price.
Chainlink censors its nodes. According to Chainlink Market, there are currently 356 nodes for Chainlink, of which 75 are designated data provider nodes. This means that the entire quote system is built around these nodes.
Chainlink censors the prices of the nodes: Chainlink aggregates the prices collected from nodes in its own way.
As we can see, all of these censorships are in place to safeguard Chainlink from potential problems if the quotation service fails. Another form of safeguard exists; for example, as previously noted, when the price of LUNA fluctuated excessively, Chainlink suspended the price feed for its customers.
To summarize, one centralized oracle, such as Chainlink, will supply pricing information reflecting its will, which may or may not be similar to the true market price.
The oracle must be open and decentralized. It should not be decided which token should be involved, which node should supply the information, and which information should be chosen or ignored. The centralized oracle is consistent with the classic web2 scenario in which the user does not have complete control over his or her asset (again recall the loss of Venus protocol and Blizz Finance). However, we are approaching the Web3 era, in which an open oracle is required, and this openness requires two conditions.
1) the quotation price should be verified on-chain.
a) An open oracle should incentivize its miners to feed price
b) When one miner reports the incorrect price (rather than the market price), the verification procedure begins, and the miner loses the asset. Surely the verification procedure should be on-chain and not controlled by some centralized nodes. And non-cooperative game is an idea solution where any one can participate.
c) The verified price cannot be preserved because it is highly likely to be incorrect. Validators must always correct the price in order to assure price continuity. This mechanism will help build a price chain, and like the blockchain, will form a chain of evidence that cannot be tampered with.
2) Resistant to attack.
To prevent malicious attacks from tampering with the correct price, hackers must find it difficult to get access to the system. An open oracle forces hackers to battle against the entire network, raising the cost of an attack. This game system is a fully functional Oracle network. Several projects have attempted and failed to achieve the objective of building a transparent and trustless decentralized oracle. However, NEST does an excellent job of meeting the requirements for an open Oracle protocol.
NEST is a decentralized oracle system that uses an on-chain verification mechanism to allow for real-time price verification. For example, if a “wrong” price appears on the price feed and an arbitrage opportunity exists, the verifier must feed in a new price to benefit from the arbitrage. The on-chain verification process would get the final price so close to the market price that arbitrage would be nearly impossible. It’s worth mentioning that the verifier must submit a new quotation with asset scales that are twice as large as the recently traded transaction; the verification cost doubles every time this happens.
The NEST protocol is essentially attempting to address the inadequacies of protocols such as Uniswap v3, in which liquidity providers incur temporary loss when supplying liquidity to the pricing pool. NEST stands apart from the pack in part because it includes an algorithm that can identify the price of the attack from the price of market fluctuations. This issue has previously plagued multiple Oracles, causing several DeFi projects to lose money. On May 9, 2022, DeFi protocol Fortress lost all funds in an oracle price manipulation attack. With multiple attacks and hacks as a result of oracle manipulation, the value of an open decentralized oracle cannot be overstated.
A decentralized open oracle network does not need to trust nodes at all and there is also no need for censorship. Innovative protocols, such as NEST, advocate for the adoption of on-chain verification mechanisms for price feeds in order to protect DeFi projects from malicious attacks. It is also worth noting that NEST price feeders have received effective incentives and rewards, forming a non-cooperative game network on the chain, similar to how BTC and ETH work. There is a need to maintain the fundamental principles such as openness, transparency and trustless systems on which blockchain was built. NEST appears to have positioned itself as a decentralized oracle protocol that provides onchain verification mechanism.
Please keep in mind that this is a personal opinion and does not constitute investment advice. All images in this article are sourced from the internet.