"No Feed" Synthetic Tokens: Minimizing the Use of the oracle

Foreword: The field of cryptography requires more innovation and requires a model beyond conventional thinking. The "no feed" model is essentially a game mechanism that can minimize the use of oracles. It assumes that the mortgage positions are all repayable, and once the mortgage position is in a state of insufficient mortgage, anyone can liquidate it. If there is a dispute in the liquidation, if the disputer is correct, the disputer will receive a penalty reward from the liquidator, if not, the disputer's deposit will be forfeited. Will this mechanism work? What do you think? The author of this article is UMA, translated by "SIEN" from the "Blue Fox Notes" community.

UMA announces a DeFi contract design:

No feed price-no on-chain price data stream!

Multiple participants-share the risks!

Synthetic tokens-ERC-20 tokens that can track anything

Minimize oracle use

We believe that oracles are the biggest problem facing DeFi today. Recent events clearly show the problems of the oracle: bZx flash loan attack, SNX oracle preemptive transaction, Maker's Black Thursday.

(Blue Fox Notes: For the lightning loan attack, you can check the previous article "Crypto Flash Loans: The Miraculous New Invention of Internet Currency" and "Inspiration of the bZx Event". Take the order and then realize the arbitrage)

We believe that DeFi can be made more secure by minimizing the use of oracles. We call this a "no-fee" contract design.

The mechanism of "no feed" contract is to incentivize counterparties to properly pledge their positions without the need for any price data flow on the chain. These mechanisms include liquidation and dispute processes, which allow counterparties to be rewarded for identifying improperly mortgaged positions. Unless the position is liquidated, it is assumed to be repayable (properly secured). The oracle is used only when liquidation is in dispute (rarely).

This design pattern can be likened to a traditional legal contract. If Alice and Bob had written the contract under U.S. law, they would have preferred to abide by the contract without intending to eventually sue. As long as both Alice and Bob believe that the other party has complied with the contract, they will never use the court system. The "no-fee" contract design applies a similar principle, redefining the oracle machine as a court system: the oracle machine should be used as a backing for dispute resolution if these disputes cannot be resolved through the mechanism written by the contract itself .

No feed synthetic tokens

Synthetic tokens are mortgage-backed tokens whose value fluctuations depend on the token reference index. Created by depositing collateral into a smart contract and mining out tokens backed by collateral. An example of a synthetic token is USStocks, which is an ERC20 token issued last year to track the value of S & P500.

Until now, the design of synthetic tokens required smart contracts to always understand the value of collateral, as reported by the on-chain price data stream. "No-fed" synthetic tokens are different because they do not require a stream of price data on the chain to indicate whether the contract is properly mortgaged. Instead, they have a liquidation mechanism that allows anyone to liquidate under-secured positions.

In this design, the liquidator can choose a liquidation position based on his off-chain view of the reference index of the token, which informs them whether the position has sufficient collateral. Unliquidated positions are assumed to be properly secured.

The liquidator is honest with the disputer, and the disputer will be rewarded for seizing the invalid settlement. A prophecy machine is needed only when liquidation is controversial. If the price returned by the oracle indicates that the disputer is correct, then the disputer will receive a fine from the punishment of the liquidator; on the contrary, if the disputer is incorrect, the security deposit will be forfeited and given to liquidation people.

This incentive mechanism is designed to minimize the use of oracles, while at the same time maximizing the correct mortgage rate of the entire system.

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(Decision tree for clearing positions)

Create Your Own Feed-Free Synthetic Token

We have open sourced the code for the no-fed synthetic token design, published tutorials on how to deploy your own contract, and written technical instructions for more details on this design. (Code https://github.com/UMAprotocol/protocol/tree/master/core/contracts/financial-templates/implementation )

On the testnet, you can use the tutorial to deploy your own tokens to track anything. E.g:

Real-world assets (e.g. USD, local currency, gold, oil, S & P500)

Cross-chain crypto assets

Bitcoin / altcoin advantage tracker

Tokens tracking total mortgage assets locked in DeFi projects such as Uniswap or Compound

Non-tradable index tokens (e.g. Poopcoin tracking poop sightings in SF)


Risk Warning: All articles of Blue Fox Notes cannot be used as investment advice or recommendations. Investment is risky. Investment should consider personal risk tolerance. It is recommended to conduct in-depth inspection of the project and make good investment decisions.