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No governance, no oracles, and no upgradability. This combination of key characteristics is slowly becoming popular for cryptocurrency protocols and primitives.
However, one of the characteristics that stand out currently as the most important is the fact that the new projects are becoming oracleless. Why is this important, what does this mean for the future of the DeFi sector and which projects are already implementing this strategy? That, and much more, will be described in the following article.
Oracles are an important part of the cryptocurrency world. Their primary function is to provide reliable and trustworthy data for either smart contracts, or blockchains as such. They are considered to be a link between decentralized applications and different external sources (such as APIs, IoT services or web services). Oracles use inputs from these data sources, verify them and then make them accessible for use by smart contracts.
This means that projects that need a stream of real-world data, can use oracles to mirror these data into the cryptocurrency world. The subsectors of decentralized finance (DeFi), insurance or gaming are heavily reliant on oracles currently.
However, these oracles or projects using oracles are often subject to hackers, data breaches or exploits. This is due to their inherent nature of being either centralized or viewed as a possible point of failure. Since they act as a universal gateway to off-chain resources, they are viewed by many as a possible weak link, which is why they have been under attack on many occasions.
That is why people have started to look for solutions that would provide oracle-free alternatives that would reduce possible attack vectors, which is what is happening right now. A rise in a number of oracle-free protocols aims to solve problems connected to oracles. These types of protocols, in some cases even primitives with no oracles, no governance and no upgradability offer a different alternative in the markets that should eliminate the dangers of oracles.
These primitives are designed in a way to allow users to Bring Your Own Oracle (BYOO). This should help especially technically experienced and sophisticated institutional investors, for whom it is easy to access their own high-quality data feeds. This would allow them to not only diminish the possibilities of hacks, but also make their data feeds decentralized and censorship-resistant.
Currently, most of these projects are still in development phases, with some having testing and pilots. It is possible that these projects will first rely on public oracle protocols with a history and reliable name such as Chainlink, but will also offer a possibility for investors to use their own data feeds should the users want them. This is for instance an opinion of Dan Elitzer, co-founder of Nascent:
“Some users may choose to use a service that relies on Chainlink and mirrors the collateral assets and ratios of Aave. Others may choose to use a Bloomberg API and only lend against ETH at conservative collateral ratios.”
It is thus possible that not only Chainlink, but also projects such as Bloomberg API, Pyth or different zk-based oracles will still be used in the beginning stages of the possible switch from oracles to oracle-free projects.
While there are not that many projects that are currently developing oracle-free or oracleless solutions, there are some that are already worth mentioning. They are currently mostly either in development or testing phase, so most of them are not fully rolled out, yet, they are still pretty interesting and should get the attention of anyone who is curious about this new solution.
Ajna is one of the examples of not only oracle-free protocols, but also primitives. Ajna does not only have no oracles, but also no governance or upgradability. This translates to the following: the lenders as well as the borrowers who decide to go through Ajna, can impose their own requirements or select their own management protocols.
This gives a space for usage of protocols such as Chainlink or Aave, but it also allows the users to go for Bloomberg API for instance. Ajna can thus be thought of as mostly a lending and borrowing protocol that emphasizes no reliance on a third party. The official website of the project for instance also states the following:
“The mission of the Ajna Protocol is to improve on existing DeFi lending and borrowing protocols by giving users a truly decentralized system with more options and less systemic risk.”
Ajna is one of the most prominent oracle-free primitives that has been in the making for more than two years. It is a non-custodial, permissionless system that is probably a flagship or oracle-free primitives and protocols, which is a reason why many experts in the industry put a lot of pressure and expectations into the project.
Blend is another project that has decided not to implement any oracles. It is a peer-to-peer lending protocol developed by one of the biggest marketplaces for NFT traders, Blur, that supports arbitrary collateral, including NFTs. It does not have any expiries, which allows borrowing positions to remain open infinitely until they are liquidated.
In the case of Blend, the terms of loans are being determined solely by the lenders, which means that there is no need for oracles, hence avoiding dependency on them. When it comes to liquidations, they are triggered by a failure of Dutch auction.
Another project that is considered to be primitive, meaning that its design is permissionless, oracles and capital efficient is MetaStreet ATM (Automatic Tranche Maker). MetaStreet ATM is a new primitive in the NFT lending market, where the ATM means that it uses user defined tranches within the broader pool of capital. This enables economies of scale without the need to depend on a third party or a centralized oracle or governance.
The fact that the protocol is oracle-free also means that the users are able to choose their risk tolerance and data feed, which is one of the main unique selling points of MetaStreet ATM. Moreover, since it is permissionless users can deploy any type of collateral and the capital efficiency ensures that users’ individual preferences are pooled together to offer a single market rate for the borrowers.
Another project in the field of oracle-free protocols is Panoptic. It is a perpetual, oracle-free options protocol built on the Ethereum blockchain that utilizes smart contracts to handle minting, trading, or market-making for the markets of perpetual put and call options. Just like with most protocols of this type, there is no need to interact with a third party such as a bank, centralized exchange, or a clearinghouse.
Panoptic is not only oracle-free and permissionless, it also does not have any liquidity fragmentation. The combination of these three characteristics makes the unique blend with which Panoptic wants to succeed.
A decentralized exchange without liquidations, counterparty risk, and oracles. That is another project in oracle-free space called Infinity Pools. It is also a project that wants to offer unlimited leverage on any asset. It is the newest primitive in the world of decentralized finance that is currently gaining more attention within the space.
According to the co-founder of the project, Matthieu Gavaudan, Infinity Pools is capable of 10x improvements in 5 different aspects. He believes it can do 10x more assets, 10x faster listing, 10x more leverage, 10x no more liquidation and 10x no more counterparty risk without oracles.
While the list of the oracle-free protocols or primitives is not as extensively long as in other subsectors of the crypto world, there are already projects that are testing what the oracleless DeFi could look like. Should their hypothesis turn out to be true or at least promising for the future, it is more than certain that more projects will start to explore what the DeFi world without oracles could look like.
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