Compound’s New Open Oracle System

One of the leading companies in the DeFi space announced a new platform to help further decentralize financial products. Compound Finance, a leading crypto lending platform, unveiled a new project called the Open Oracle System. The is an open-source platform looking to solve the problem of accurately reporting prices for crypto lending products that utilize smart contracts. Essentially, the new platform will ensure that complex crypto financial products will receive accurate information and not have to rely on a single entity – a key step to further decentralizing DeFi.

According to Compound’s blog post announcing the project, “An ecosystem is needed, that can build a reliable price feed for Compound, DeFi projects, and any developer that would like to reliably access on-chain prices — a system that can operate perpetually without reliance on any one project.”

The main goal of platforms like Compound and some of its competitors is to allow anyone access to products like loans without having to go through a gatekeeper or become beholden to a single financial institution. Compound and others have successfully done that so far to a degree. However, the Open Oracle System takes it to the next level. Because itis open-source, it means that it will not only use it for its platform but any of its competitors or new startups can as well.

What is Oracle?

An oracle refers to an “off-chain” source that is feeding information “on-chain” into a specific smart contract. For instance, the crypto lending products on Compound currently rely on the price of Ether and other cryptocurrencies function properly; the smart contracts of the loans need a price input in their code to determine things like margin calls and collateral management. So an oracle could be checking the price of Ether on Coinbase or Coinmarketcap.com.

The Problem

Currently, Compound other projects set and update the price internally of each cryptocurrency, which makes for a single point of failure. For instance, imagine if a team member on Compound were to accidentally change the price of Ether that its products were relying on to something drastically lower than it really was. All of its customers could lose a lot of money that was rightly theirs.

How does Open Oracle System solve this problem?

Instead, the platform allows for any company or individual to plug into it and input price information. This could be an exchange or trading desk that is constantly quoting the latest prices. Then an app like Compound would either choose which sources they believed were the most accurate or come up with an average across a select trusted source to use in all their products. This way price information is not only transparent but subject to less risk by relying on multiple sources of information. Applications can easily delete price input sources that they deem untrustworthy or inaccurate.

Potential Interface of Open Oracle System (via The Block)

Though it has yet to clarify specifics, Compound seemed to suggest that there would be incentives in place for companies with accurate price information to plug into their platform. At the moment, the platform is already aggregating data from Coinbase, Kraken, and Binance. The platform is still in development but has an open GitHub Page. Anyone can contribute to building it out and any developer team can use the code for the new DeFi app.

The issue of oracles is one of the hardest to solve for deploying smart-contract driven products. However, the Open Oracle System is the first step towards tackling a central problem that will help many DeFi applications and users to come.

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