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Fairness in Web3: Eliminating Information Asymmetry with Oracles

January 03, 2024 - 8 min read

Leveling the playing field with open-sourced transparency and trustless public auditability.

The Whole Point of DeFi is Fairness

One of the core challenges Oracles face in bringing fairness to Web3 lies in how they bring real-world data to on-chain ecosystems (multi-chain) and in between them (cross-chain). The high costs of updating price feeds in every block prevent Oracles from validating data as often as it should.

As such, status quo Oracles are forced to strategically decide when to update their price feeds in managing this challenge. This negatively impacts the DeFi ecosystem, reducing everyone’s gains, limiting the reach of dApp developers, and hindering the adoption of digital assets overall. Supra Oracles represents an opportunity to transform these challenges into a convenient stack of decentralized services for entrepreneurs, dApp developers, and end users across the entire DeFi ecosystem.

DeFi relies on public access and transparency instead of trust in a centralized entity. Distributed ledger technology (or blockchain networks) helps to ensure that information is transparent in that it is publicly accessible, secured by a distributed group of incentivized peers, and immutable in that the ledger can’t be tampered with. Most importantly, new cryptocurrency units or tokens cannot be added by fiat as is the case with currencies on government-controlled ledgers.

The Principal-Agent Problem and Decentralization

The principal-agent problem is characterized by conflicts of interest between participants in an exchange, and the asymmetrical power structures enjoyed by the agent authorized to act on the behalf of a principal. In other words, agents should be expected to act in their own best interests as opposed to those of the principal. When it comes to blockchains and Oracle price feeds, that means that node validators might be able to buy or sell assets based on their asymmetrical knowledge of the upcoming transaction waiting in the mempool.

For instance, token holders are essentially part-owners when it comes to their stake in a protocol. In such cases, they are essentially principals who rely on the protocol’s code as their agent to maintain a stable incentive mechanism which is in their best interests. That is, they want nodes to behave honestly and in accordance with a Nash Equilibrium.

If validator nodes are able to anticipate upcoming transactions and extract value from their asymmetrical knowledge, then such protocols will become the hunting grounds in which principals will have their capital slowly taken advantage of by their agents. This is why decentralized Oracles are absolutely essential to the pursuit of fairness in decentralized environments like Web3.

Addressing Information Asymmetry in DeFi

Information asymmetry is a fundamental concept in fields like accounting, finance and supply chain management. Information asymmetry erodes trust amongst participants, as those who feel disadvantaged will inevitably question the integrity of the system, and whether continued participation is in their best interest or not. Information asymmetry is so damaging to a network’s trustworthiness because it undercuts its greatest strength, but what exactly does it mean?

Information asymmetry in DeFi means that one or several of a network’s nodes get to see unsettled transactions in the mempool before they are validated and written on-chain. This could allow them to detect these transactions and try to front-run them for an easy profit by buying or selling certain assets in advance.

Obviously allowing any sort of information asymmetry to exist allows for security vulnerabilities to perpetuate. It is wholly unacceptable and is the reason why so many protocols suffer hacks or exploits. Once bad actors identify an advantage, they will exploit it relentlessly. The only solution to this problem is a truly groundbreaking design which anticipates it.

Centralized exchanges are perhaps one of the most egregious examples demonstrating the power of information asymmetry. In DeFi, information asymmetry is great for malicious players while terrible for the average user, yet not every protocol is optimized to guard against this security risk. This is the beauty of Supra’s Moonshot consensus, and its tribes and clans model which circumvents this issue.

Maximum Extractable Value (MEV) Bot Attacks

Maximal Extractable Value (MEV) is an important topic in DeFi, and its negative effects on dApps are well known. As part of the consensus mechanism, validator nodes have the authority to determine the order of transactions in the blocks they validate, which in turn creates opportunities for them to maximize their profits based on this asymmetrical knowledge.

Simply put, MEV is best understood as a hidden inflation tax on dApp users because node validators can profit without adding value to the transaction. Annoyingly, MEV bots increase transaction costs, reduce validator profitability, and contribute to a negative end-user experience.

MEV is shorthand for the profits captured by MEV bots and Byzantine nodes from their ability to asymmetric knowledge and consequent opportunities to exploit it. This often originates from their power over the ordering, inclusion, or exclusion of transactions within the mempool of an upcoming block yet to be validated by themselves. After all, validating transactions is the ultimate role of node validators.

By monitoring the mempool for opportunities, Byzantine participants can front-run transactions and arbitrage upcoming transactions, or even prioritize certain transactions with higher gas fees over others. All of this benefits the nodes instead of the users just trying to conduct their business honestly.

A subset of MEV is related to the exploitation of Oracle nodes to gain an unfair advantage and extract profits. Of course, Oracles are essential components of DeFi as they provide real-time data to smart contracts across a number of dApps.

Oracles deliver crucial data which enables the automation of various services like cross-chain token swaps, options trading, and even insurance claims. Given the positioning of Oracles at the data faucet pouring into DeFi applications, they become ideal honeypots which inevitably become targets for MEV attacks looking to capitalize on information asymmetry.

Flattening Information Asymmetry for Consumers

First, blockchains address information asymmetries at the supply and value chain by improving our ability to track and trace inventory throughout its lifecycle. In fact, the impact of blockchain is already being felt in logistics, including both pharmaceutical and food sectors.

The combination of blockchain, NFTs, and AI will soon be reducing waste and fraud in an industry you’ve heard of. It can also be used to identify counterfeit products, instances of loss or theft, and bolster other consumer safety benefits like validating that refrigerated food remains at a stable temperature during transport.

The public ledgers of blockchains also allow auditors to track the provenance of rare goods they purchase, like Rolex watches. This provides all users with the knowledge they need to make better choices about the investments they make and products they consume, and is a boon for any collector.

The lack of decentralized yet verifiable identities (DIDs) is emerging as one of the more salient issues when it comes to the rights of individuals in the information age. Entering one’s personal information again and again online in order to use online services means trusting in the ongoing operational security of those entrusted with sensitive data, enabling everything from identity theft to privacy violations, new and existing forms of surveillance, and other forms of fraud.

Today, citizens have little to no control over their online presences, and this has contributed to the erosion of trust in centralized, status quo institutions. It also doesn’t help when those institutions prove themselves untrustworthy again and again either by malice or incompetence. To end users it hardly matters, and is in part why DIDs are being proposed as a self-sovereign workaround in which people can enjoy not only the conveniences of technology, but also a reasonable expectation of privacy online.

Oracles to Even the Score in DeFi

Decentralized Oracle networks mitigate the negative effects of information asymmetry in DeFi, without a doubt. Importantly, they promote transparency, open communication, and equal access to information on the ledger and in many cases, the code is open-sourced itself. Additionally, robust security measures and regular users having a stake in the ecosystem and its governance lays the groundwork to a more equitable and trustworthy Internet.

By connecting disparate blockchains and financial ecosystems with pristine data accuracy, Supra is carving out a future for a trustless and more sustainable and profitable DeFi ecosystem. Simultaneously, Supra’s Intralayer stack aims to eliminate information asymmetry and minimize the detrimental aspects of MEV bots. Network participants can rest assured that validators are unable to collude or manipulate the ordering or transactions in the mempool.

By using Supra’s DORA, dApps can minimize negative externalities and guarantee that information asymmetry on their network does not allow for any participants to gain at the expense of others. Not only do users get as close to the data faucet as possible, but they can be sure that the market-making Oracles validating each block are unable to gain knowledge about price fluctuations or anticipate them with privileged information.

This ultimately culminates in an improved market-making and UX, creating a sort of flywheel effect for the ecosystem. That is to say that the security guarantees and incentive structures foster more confidence, attracting more liquidity to the application, reducing fees, and attracting more users and TVL over time.

With its native stack of robust and decentralized services, Supra has tackled the most crucial vulnerability in the DeFi ecosystem by optimizing price feed Oracles and keeping them randomized with its novel consensus mechanism and nested architecture.

About Supra

Supra is at the forefront of researching and implementing decentralized Web3 services which optimize for scalability, security, and fast finality when it comes to settling transactions on-chain. Our developer toolkit consists of a growing library of comprehensive guides and technical whitepapers, and serves as the foundation for builders to understand and implement these tools.

You’re invited to join Supra’s epic journey to make digital assets more secure and interoperable, be a part of our vibrant community, and be the first to enjoy the stream of innovations pouring forth from Dr. Kate and Supra’s research team.