This article’s purpose is to provide a high level overview of Kava’s approach to oracles and the vision for how Kava’s use and integration with oracle solutions will evolve overtime.
Oracles & DeFi
It is nearly impossible to discuss DeFi without also mentioning the critical role oracles play. Oracles are responsible for bringing accurate, high-quality data to blockchains, apps, and dapps. In DeFi, oracles allow developers to securely build more advanced financial products that rely on market data, e.g. derivatives, money markets, lending, and many others. Millions and soon billions of dollars will be locked within DeFi applications. It is critical that the price data DeFi applications use remains correct and not affected by malicious or corrupted oracles. Price data impacts actions like debt issuance and liquidations so incorrect data even for a few seconds can result in millions of dollars being lost. With this in mind, Kava will need to prioritize the robustness and decentralization of its oracle infrastructure and aim to make its platform as resistant as possible to the impacts of incorrect data and adversarial oracle conditions.
Kava’s Design & Use of Oracles
The Kava platform has three core modules — Pricefeed, Auction, and CDP. Pricefeed provides data that is integral to the functioning of Auction and CDP modules.
Today, we use a white-list of oracles that collectively post prices to the blockchain for each asset. During each block, active prices from oracles are aggregated and the median posted price for each asset becomes the price throughout the CDP system. These prices control core functionality of the platform, like liquidating risky CDPs, and selling seized collateral at auctions, so it is absolutely essential that Kava prioritizes the robustness and reliability of its oracle solution.
From an engineering perspective, one of the main reasons we chose to build an application-specific blockchain is to avoid the congestion spiral preventing from oracles to post timely data as seen on networks like Ethereum during periods of high volatility. Our goal is to be able to handle the volatility of crypto markets without downtime or system disruptions. We believe the design decisions we’ve made make that possible.
Kava’s Approach to Oracles
Kava’s general approach to oracles is to increase the reliability and robustness of existing solutions, while looking to remain at the forefront of decentralized oracle technology moving forward.
In the near term, we will be on the lookout for partnership opportunities that bring new oracles to Kava and increase the reliability of our oracle network. We also will be exploring opportunities with projects that can port oracle technology directly to the Kava platform. These partnership opportunities have the potential to enable Kava to go-to-market faster, lessen the development lift, and allow Kava’s core development team to remain laser-focused on building core modules and features.
Further, we aim to better align the incentives of oracles with the longterm growth of the network. A key feature that is missing in the ecosystem today is direct incentives that reward oracles for good behavior and discourage/punish bad behavior. We’re working internally on mechanism design for this problem as well as with external partners to potentially bring existing solutions to the platform.
Decentralized oracle solutions do exist, but the technologies are still fairly unproven and should be considered still in their infant stages. We expect these technologies to evolve quickly over the next few years and eventually reach a state that is more secure and reliable than the centralized solutions we have today.
As assets under management of the Kava platform increase, the need for improved oracle security will increase. Going forward, we will strive to further decentralize Kava’s oracle infrastructure and improve its security and reliability. This can be done by expanding Kava’s oracle technology and how it is used in the Pricefeed module. It can also be achieved by integrating decentralized oracle solutions that are able to provide greater security and reliability of data than Kava’s validators alone.
Kava’s DeFi platform will be dynamically evolving over the coming years. Oracle infrastructure is one of the critical components that will need to continually evolve to ensure users of the Kava platform can be served financial products in a safe and reliable manner. It’s paramount to keep an eye on our oracle infrastructure at all times, to be willing to test oracle solutions as they become available, and make sure that Kava’s oracle security evolves overtime so that we can build and maintain Kava’s position as the leading DeFi platform.