Ethereum creator Vitalik Buterin made a proposal for Uniswap’s UNI token to become an oracle price token for ETH/USD so as to allow the DeFi eco-system to ‘mark to market’ its fair value, thus providing a more robust mechanism for smart contract execution. He says that the pricing oracle should be modeled along the lines of Augur.
Aside from Ethereum itself, many innovations in the ecosystem have come about from Buterin’s online posts ––the ERC20 token standard and Uniswap itself are two examples. So whenever he writes about a new idea, people take note as it just may be the next big thing in crypto. In this case, Buterin is talking about an entirely new use case for UNI, the 11th biggest cryptocurrency by market cap.
Buterin highlighted the need brought about by the increasing adoption of ‘algorithmic stablecoins’, and thus the need for an oracle price of ETH/USD. Fundamentally, stablecoins are the entry medium for ‘real assets’ into the decentralized financial services but seemingly lack the complementary pricing symmetry to facilitate smart contract execution. A pricing oracle for ETH/USD allows for more prudent risk management and a basis for dispute resolution, thereby creating a more robust eco-system with greater depth and liquidity.
UNI’s prodigious market cap of over $19B ensures that incentives are aligned when utilizing the Augur-like model. Poor price reporting is ultimately self-defeating to all actors involved as a potential fork leads to market cap destruction. Hence, all actors are incentivized to provide price transparency as it facilitates more volume on the Uniswap platform which enhances the value of the UNI token.
Augur uses an ERC-20 token called REPv2 to incentivize reporters on its network to back their reports with tokens. The REPv2 token holders are entitled to the trading fees generated on the platform.
The Chainlink Argument
Chainlink is the oracle network being used by many DeFi projects. Buterin argues it doesn’t provide an elegant solution to the problem – “it is a complex system with many features” that also lacks high latency. Moreover, he states that “incentives are not as clean as they are in eg. Augur.”
One of the most upvoted replies to the proposal made the counterargument that the Augur arbitration model would require a re-design of UNI’s economic system, at a time when the current governance system has “seen some difficulties.” The commenter argued that the full market cap of the LINK token can be dedicated to purchasing data and securing it when its staking mechanism is deployed, and added that Chainlink is already proposing an Augur-style resolution system.
Another option would be relying on the on-chain price for ETH/USDC, but the problem is that it creates another layer of dependency in the architecture (USDC was created by Circle and Coinbase), which is vulnerable to attack, thus creating friction and reducing robustness.
If UNI token holders and community agree with Buterin’s idea, the next step would be to draft up a formal proposal which would then need to be approved by Uniswap’s governance system.