CryptoGeek Sharing Session:”Nest-”Game Theory” in Oracles”
On November 9, 2020, the founder of NestFans Forum “Shi Er” was a guest in the CryptoGeek Live Room, bringing everyone a sharing on the theme of “Game Theory in Oracle”
This event is hosted by CryptoGeek and NEST; TokenClub and Coinversation are co-hosted; media support includes Odaily, Golden Finance, Mars Finance, ChainNews, Carbon Chain Value, Blocklike, Bajiote, Coinvoice, Tokeninsight, Bochain Finance, and BlockBeats, etc. Also, Cofix, Bihu, first-class warehouses, etc provide us with community support.
To enable the friends to review this wonderful sharing again, the password geeks deliberately summarized this. For fans of the crypto geek community who want to figure out what an oracle is, this article is rare learning material.
Sharing Session
1. What is the NEST?
Shi Er: Hi everyone, this is the NestFans Chinese forum. Ten two, NEST is a decentralized price oracle network that provides DEFI with block price data and volatility data on the chain.
The NestFans Forum is an autonomous organization initiated by the NEST miners group, dedicated to the promotion and popular science education of NEST Protocol in the Chinese market. We hope that more DEFI developers can fully understand the NEST oracle and adopt the NEST oracle. At the same time, we also hope that more miners can join the NEST ecosystem, participate in the mining of NEST oracles, and generate deterministic price data on the chain together in a distributed manner.
Next, I will introduce the core operating principles of the NEST oracle, so that everyone can understand the NEST oracle easily.
When NEST miners conduct quotation mining, they need to transfer the specific amount of assets corresponding to the quotation transaction pair. The minimum unit is 10 ETH. Assuming that the current market price of the USDT-ETH trading pair is 1 ETH = 400 USDT, then the quotation miner needs to transfer 10 ETH and 4000 USDT quotation assets to the quotation contract list at the same time.
After the transfer is successful, the quotation contract will take effect on the chain for 25 block times (about 5 minutes); during this period, anyone can perform transactions on the chain according to the miner’s quotation. For example, I can transfer 4000 USDT to the quotation contract and take away 10 ETH, and I can also transfer 10 ETH to the quotation contract and take away 4000 USDT.
It means that if the miner’s quotation deviates greatly from the real market price, then another person (verifier) is provided with an arbitrage opportunity. Anyone can become a validator and participate in arbitrage; this “arbitrage penalty mechanism” prompts the quotation miners to make quotations according to a fair market price and then directly generate real and effective price data on the chain.
If the quotation is traded by the verifier, indicating that the price data cannot represent the fair market price, it will be automatically discarded by the oracle system and will not participate in the chain price generation.
All market validators will verify every quotation on NEST. Only the quotation data that survived the verification cycle (quotations that have not been traded) will participate in the block price generation on the chain. Therefore, the core principle of the NEST oracle machine is in line with the blockchain consensus mechanism, and the price of each effective block is subject to market consensus. Verify before use. It is the essential difference between NEST oracles and other oracles.
Simply understood as: NEST oracle miners are using real money to prove their quotation, while other oracles just upload a price data.
2. What is the difference between the NEST and other oracles?
Shi Er: Next, I will briefly share with you other common oracle solutions on the market. If you are in CryptoGeek and see my sharing this time, you can have a more comprehensive understanding of the entire oracle market.
Oracles such as Chainlink, Band, MakerDao, etc., we call them “indirect” oracles here. Their price feed nodes are just the porters of price data, passing off-chain price data to the on-chain contract.
There is a fundamental problem, that is, data verification is not directly, but indirectly ensures the authenticity and validity of the data by verifying the uploader (reputation node).
The common understanding is: you cannot verify the data uploaded by the node effectively, you don’t know whether the data is correct, you can only trust these price feed nodes.
Another problem is that in the indirect oracle, the credit risk of the node that uploads the data determines the cost of attacking the data of the oracle. If 1 trillion dollars of assets are derived based on the price provided by the oracle, the credit of the oracle node should also match it. It is impossible in reality. No matter what node randomness is using, it still cannot be guaranteed. It is an essential problem, not a technical problem, so indirect oracles can only be used in small-scale, non-financial scenarios.
There is also a type of oracle in the market, which uses the transaction price of the DEX as the price of the oracle, such as Uniswap;
There are several problems with this type of DEX oracle. I will give you a brief list.
1) Cannot eliminate the wrong price/Cannot represent the fair market price; we all know that Uniswap is algorithmic pricing, so it is destined that the price data is a partial consensus in most cases, not a market equilibrium price.
2) Cannot provide timely prices, only historical price data;
3) It is easy to be attacked or manipulated, because the depth of most Uniswap transaction pools is not very good, and the transaction slippage is high, so it is easy to be manipulated.
4) Very unstable. Because the LP funds in the trading pool are dynamic, if LPs with large funds withdraw from the pool, the depth of the pool will drop instantaneously, and the problems mentioned in 3) will occur.
If you have been paying attention to DEFI, you may also understand that there have been many security incidents where the DEFI protocol quoted Uniswap price data and was attacked by arbitrage.
Speaking of this, some small partners may also find that NEST’s quotation mechanism is also similar to DEX. However, the starting point for setting up a trading mechanism in the NEST oracle is completely different from DEX. The NEST oracle system regards the transaction quotation data as not representing the market price or as an incorrect quotation (the price that can be arbitrage is an invalid price), while the DEX treats the transaction price data as the market price.
3. How does NEST relate to the game?
Shi Er: Then I will introduce to you a few points of NEST Protocol’s use of the game. It is more interesting.
The first point is quotations that cannot represent the fair market price will be arbitrage by the verifier. It is the most direct game, a game between the offer miner and the verifier.
Through this game, the offer miners can be encouraged to do the “right” things. If they do the wrong things, they will be punished by the validator, and the offer funds will be arbitraged and lost.
We all know that the operating principle of the blockchain world is: alternately that every participant is a perpetrator, and the mechanism is designed to prevent them from doing evil, or in other words, not to allow them to do evil at all.
The second point is the verifier needs to report a new quotation while taking the order to verify, and the quotation scale is twice the size of the order.
For example, the quotation miner reported an incorrect quotation: 1 ETH = 200U, the correct market fair price should be 1 ETH = 400U, then the validator will take the order, and the order size is 10 ETH, then the validator will compare a new one. When the price comes, the quotation scale doubles, that is quotation asset of 20 ETH + 20 * P USDT, P is the new quotation of the validator; P is the new quotation of the validator, if P is also wrong, there will be other validators. Take-order arbitrage, loops, in turn, the boots form a take-order price chain until the correct quotation (quotation without arbitrage space) appears.
We can find that through this mechanism, the cost of the attacker’s distortion of the price of the NEST oracle can be effectively increased. The game between validators (bidders) can effectively prevent the attacker’s attack, or the geometric progression increases the attacker’s attack cost, and eventually, it will fall into a death spiral, the attack will fail, or the attack will stop.
The specific performance is the number of NESTs of the mining depth of each quote = the number of blockchain intervals from the last quote * the blockchain NEST reward (currently 256NEST).
The NEST protocol is based on Ethereum. The Ethereum blockchain generates a new blockchain in about 13 seconds.
According to the mining algorithm, it means that the longer the time has passed since the last quote, the more NEST will be mined. When each quotation miner follows this rule to think about his quotation strategy, the game competition will occur, and through the NEST oracle machine, a higher-density quotation sequence can be generated on the chain to form a highly deterministic and high-value Price database.
The above three points are the most direct game in the NEST protocol. Of course, there are many details, so I won’t introduce them here.
Essentially, the operating mechanism of a distributed system (blockchain network) is a fair game. If this game is done well (Bitcoin), it can attract the whole world to play; if it is not done well (several weather forecasts), then a few people will be playing it.
The market in real life is a super big game, also known as the invisible hand. In the blockchain world, there will also be many game systems, such as Bitcoin, Ethereum, and NEST.
The market in the off-chain world is a super big game, also known as the invisible hand. In the blockchain world, there will also be many gaming networks, such as Bitcoin, Ethereum, and NEST.
Personally, there is no so-called blockchain 3.0. If you have to say there is, then the NEST protocol represents the blockchain 3.0: it is a price game in the blockchain world, a more compact equilibrium price, based on the equilibrium price, creation Endless possibilities.
CryptoGeek Community Q&A Session
Q1: Does Nest have any development plans for oracles in blockchain ecosystems like Polkadot and Nervos?
Shi Er: I think that NEST Protocol is an open-source and open oracle program. Any developer interested in it can develop and implement it on other public chain networks. You do not have to be a NestCore developer to do it. You can do it too.
As far as I know, NestCore does not have a clear plan for the time being, but there are a close communication and cooperation relationship with the NERVOS development team.
Q2: Has the market underestimated the value of the oracle? What are the future application scenarios of the oracle?
Shi Er: I’m not sure that do I underestimate its value or not. What is certain is that many developers do not realize the importance of oracle, especially its anti-attack and decentralization degree as a global variable.
Because many DEFI developers are still thinking about products, not the thinking of the blockchain world. If we look at this issue from the perspective of the blockchain world, we will find that the NEST oracle solution is so essential and beautiful. It is what programmers should pursue
Q3: Is there a ceiling for the existing oracles on the market? In which direction do you think the prediction opportunities will develop in the future?
Shi Er: NEST has just started, and it has been called COFIX. The cumulative number of calls is nearly 5000 times. The development direction of the oracle is not very predictable, because technological changes are always revolutionary. However, the core of the oracle is always the verification scheme. If it is small, it is the verification of price data, and if it is large, it is the problem of the actual chain. As for the development of other oracles, it is not convenient for me to say whether there is a ceiling.
Q4: What if the miner does not actively conduct quotation mining?
Shi Er: That means NEST’s incentive mechanism is not well designed, and NEST should die.
