The original intention of oracle design is to accurately report the truth, but it was never designed to determine what the truth actually is.
Written by: Aradtski
Translated by: AididiaoJP, Foresight News
For prediction markets, the "oracle problem" is not really a problem at all; stop blaming UMA, this conclusion may be somewhat counterintuitive.
The "oracle problem" is one of the oldest issues in the crypto space; like everything else, it can be traced back to the early bitcointalk forums. In discussions about prediction markets, this issue is always at the core: people expect oracles to provide the truth on-chain based on real-world outcomes, allowing on-chain financial programs to operate correctly.
The oracle problem has never been simple, but it seems particularly tricky for prediction markets for several reasons. The most obvious one is that malicious oracle reports can lead to catastrophic consequences! Incorrect contracts can result in massive losses for users.
Polymarket has had many controversial oracle rulings, some of which even sparked strong dissatisfaction among users, making them feel blatantly deceived:
- Will Zelensky wear a suit before July 1, 2025?
- Israel's military actions in Syria
- The winner of the 2024 Venezuelan presidential election
- LayerZero's airdrop
- Did Barron participate in Shkreli's Trump memecoin?
- Approval of the Ethereum ETF
- Will Sam Bankman-Fried go to jail?
- Will Trump tweet?
- Israel's invasion of Lebanon
- Is the gold in Fort Knox missing?
- Will the Titan submersible be found?
- Will the U.S. and Ukraine sign a mineral extraction agreement by the end of the month?
… there are many more such examples.
Each market has its unique story, along with a group of innocent users who have been scammed. In a few markets, the funds involved amount to millions or even tens of millions of dollars. Typically, most bets flood in after the relevant event occurs, just to wager on how UMA's oracle will rule on that event.
How do we solve this problem?
As practitioners in the crypto space, our first reaction is: "Well, to solve this problem, we must make oracles trustless and decentralized, right?"
However, that's not actually the case. For prediction markets, doing so doesn't make much sense. It may sound strange at first, but please bear with me as I explain.
We need to clearly distinguish between conventional oracle data sources and event oracles:
A) Price data sources (conventional): Liquidity prices have a clear definition, and the truth is widely recognized. Disputes over liquidity asset prices are rare because their definitions have been widely understood for centuries; prices are typically the last transaction price or the mid-price between buy and sell orders in an active market.
Even in extreme cases where the order books of a few exchanges become empty or distorted, participants are still well aware of the actual market prices of these liquidity assets. Moreover, even in highly volatile scenarios where all order books become so sparse that market prices are unclear, this is only a temporary situation; oracle price data sources can usually pause and resume shortly thereafter without causing serious harm to DeFi protocols.
In short, price data source oracles need to worry about activity and how to filter malicious reports. But they do not need to worry about the definition of "price."
B) Event data sources: Event oracles do not need to worry about activity. They do need to be concerned about malicious reporting, but most importantly, they must focus on the definition issue. For price data source oracles, the definition of "market price" is implicit, known, widely understood, and permanent. However, the definitions of events in prediction markets are human-made and can vary significantly from one event to another. For event oracles, the question of "the truth itself" often exists in contention at the most fundamental level.
When reporting event outcomes, the oracle problem seems trivial compared to the definition problem. Prediction markets can have the most honest, trustless, decentralized, and neutral oracles, but if there is a fundamental logical dispute over which outcome should be reported, then a decentralized oracle is like providing frosting on a cake without the cake itself—utterly meaningless.
In other words, since the inception of the crypto space, the design of oracles has been intended to accurately report the truth, but they were never designed to determine what the truth actually is.
When clearly defined assumptions collapse, oracles become utterly useless.
Let me take a step back and think about this.
How did we get here?
It is understandable that oracle design has always been based on clearly defined assumptions. The market demands price data sources, TVL (Total Value Locked), interest rates, and sorter uptime, all of which are replicable empirical data sources.
The principles described by Vitalik in a 2014 blog post titled "SchellingCoin: A Minimal Trust Universal Data Source" still form the basis of all oracle protocols today: if everyone knows what the value of the Schelling point is and participants are confident about what other participants might report, then the protocol can reward those who report close to others and punish outlier reporters, as they can be assumed to be malicious or lagging.
However, if there is no obvious Schelling point, the entire design collapses.
In summary, for prediction markets, the oracle problem is not really an oracle problem because crypto oracles were never designed for things like world events.
Now, if trustlessness and decentralization are not important for prediction market oracles, because the most common disputes are definition disputes, then what is important? How can we improve?
Recognize the following two practical guiding principles:
Oracle participants need to have a direct stake in the long-term success of the platform. This is a well-known fundamental principle in consensus mechanisms, but for some reason, it has been overlooked. A proprietary, centralized Polymarket oracle is preferable to an externally "decentralized" UMA oracle composed of hired capital.
Definition! Definition! Definition! The importance of oracles is secondary to providing a rigorous definition for events. In the many controversies surrounding Polymarket, almost all roots stem from a persistent neglect of definitions.
Acknowledge that the real world is not perfect; even the best initial definitions may overlook certain edge cases. In such cases, clarifications should be provided immediately to prevent the problem from worsening.
Most importantly, scoff at those who try to sell you complex decentralized oracle mechanisms. I can guarantee they are not addressing the real issues plaguing prediction markets.
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