In this blog, we discuss an issue with the current on-chain derivatives space. The issue with on-chain derivative is not how you design the contract, it is how you avoid using oracles. The price feed is always faster for CEX than DeFi, and it is not attractive anymore. Below we list two major reasons why having an oracle is bad for on-chain derivatives.
Flash loan allows investors to borrow and return a significant amount of money without interest rate within one transaction block. Flash loan attacks can have a devastating effect on the exchange(platform). Here is an example: one can first borrow a large amount of asset A from the protocol. He swaps asset A to asset B so that the price of asset A will decrease. He then uses the swapped asset B as collateral and borrows more of asset A. This could be achieved because the price of asset A has decreased. After he returned asset A, the difference in the amount is his profit. It seems profitable but it will ultimately drain the pool since the above process can happen every block. Asset A and B can be contracts too. Contract trading always includes inherent leverage, so the effect can be magnified, which is detrimental to the platform. Certainly, with flash loans, one can arbitrage and wash trade, but stabilizing the platform is of more importance.
A large number of protocols use oracle. Oracle is used to receive Defi-related data from other platforms. The use of oracle can sometimes cause trouble to the protocol. Suppose that it takes 1 second to display the price of a certain cryptocurrency. Within 1 second, the price changes and one smart trader realizes this change. He can then open positions and take advantage of the pricing lag. The drawback of the delay can cause trouble in extremely volatile markets. If one pumps and dumps a certain asset, the execution price will be unfavorable to other traders because of this lag. Since the decentralized exchange generally exhibits prices slower than the centralized exchange, a delay in the price display is unfavorable to contract traders. A simple example is that the trader’s position may have been liquidated before he realizes the price change. Antimatter platform, however, does not rely on oracle. The pricing mechanism can stabilize itself.
Oracles play an important role in DeFi applications and are sources of many forms of attacks. Antimatter designs an innovative way to abandon the use of oracles to secure the system and maintain systematic independence. In Antimatter, arbitrage activities will act as “oracles” to make sure the price of call and put tokens follow the trend of market price movement of target assets. The Antimatter math model will rebalance underlying assets through arbitrage activities.
(For more information, check here: https://docs.antimatter.finance/mechanism/price-equilibrium-and-arbitrage)