[Crypto Radar] Oracle Role Grows as On-Chain Finance Expands... Data Reliability Remains a Challenge

Oracles Link On- and Off-Chain Information
Data Errors Raise Concerns Over Cascading Losses
Liability for Data Errors Also a Key Issue

As traditional financial data becomes linked with blockchain, ensuring the reliability of external data is becoming increasingly important. As the use of oracles to deliver external information, such as asset prices and credit ratings, to blockchains grows, concerns are emerging that data errors could lead to faulty financial transactions or cascading losses. The need for risk management is increasing, including verifying data accuracy and clarifying accountability in the event of an incident.

According to the financial industry on November 13, global credit rating agency Moody's Ratings recently completed a proof of concept with blockchain infrastructure company Chainlink for delivering credit rating information across multiple blockchains. The project connects Moody's Token Integration Engine (TIE), a system for delivering its credit rating information, with Chainlink's Cross-Chain Interoperability Protocol (CCIP) to verify whether the same credit rating information can be used across different blockchains.

In this way, the on-chain industry is linking various types of information from traditional financial markets to blockchains. Transactions involving financial assets such as stocks and bonds on-chain may require various external financial data, including asset prices, credit ratings, and interest rates. Smart contracts, which automatically execute transactions on a blockchain, have difficulty accessing this information on their own, so a separate connection system is needed. Oracles serve to deliver external information to blockchains.

However, even if a smart contract operates as designed, errors in information delivered from external sources can result in faulty financial transactions. For example, if the price of an asset pledged as collateral for an on-chain loan is reported as higher than its actual value, the borrowing limit may be set too high based on that valuation. Conversely, if the price is undervalued, the collateral may be deemed insufficient, potentially triggering the forced liquidation of assets.

In July, an incident occurred at the decentralized lending protocol BonzoLend after attackers exploited a vulnerability in the verification of an external oracle. When the attackers fed the oracle inflated cryptocurrency prices, the collateral was overvalued on that basis, enabling them to obtain loans improperly. The problem arose in the process of verifying external price data, not from a vulnerability in the lending smart contract itself. "People may think that even if an oracle reports an incorrect price, the data can simply be corrected later, but that is not necessarily the case," an industry official said. "If forced liquidations occur in a cascade, it is not easy to reverse transactions that have already been executed."

As reliance on external data grows, concerns are also being raised that errors or system outages at a particular data provider could spread elsewhere. The explanation is that if different financial services, such as on-chain lending and asset trading, use the same oracle, a problem at one point could lead to cascading losses. In this regard, a financial industry official said, "Legal liability related to oracles is not an issue for the future; it is already being addressed in practice. When we sign contracts with clients, we specify responsibility for losses caused by data errors and for resolving problems. Liability can vary depending on whether the problem originated with the data provider, the oracle, or the service itself."

This content was produced with the assistance of AI translation services.