Coinbase launches "Oracle" to reduce risk in the DeFi space

With around a billion dollars in apps and decentralized financial protocols (DeFi), Coinbase has started providing a data feed for cryptocurrency prices to protect those funds.

What is Oracle and what are the benefits it can bring

Available since last month, the San Francisco cryptocurrency exchange says that this feed, called Oracle, provides data taken by Coinbase Pro on exchange rates for both bitcoin and ether against the US dollar.

It is also signed with the Coinbase private key, which means that, even if shared between third-party services and protocols, the data can always be verified as coming from the exchange.

Coinbase Oracle can be used by other blockchains and can be associated with other data feeds for use by DeFi projects in functions such as loans, trading and more, Coinbase said in a post.

The new offer is intended to help counteract the dangers that can be encountered when DeFi protocols use third-party off-chain data, which requires that the prices provided are reliable. The company also indicates the risks deriving from the use of data from decentralized exchanges.

Oracle is supported by the same secure key storage infrastructure that supports Coinbase's exchange operations, storing billions in investor funds. It also offers protection against price manipulation through invalid transactions or data.

Last year, Bitwise Asset Management published a report stating that 95% of all reported bitcoin trading volume is fake. In this market, reliable sources of pricing data are essential for the automated protocols that dominate user funds.

"Coinbase Oracle will increase the security and decentralization of the Compound pricing feed, which is critical to the Compound-based protocol and ecosystem of applications," said Robert Leshner, CEO of Compound.

Some technical details

In the blog post, Coinbase also delved into the technical side of the new Oracle tool, informing that it is provided via an Open Oracle compatible API – an open source set of Ethereum smart contracts originally developed by Compound to help standardize and increase the interoperability between different data sources.

Projects using Open Oracle are able to select the feeds they wish to include in the calculation of an average price returned by the Oracle contract. To ensure the accuracy of this median, Coinbase has designed its feed in order to have three "levels" of protection, including the quality of data deriving from Coinbase Pro's high liquidity platform.

An off-chain filter that blocks data on cryptocurrencies that deviate significantly from volatility expectations, and a blockchain filter via the Oracle Open's DelFiPrice smart contract.

The latter again rejects data on prices that deviate significantly from the last price reported by the so-called "anchor sources". "Coinbase is uniquely positioned to provide Oracle prices as it is the most reliable and secure institution in the industry," said Antonio Juliano, CEO of dYdX, a decentralized exchange.