Uniswap unveiled an innovation to bring scalability and solution to protocols. The new tool dubbed TWAP Oracles is an algorithm that provides information regarding the price of an asset. This is for developers who encounter setbacks when developing smart contracts fused with a Decentralized Finance (DeFi) protocol on Ethereum.
Uniswap v3 Unleashes TWAP Oracles
The launch of Uniswap v2 was geared towards empowering mainnet builders to design decentralized on-chain TWAP Oracles, free from internal or external manipulation. Uniswap v3 extended included this with additional gas capabilities within TWAP Oracles.
Essentially, smart contracts connect to these oracles to excerpt the price details of an asset. Thus, making them crucial to the functionality of the ecology. But, individuals with dreadful intents cash in on their vulnerabilities to manipulate their economic providence. Originally, Uniswap created TWAP Oracles to operate on Proof-of-Work.
Interestingly, their back-run security model could turn the tide on bad actors, subjecting them to losing money.
Ethereum had its most significant block upgrade when it transitioned to Proof-of-Stake from Proof-of-Work. This offered far more perks to the network than PoW did. But, unfortunately, it had unforeseen consequences on TWAP oracles and other layers that depended on PoW blocks.
A notable repercussion was that it gave manipulators an opening to wrap their fingers around the oracles. Thus, keeping them from losing funds to back-runs. Although, there are still some restrictions.
What Are The Odds Of Manipulating TWAP Oracles?
Cheating a TWAP oracle on Uniswap is impossible at the moment. That is because it would require a bilk to flush in a massive load of funds and make back enough money to cover the network’s high gas fee.
So, validators with sufficient capital cannot manipulate the market as that would strip users of trust in the network. Likewise, diminish their position in the market.
To this end, TWAP developers seek to explore the potential of these oracles on Proof-of-Stake. In addition, they hope to discover possible solutions that would surface through the existence of oracles on various protocols at present and in the future.
Generally, while it is still being researched, its results will tell of the possible moves Uniswap Labs will make toward oracles in the future.
Several protocols need on-chain price information of an asset to estimate the value of its holding. For instance, lending protocols usually have to calculate the worth of loans and collaterals they issue. Thus, making oracles indispensable to these blockchains.
Through the knowledge of these values, lending protocols can liquidate loans before they are less collateralized. It puts lending protocols at risk when under-collateralized loans are issued. This would result in the mainnet overvaluing collateral.
Hence, creating bad debt for the protocol as liquidating such loans becomes impossible, making the borrower richer.
Due to ease in manipulating assets’ spot prices, most protocols enable a 30-minute price calculation window for TWAP. When TWAP is used for an extended timeframe, it leads to prices lagging even though it would run smoothly.
Lagging prices pose a threat to protocols as spot prices may surge such that they create bad debt arbitrages in the system. The stretch of a TWAP window is a computation of price actions against manipulations.