Written by Chase Jeter (@0xdididoitright)
Aave is one of the most popular lending and borrowing protocols (aka “liquidity protocols”) within the decentralized finance (DeFi) space, allowing users to borrow cryptocurrency by putting down another cryptocurrency as collateral or to loan cryptocurrency while earning passive income on their committed funds. In order to ensure that borrowers do not run away with their loans, the protocol requires that the value of the collateral is higher than the borrowed amount. In other words, the loans must be over-collateralized.
To make sure that these loans remain over-collateralized, the protocol has to have access to price data on various cryptocurrencies which are only available through oracles. Oracles take data from outside of blockchain networks (such as price data) and make them available to blockchain protocols and applications like Aave. While oracles serve a crucial function in the operation of autonomous DeFi protocols, they inherently introduce risk. If an oracle malfunctions it could lead to critical errors in the operation of Aave's borrowing and lending activity. The oracle provider that Aave has used since its inception and continues to use today is Chainlink, a leading and battle-tested oracle service. The following proposal from the Pyth Data Association asks the Aave community to consider adding a backup oracle service, Pyth, to Aave’s deployment on the Optimism chain.
The Proposal
Although there has always been the technical ability to add a backup oracle besides Chainlink to the Aave protocol, there has never before been a proposal to do so. This proposal, currently in the TEMP Check stage (see the “Governance Process” section below), argues three main reasons to do so: “resilience, competition, and decentralization.”
Resilience: The core function of any secondary oracle is to serve as a backup data source. If the primary oracle experiences downtime or becomes compromised, secondary oracles can step in and provide the necessary data to ensure the continued operation of critical collateralization monitoring. This redundancy creates a more resilient AAVE and reduces the risks associated with any potential single point of failure.
Competition: Pyth’s presence as a secondary oracle on AAVE introduces competition among other providers as well — which drives innovation and continued improvements in data quality, costs, latency, and security, ultimately benefiting the AAVE in the process.
Decentralization: Incorporating secondary oracles providers add an added dimension of decentralization. By relying on multiple data sources, AAVE can become less susceptible to the centralizing influence of any single oracle provider, thereby reinforcing the core principles of decentralization and censorship resistance.
(Source: ARFC: Pyth to support AAVE on Optimism as a secondary oracle)
Pyth Data Association argues that their oracle service is well-suited to fill this role. Pyth has a robust set of 80 data providers and the ability to provide over 200 price feeds. Further, as claimed in the proposal post, Pyth has “already proven to be a robust and reliable oracle provider on Optimism. Functioning as the principal oracle for the Synthetix protocol, Pyth has efficiently served 40 perpetual markets with $10B Traded Volume for over 5 months.”
This proposal would add Pyth as a secondary oracle for Aave on Optimism only.
In the forum, the community showed support for Pyth as a high quality product and team. Bigger picture, there also seems to be significant support for adding a secondary or backup oracle to the Aave protocol.
However, other community members noted that Pyth would only be used in the extremely rare event that Chainlink maliciously updates a price feed to “return 0 or negative” and, as a result, secondary oracle services aren’t necessary.
Stakeholders
Proposer
The Pyth Data Association is a “Swiss association founded by Pyth Network participants to advance the development of the network.” It is the primary driver of business development, partnerships, and growth for Pyth Network.
Supporters
Representatives from Synthetix, Wintermute, Ribbon, Index Coop, and Lido offered their support for the proposal based on their experience using Pyth in other contexts and products. Other parties, such as LBSBlockchain, Keyrock, OP Labs, and Flipside Crypto, signaled their support for the technical benefits of testing a secondary oracle for Aave.
There are no apparent conflicts of interest in the support found for this proposal.
Other
Bored Ghost Development Labs (aka BGD Labs) - a development initiative focused solely on Aave and led by former Aave Labs team members - said that they “don’t really see much value in the fallback oracle as it is, given its ‘legacy’ nature, but if it doesn’t create any extra burden to the community (e.g. additional cost), we don’t have a strong stand against enable it.”
Governance Process
For proposals to pass within the Aave governance system, they must start in the forum, move to off-chain voting for a sentiment check (i.e. TEMP Check) on the idea, come back to the forum as an official Aave Request for Comment (ARFC), pass off-chain voting again, and then move to an official on-chain vote, if necessary, as an AIP (Aave Improvement Proposal). This proposal is currently in the Temp Check phase.
A voter with AAVE or stkAAVE (staked AAVE) can vote For, Against, or Abstain . The quorum is 320K AAVE (or stkAAVE), which at the time of publication has already been reached. The weight of the vote in each option (For, Against, Abstain) is currently hidden until the vote is over. If this proposal passes in off-chain voting, it will be put on-chain for a vote that, upon success, will automatically set Pyth as a secondary oracle.
The snapshot vote will close on June 15 at 7:30PM UTC.
Click this link to vote on Boardroom.
The Big Picture
Passing this proposal to add Pyth as a secondary oracle will realistically have little consequence for Aave protocol operations. Again, this proposal would add Pyth only on Aave’s Optimism deployment and, as BGD Labs noted, the likelihood of needing to call on Pyth’s oracle is low. However, one could interpret the community voting in favor of this proposal to indicate a desire to reduce the reliance on Chainlink’s oracle service. As currently constructed, the Aave protocol is not designed to take in data from more than one oracle in its ongoing operations. Perhaps this vote portends future development and governance efforts to change this aspect of the protocol or at least debate its merits or potential downsides.
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