One of my favorite words in crypto is “oracle”—a term inspired by truth-telling figures from Greek mythology—which in the case of blockchains describes the data sources on which smart contracts rely to make decisions. Oracles are a critical piece of infrastructure but are rarely discussed unless something goes wrong.
That was the case in the wake of last week’s $114 million Mango hack, which reportedly occurred after the hacker was able to use an oracle to inflate the value of his holdings. FTX’s CEO, however, used a long Twitter thread to argue that the oracle itself wasn’t so much to blame as was Mango’s “risk engine,” which had failed to correctly interpret its data. Mango’s founder also apologized to the makers of the oracle, known as Pyth, for not making clear it wasn’t at fault.
All of this highlights both the complexity involved in designing the trading platforms that power crypto and how these platforms are still evolving. The situation also led me to recall a conversation I had with Mike Cahill, a former banker who is helping to build Pyth.
Cahill told me that, unlike the most widely used crypto oracle, Chainlink, Pyth doesn’t “scrape” data from the open internet but has instead built a network of dozens of partners that supply it with information. Those partners include exchanges, trading firms, and market makers. In order to promote accuracy, Pyth rewards firms that provide good data and punishes those that don’t.
Cahill makes the case that while oracles can consult any data source, such as sports scores or weather, the reality is that financial data—especially prices—amounts to 99% of the information provided. For this reason, he says, it’s critical to have active participation from firms that produce such data. He added that this is especially the case when it comes to equities—where pricing data is big business in the traditional financial sector, and which many in crypto expect to move to the blockchain in coming years.
To this end, Pyth recently added CBOE, the large Chicago derivatives exchange, as a partner. For now, it’s too soon to say if Pyth will be able to eclipse Chainlink and other rivals, but the network it is building underscores both the importance of oracles and how the decentralized and traditional financial sectors continue to move toward each other.
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