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Oracle Risk

Breakdown of oracle risk on Moonwell

Definition

Oracles are the price feeds used by the smart contracts to keep track of account liquidity amongst other things. Oracle risk is the probability of the oracle price feed not accurately tracking the actual market price.

Risks

Moonwell relies on Chainlink oracles to determine solvability of accounts. By design, the oracle price lags the actual market price, and also may not exactly track the actual spot price on decentralized exchanges of a given chain.
If oracle prices are not in line with on-chain prices, users could borrow more than they have deposited leading to bad debt. More importantly, oracle prices must remain in line with market prices in order for liquidators to be able to profitably liquidate risky accounts. For example, if the oracle price of an account’s collateral asset is lower than its market price it could make a liquidation unprofitable.

Indicators

For our methodology, we’ll use the following data points to assess an asset oracle response time compared to market prices:
  • Oracle price skew - Historical difference between market spot prices and chainlink prices.
Historical comparison of spot price vs oracle price, as displayed on the Warden Finance asset dashboard for KSM.multi