The cosmos of inter-blockchain communications (IBC) experienced significant turbulence in 2022, with the Cosmos network at the epicentre. Major disruptions included the collapse of the Terra Luna ecosystem – the largest protocol on Cosmos – along with internal strife among co-founders and a downturn in the token’s value. Despite these challenges, certain projects like dYdX and the cross-chain oracle protocol, Seda, have continued to champion the IBC vision, remaining firmly rooted in the network.
The Vital Role of Oracles in Cross-Chain Bridges
The Seda protocol, previously known as Flux, is now powering over 12 million data feeds across 24 networks. Its co-founders, Jasper de Gooijer and Peter Mitchell, recently shared their insights on the value of oracles in cross-chain bridges. They emphasized the crucial role of multichain oracles in safeguarding the value they generate.
When asked about the value that oracles bring to IBC, de Gooijer highlighted the current challenge: smart contracts can only request data from outside blockchains. This limitation reduces the potential applications of smart contracts, such as in lending markets. If you need to access price information across six chains simultaneously, you’d require six separate oracle providers. This is where multichain oracles come into play.
Technological Breakthroughs in the Seda Ecosystem
Since its launch a year ago, Seda has grown rapidly. In just eight weeks, it became the second-largest oracle, securing over $2.7 billion in total value locked. However, the team soon realized the impracticality of scaling this to something like 200 chains due to the challenges of robust price feed monitoring. The innovative solution developed by Seda involves the main chain aggregating data and then pushing the smart contracts to the subchain. This approach bypasses the need to deploy the oracle contract on every new chain, instead deploying a single smart contract.
Ensuring the Security of Oracle Technology
In response to recent high-profile oracle exploits, de Gooijer and Mitchell outlined some strategies for securing the technology. Education was highlighted as a key factor. Users should be aware of the risks of building a bridge with hundreds of millions in total value locked if the underlying token only has a relatively small amount of liquidity on decentralized exchanges. Another safeguard is the development of smart price data modules that can swap tokens for something like a time-weighted average price, reducing the likelihood of slippage in volatile conditions.
Setting up metrics like liquidation thresholds and collateralization ratios in advance can also help prepare the protocol for success. For instance, if a token is being borrowed against $100 million, but only has $10 million in liquidity on-chain, you can’t realistically liquidate $100 million or even $50 million positions against such liquidity.
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This article has been adapted from an interview for clarity.
