Chainlink launches low-latency oracle solution to address DeFi derivatives market challenges and prevent front-running.

The decentralized oracle protocol Chainlink announced the launch of a low-latency oracle solution, aiming to address the three major technical challenges faced by the DeFi derivatives market and to facilitate transaction settlement more efficiently.

Technical Challenges of DeFi Derivatives

Chainlink stated in a blog post that due to the technical complexity of DeFi derivatives protocols, it has slowed down the maturity of the Web3 derivatives market. Currently, there are three key technical challenges:

1. Data Latency and Real-timeity

For blockchains, latency refers to the time it takes for a transaction to be completed from broadcast.

For oracle networks, it refers to the time needed for oracle-reported data to be confirmed on-chain, and can also represent the real-timeity of data points in the oracle network, indicating how much time has passed since the last update.

Due to the possibility of small price fluctuations in crypto assets within a short period of time, in order for traders to protect their assets by obtaining the latest price data, especially for on-chain perpetual contracts, DeFi derivatives platforms must be able to access real-time and low-latency market data.

2. Lack of Data Privacy Pre-settlement Increases MEV and Front-running Risks

If oracle price data is public before being used by DeFi derivatives protocols, malicious actors can extract value from others before the oracle update. For example, they can view data on another blockchain before the data crosses chains or enters the mempool.

DeFi derivatives protocols typically address this issue by increasing user transaction fees, but at the cost of becoming a less competitive protocol.

3. Infrastructure and Maintenance Costs

A single-source data or data extracted from multiple exchanges without proper weighting may pose risks of downtime or manipulation attacks.

In such cases, trading volume can easily shift from one market to another, exposing contracts to significant error risks because illiquid markets incorrectly price assets.

Chainlink's Low-Latency Oracle Solution

To address the above issues and meet the growing demands of the DeFi derivatives market, Chainlink has introduced a low-latency oracle solution with the following features:

1. Ultra-low Latency:

Oracle updates are now generated off-chain and can be directly appended to user transactions, significantly reducing update latency.

2. Mitigating Front-running:

Prices are kept confidential before transaction settlement to prevent related information from being observed by potential arbitrageurs, reducing the occurrence of front-running.

3. Decreased Gas Costs:

The new oracle solution is more gas-efficient, eliminating the need to transmit data to the chain before publishing it to individual blockchains.

How Does the Low-Latency Oracle Solution Work?

To illustrate the operational principle, Chainlink assumes that DeFi projects use this solution on Layer2 solutions like Optimism, divided into two phases:

Phase One:

1. Assuming a user makes a 10ETH transaction and pays with USDC.
2. This transaction is sent to the customer contract of the DeFi derivatives protocol, requesting an order in a market order manner.

Phase Two:

1. The settlement process begins once the block number on the L2 blockchain is initiated.
2. A Blob containing price, timestamp, L2 block number, and digital signature is returned by the oracle.
3. The Blob is included in the settlement transaction for Chainlink's contract to verify the digital signature and obtain price, timestamp, and L2 block number data.
4. The process is all returned to the customer contract for expiration checks and settlement of the transaction. If any issues are found during the check, the transaction is rolled back. If not, the transaction settles.