This article was first published on Chainlink
DeFi asset prices can experience large amounts of volatility, especially in illiquid markets. This is a major reason why it’s important to build smart contracts around aggregated price data that reflects broad market coverage and that is highly resistant to low liquidity price source manipulations. Volatility is an important consideration for both developers integrating an oracle into their dApps, as well as for consumers who wish to diversify their holdings to gain broader market exposure. For some, this is where index funds help.
Index funds or indices are financial products that track a group of assets rather than singular assets. By grouping together multiple assets, index funds offer consumers a simple and cheaper way to gain diversified exposure. With indices, consumers can place one purchase with one fee that instantly grants them ownership of an entire basket of assets. When compared to buying multiple assets individually or delegating funds to a manager, indices are both simpler and cheaper.
Just as in traditional finance, DeFi users want access to indices for easy diversification. As with all DeFi products, accurate and reliable pricing data is critical. If an index price is manipulated and artificial volatility is generated, the purpose of the index is defeated and it no longer offers a consistent haven for investors. An index could be composed of many highly liquid assets with low volatility but if the price feed for that index is illiquid or susceptible to manipulation, an attacker would only need to manipulate that price feed rather than the prices of the assets in the index. As such, the oracle mechanism feeding an index price becomes a potential single source of failure in DeFi indices.
Thankfully, Chainlink’s widely adopted Data Feeds solve this problem by providing wide market, pre-aggregated decentralized price oracles for traditional indices such as ...
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