Pythia was a trip

Pythia was the title of the high priestess of the Temple of Apollo at Delphi. She served as its oracle — the Oracle of Delphi — and was understood by her contemporaries to wield supernatural powers.

Modern scholars offer a different explanation. Pythia's insights were hallucinogenic in nature, arising from an upwelling of natural gas beneath the temple floor.

In plain English, Pythia was high out of her mind.

High on hopium

"Hallucinogenic" is also an apt description for today's oracles in DeFi. They are in a similar position — hallucinating prices based on the hopium fumes of retail.

Protocols have lost a combined $394 million from oracle and price manipulation exploits since the advent of DeFi in 2020. Oracles can be manipulated directly — where an oracle is bribed or becomes the oracle in order to report a false price — or indirectly, where the price of an illiquid token is manipulated, and the oracle simply passes on the bad information.

The former we call "oracle manipulation"; the latter, "price manipulation." Price manipulation exploits are the most common economic vulnerability in DeFi. They are commonly attributed to thin liquidity, but this is symptomatic of an even deeper root cause.

Mark-to-market fallacies

Mark-to-market valuation is an accounting practice borrowed from TradFi. Shares outstanding are valued at their last traded price to produce "market cap" — the total value of a stock.

It's a crude way to value assets, and it makes a terrible assumption: that infinite demand exists for the asset at the last traded price. Demand curves aren't flat. And demand for financial assets is reflexive — demand for an asset decreases as more of it is sold.

In crypto, code is law. Rogue actors take advantage of exploits as they're coded. There is no way to stop them that preserves permissionlessness and credible neutrality.

TardFi

As US regulators explore more lax restrictions, censorship-resistance is taking a back seat to "open finance" putting TradFi onchain.

Part of the problem is the profitability of bona fide scams built on mark-to-market assumptions. VCs — those who would know best — would prefer to allow such faulty premises as mark-to-market valuation to perpetuate, propping up trends like "low float, high FDV" at token launch.

Conclusion

DeFi presents an alternative to the existing financial system — it is not merely a recreation of it "onchain." Building zero-to-one requires new patterns. It also requires new metrics to support reasoning about protocols that are not manipulable. A few examples:

  • Nic Carter's realized cap
  • Eric Waisanen's loan-to-liquidity
  • Our own "chair ratio" — the ratio of unlocked supply to available exit liquidity

To tie it back to the original point, DeFi oracles can't help but hallucinate when the foundations they're built on are unsturdy — steaming with hopium gas.