The Rising Star of the Oracle Machine Track: Building On-Chain Price Facts

In the summer of 1954, a pioneer in the field of computer science committed suicide by poison in his home in Manchester, England. This scholar, who made significant contributions to modern artificial intelligence and computer science, tragically ended his life. To commemorate his achievements, an important award was established in the field of computer science to honor those who have made outstanding contributions in this area.

The scholar's research includes a hypothesis: there exists a box that can continuously provide data to computers. In a centralized world, inputting information is not difficult, but how to verify the authenticity of the information and prevent human manipulation has become a technical challenge.

In the field of blockchain, which pursues "information authenticity", people have begun a new exploration. With the thriving development of decentralized finance ( DeFi ), the "Oracle Machine" that provides price data for DeFi products has transitioned from niche to mainstream, entering the vision of cryptocurrency community users.

Nowadays, Oracle Machine projects are flourishing, each with different mechanisms. One project takes a unique approach by placing the price formation process on-chain, creating a "fact price" through user participation in different trading pairs' "quote mining" and arbitrage games, eliminating the trust cost associated with off-chain processes. The system provides ample token incentives to the "miners" of the quotes, allowing quote providers to receive ETH profit distribution weekly, sharing the dividends brought by ecological growth.

This "quote mining" has the simplicity and reliability similar to Bitcoin's POW, and its token economic mechanism is akin to the currently popular "liquidity mining," providing sufficient incentives for every participant. The protocol that completes all aspects of the Oracle Machine work on-chain can be considered the ideal form of the Oracle Machine.

Value Gap in the Oracle Machine Field

There are many implementations of the Oracle Machine, and most designs rely on a set of independent, off-chain gaming systems that use an off-chain node network to provide data, which is returned to the on-chain after reaching a consensus. This type of Oracle Machine has a certain trust cost, and users must trust the process of obtaining data off-chain. Most Oracle Machine projects focus on how to ensure the authenticity of off-chain network data and the trustworthiness of nodes through mechanism design, but the mechanisms are often complex and uncontrollable.

There is a protocol that aims to eliminate uncontrollable factors and directly engage in games on-chain to form a true "price fact". In the entire system, the generation of the "price fact" mainly relies on two types of participants: quoting miners and validators.

The quoting miner deposits a certain amount of two tokens into the contract in proportion to what they believe to be a reasonable market price and pays a fee. There is a minimum threshold for quoting, and the current minimum quoting unit is 30 ETH, with a 1% fee required at the time of participation.

After the user completes the quotation, the price will be publicly displayed and challenged for a period of time. The current time design is 25 blocks, approximately 5 minutes. If there are no arbitrageurs taking advantage of the price during this period, it is considered reasonable and can be regarded as the current market price; otherwise, it will be corrected to the market price by the arbitrageurs. Moreover, the arbitrageurs must provide a quotation that is double the scale of the eating order funds, for subsequent arbitrageurs to challenge.

The mechanism for price discovery through "real money" can largely prevent price manipulation, forming "price facts" entirely on-chain. Data callers can see the entire process without trusting the data source. Correct quotes will be incentivized, while malicious quotes will lose funds due to arbitrage. As the liquidity pool grows, the scale effect will become apparent, and the cost of malicious quoting will become extremely expensive, leading to corrections from the entire market. Therefore, compared to trusting off-chain data from certain nodes, the prices formed on-chain are truly decentralized facts.

In addition, the protocol's token can regularly receive dividends from the fees collected by the system and play a more important role in the new version. For example, when creating and bidding for any new ERC20 Token/ETH trading pair, both the creator and bidders need to use this token. Participants who bid but fail to win the auction can even receive an excess refund of their bidding funds, thus incentivizing market participation.

However, when making a horizontal comparison across the entire track, we will find that the current position of this project does not match its value. A rich and完善的 token economy gives it great growth potential.

In terms of project valuation, currently the Oracle Machine track is dominated by one project. According to data from September 29, the leading project's circulating market cap reaches 3.4 billion USD, which is 48 times that of the project. As the proposer and practitioner of the "price fact" solution, this protocol has immense room for value appreciation. With the booming development of the entire DeFi sector, it will also become a choice solution for more projects.

Cash Flow Discount Model 32x Valuation

The token economic model is an important standard for measuring the development potential of a project. A diversified incentive model can provide positive incentive feedback to ecosystem participants from multiple perspectives. These incentive feedbacks also stimulate the prosperity of the secondary market, and even become a stable long-term investment solution for users.

In addition to introducing incentives and game-theoretic mechanisms during the data generation phase, this protocol also has a unique incentive design for token holders. Token holders can currently deposit their tokens into the contract and receive the system's ETH earnings for the week on a weekly basis.

This adds a layer of dividend mechanism outside of governance for the protocol, motivating token holders to participate in ecosystem building, and encouraging more people to engage with and use this system.

The current sources of income for the protocol mainly consist of several parts: the transaction fees from quoting miners and the data usage fees submitted by downstream applications when calling data. All fees are collected and distributed by smart contracts, ensuring complete transparency throughout the process.

Using historical data, the cash flow discount model was used to value the tokens of this protocol. The discounted cash flow model, DCF(, is a fundamental and reliable method for absolute valuation. Considering the specific business situation, a two-stage discounted cash flow model is proposed for valuation, first predicting the growth of free cash flow, and providing the cash flow growth rates for the first and second stages based on specific circumstances.

The expected future cash flow can be calculated from the growth rate. Discounting the cash flow back to the current date gives us the present value )PV(. To discount the cash flow, we need to provide an expected discount rate. We believe that choosing the savings rate of ETH as the discount rate is appropriate. According to the data, the current savings rate of ETH is around 7%.

According to the weekly data, the protocol's weekly yield increases by approximately 138)ETH(. Similarly, assuming that the weekly yield in the first phase maintains a linear growth over a period of 5 years, with a weekly increase of 138)ETH(. After 5 years, the perpetual period will be the second phase, where the yield growth rate drops to 0, and the discount rate is set at 7%, then the current valuation is 0.005ETH, and with a discount rate of 10%, the current valuation is 0.0035ETH.

According to the data from October 7, the current price is approximately 0.000151 ETH, which means the valuation is 23-33 times the current price.

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It can be seen that the tokens of this protocol are valuable assets with long-term growth potential. Compared to other cryptocurrencies that lack cash flow support, the steadily growing quoted cash flow provides very effective support for their prices.

On the other hand, the token system in this protocol supports the quoting of any ERC20/ETH trading pairs. Users can initiate the creation of Oracle Machine trading pairs, which then enter the auction process. When the Oracle Machine is successfully auctioned and activated, the funds participating in the auction will be sent to a black hole address for permanent destruction.

Therefore, this system somewhat grants the protocol the possibility of "infinite deflation." As more valuable projects are integrated and trading pairs increase, tokens will continue to be burned, and the deflation in quantity will also enhance the value of the tokens.

Building New Infrastructure for DeFi, or Becoming the Winner Takes All

Compared to the "information flow" Oracle Machine that is simple to implement, forming "price facts" on-chain is a muddy road. Most Oracle Machine systems choose a consensus model with lower thresholds for rapid expansion. However, on the question of whether to "trust data" or "trust facts", this protocol clearly has its own answer.

Bidding through "real gold and silver" from on-chain miners creates a sandbox quoting market. Driven by interests, validators ) and arbitrageurs ( will continuously adjust the data to reflect the true price. As the quoting market thrives, the entire ecosystem will become stronger. However, the information import-based Oracle Machine field will form a red ocean due to low entry barriers, and the emergence of malicious projects during the competition will decrease people's trust in "price information."

Instead of transferring data on-chain, real data is generated in a decentralized manner on-chain. This trustless approach will undoubtedly scale with the development of the DeFi ecosystem, which in turn can further enhance the efficiency and accuracy of data, creating positive feedback. As the number of validators and arbitrageurs increases, the transfer costs of projects will continue to rise. Protocols with first-mover advantages may even create a winner-takes-all situation, becoming the new banner of the Oracle Machine track.

There is an important saying in the crypto community: Don't trust, verify. This means do not trust anyone, go verify for yourself. This network is clearly a practitioner of this saying, imagining itself facing the most lies and the greatest malice while building a "perfect" quoting system. Only in such a harsh environment, if it can still form real on-chain information, can it be considered an excellent Oracle Machine system.

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