The Volatility DAOracle: A DAO-Governed Optimistic Oracle for Decentralizing Indices

Volatility Group’s mission is to make the DeFi ecosystem more robust with decentralized volatility indices. When designing our decentralized protocol for on-chain volatility indices, we ran into challenges with bringing indices on-chain. In response, we’ve developed a new structure on top of UMA’s optimistic oracle that we believe is the perfect solution.

Introducing: The Volatility DAOracle, A DAO governed oracle that verifies indices and posts them on-chain frequently.

The Problem

There is no ideal method for bringing a volatility index on-chain. Existing oracle solutions like Chainlink do well at verifying the source of data, but are less useful at verifying the methodologies, data filtering, and algorithm implementation. So while the source of an index can be appropriately verified, how that data was collected and calculated remains a grey area. This lack of clarity and reliability undercuts the validity of the data in a foundational manner.

Existing implementations of volatility methodologies are typically a black box. The source of the value is verified and posted on-chain but there is a lack of transparency for how that value is actually calculated.

Vitalik and others have pointed to the affordances of oracle solutions like UMA or Augur for their ability “to optimize incentives and maximize cost of attack.” In our opinion, this optimization allows for more complex methodologies to be verified and brought on-chain. In terms of oracle types, we feel that UMA’s optimistic oracle is particularly well suited to bring complex calculations on-chain. To fully understand our solution you should be somewhat versed with how UMA’s optimistic oracle works. You can read more about it here.

The caveat with UMA and Augur is that they are high-latency. This trade-off is problematic for a composable volatility index. Volatility can move quickly, and during those times anything composed upon the volatility index would need to be updated frequently. We’re concerned with reducing this latency so that a volatility index can have frequent updates and operate with a ‘liveness’ that suits the dynamic needs of DeFi

The Solution: The Volatility DAOracle

Our solution is to create additional economic incentives and governance mechanisms that allow for collective control of key parts of the optimistic oracle. The VOL token is central to these new layers of governance and economic incentivization.

Here is exactly how the Volatility DAOracle works:

Part 1 — VOL As Economic Incentive

VOL becomes the token used by all actors in the optimistic oracle:

• The Requester — Makes a price request and uses VOL as a reward when a valid response is made.
• The Proposer — Proposes a price and uses VOL as a bond to ensure the integrity of that price.
• The Disputer — Disputes a proposed price and uses VOL as a bond to initiate the dispute process.

Part 2 — Collective Control of Requester and Proposer Roles

Community-managed bots take the roles of requester and proposer. Through governance, the community approves specific implementations of all bots. For the combined requester-proposer bot run by Volatility Protocol, the community approves the necessary VOL amounts for rewards and bonds.

These rewards and bonds are controlled in a smart contract:

• The VOL for rewards comes from the Community Treasury and amounts are set for each individual request on each index.
• The VOL for bonds comes from token holders who stake their VOL into the contract. Stakers split rewards proportionally for proposals that are approved. Similarly, upon a successfully disputed proposal all stakers lose a proportional share due to the forfeited bond.

Part 3 — Governance

Voting with VOL determines the parameterization of the community-controlled requester-proposer bot. Examples of governable parameters include:

• frequency of request per index
• reward amount per request
• frequency of proposals
• bond amounts
• data sources

VOL token holders can also vote to add or remove an index. These indices need not originate with the Volatility Group team. In order to create a new index a user must submit its methodology, data sources, and implementation. This is then voted on by VOL holders and if approved becomes a Volatility Protocol feed.

Part — 4 Further Decentralization

Disputed values are not resolved with the VOL token. Instead, disputes are settled by UMA token holders, providing further decentralization from both Volatility Group and VOL token holders. Furthermore, in order for a dispute to be considered by UMA token holders, each data feed must be approved by the community through the UMA Improvement Proposal (UMIP) process. The UMIP process provides rigor to the framework in which participants understand how the methodology and implementation work.

The DAO not only creates transparency for the black box of the calculation but ensures that indices are posted frequently and persistently. UMA’s optimistic oracle provides the mechanisms to verify indices are indeed correct.

Why This Solution Works

The Volatility DAOracle creates the opportunity for decentralized indices to provide remarkable value in the crypto and DeFi ecosystem. The DAO approves the methodology and its implementation to ensure the transparency, trustlessness, and verifiability of an index. A community governed rewards pool creates robust and continuous economic incentive to request complex index values and post them on-chain. Posts can happen at regular intervals (e.g. 5 mins) or dynamically (e.g. index value moves 0.1%). Since these are managed by a single smart contract, transactions can happen atomically, significantly reducing the cost in gas.

Volatility Protocol, The DAOracle, and the VOL Token mean that a volatility index can now be truly composable. Any protocol can build our volatility measures into a smart contract and be assured that the index is correct and posted frequently enough for their needs. This means volatility itself can be turned into a “money lego” in the DeFi stack, adding another layer to the rapidly maturing ecosystem.

In the coming weeks, we’ll be releasing research on novel ways to compose these indices and also sponsoring hackathons to BUIDL our indices into other protocols.

Learn More

You can read more about The Volatility DAOracle in our whitepaper or join our Discord to discuss in more detail.

Volatility Group is a data provider that develops and publishes real-time index feeds tracking the volatility of various types of assets. Volatility Protocol is our open-source, community-governed DeFi offering that publishes periodic snapshots of our real-time feeds to the Ethereum blockchain. Our mission is to enable a stronger DeFi ecosystem by publishing robust and composable volatility data that can be used to build compliant synthetic assets, manage portfolio risk, and gauge market sentiment for popular tokenized assets. Make volatility work for you.

For more information, visit us at Volatility.com, and join the conversation on Discord, Telegram, and Twitter.