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· 4 min read
NEST Protocol

Blockchain technology builds a decentralized world. Imagine: a complete network that doesn't depend on any individual, regardless of time, with contracts, AI, and other things on it interacting frequently. Value flows between them, but not only is there no middleman in the process, it doesn't even need to be operated. Information and data automatically get to where they're supposed to go, and all it takes is for you to hit a line of code. What people agree to do will definitely happen even 500 years from now. What kind of amazing world is this? If this does not represent progress, what else can?

However, the decentralized world is not easy to build and understand. And there’s a strict rule, which we propose as the decentralization first principle: in the whole process of value exchange, as long as there is one process that is centralized, the whole process is centralized.

The idea of centralization always interferes with your perception of decentralization. There is a need to find some criteria to judge whether something is decentralized or not, just like judging the color of gold. According to the economic formulation, the difference between centralization and decentralization lies in the inclusion of some kind of individual or organizational agency risk. Risk means that if these individuals or organizations do not act according to the principal's wishes, the principal may suffer losses. In a decentralized process, there is only trust in the mechanism and the code, and no dependence on a specific individual or organization. This feature inspired us to propose the first principle of decentralization: in the whole process of value exchange, as long as there is one link that is centralized, the whole process is centralized.

This seemingly simple conclusion is actually very powerful, and can directly test the merits of all self-proclaimed decentralized projects on the market: whether they are as decentralized as they claim to be or not. You can try to find out the "centralization" of any one of them from one project to another - even if you only have the power to upload and download but not to modify (such as some off-chain aggregation with zero knowledge proof), it is centralized because you can refuse to perform.

No matter how advanced you seem to be in smart contract development, or use the so-called blocks and chains, as long as there is centralized control, it is centralized. Do not just advertise as decentralized. For example, Makerdao (which directly controls the important parameters of the contract: price variables), as well as bZx, which claims to freeze user assets, and various private chains, and even most of the nodes are in their own hands but externally claimed distributed DPOS public chain. These can only be described as blockchain or smart contract applications, not decentralized systems, because their creators can exercise artificial control over the assets on the chain or important variables on the chain. Of course, in order for this control to be less obverse, it is usually claimed that they use multi-signature or decentralized node arrangements. These are not self-certifying if they cannot be open source, or joined without audit, and are therefore classified as centralized rather than weakly decentralized.

The first principle of decentralization is so important and simple, yet no one in the industry has seriously bothered to refine and appeal to this as a judgment criterion. It is mainly because more and more project parties are carrying out various centralization operations, as well as some so-called realists have adopted a compromise attitude and do not care about the decentralization success of projects, nor do they classify and standardize them, which is a huge loss and drain on the industry.

In fact, of all the blockchain innovations, the truly disruptive idea is the insistence on decentralization like NEST's oracle machine. It's not just Satoshi Nakamoto's whimsy, it's also a set-up for the survival of a whole new technology network that gives pure technology creation a self-evolving "life". The exploration of this direction has just begun, and we are easily moving towards eclecticism, which is a lazy attitude in the face of difficulties, and speculative idea in the industry chaos that needs to be guarded against.

· 9 min read
NEST Protocol

Trust problem in oracle

Blockchain is known as the machine of trust. The biggest innovation of blockchain is the decentralized solution to the trust problem, we no longer need to trust and rely on third-party institutions for value transfer. Among them, smart contracts play an important role. It is a set of contracts defined in digital form that helps contract participants execute agreements to complete tasks, saving time and tedious steps.

People often need to use information from the off-chain world in the process of interacting with blockchain smart contracts for value. So, there is a problem: we live in the real world, and many empirical laws and conclusions are obtained through off-chain information. Although we are interacting with the on-chain world, we still need to use the off-chain information for reference and decision making. In this process, we inevitably face the problem of de-trusting the information on the chain, and there is an inevitable break in the chain of information (real data) on the chain, which we call the oracle machine problem. Vitalik highlights the oracle machine problem in his article "Reviewing the last 5 years of blockchain economics and emerging issues", focusing on the "access to real data".

The function of the oracle machine is to synchronize the data facts of the off-chain world and upload them to the blockchain, completing the data synchronization between the blockchain and the real world. It allows deterministic smart contracts to react to the uncertain off-chain world, and is the only way for smart contracts to interact with data from the real world, as well as the interface between the blockchain world and the real world for data interaction.

Through the above introduction, we have understood the origin of the oracle machine problem and the important impact of oracle machine on the development and application of blockchain technology.

There are 3 different types of oracle machine solutions.

The first type: the "Alliance" oracle machine represented by MakerDAO

MakerDAO oracle machine uses 14 miners to feed the price. These 14 anonymous miners, representing different entities, get the price from a centralized exchange, calculate the average, and upload it to the oracle machine's smart contract, after which the oracle machine calculates the median. So far, these 14 fed miners have been kept private for security reasons, as there is a risk of blackmail to change the price if someone knows half of them; therefore, MakerDAO's oracle machine system has a high risk of centralization, and we call this type of oracle machine a centralized oracle machine.

MakerDAO, as an old DeFi project on Ethereum, did not have a mature available oracle machine network in the market when its product was launched in 2017, and had to adopt this simple centralized oracle machine scheme; at the same time, MakerDAO made some special security restrictions on its price admission mechanism in order to prevent oracle machine price attacks from happening; in regards to In the V2 version of the MakerDAO oracle machine, its oracle machine scheme will gradually evolve into a "federated" oracle machine, which will include certain DeFi projects as members of the federation.

In addition to MakerDAO, some smaller DeFi projects are also using this highly centralized oracle machine solution at the beginning of their development, sacrificing the security of the product itself to reduce the development cost and cycle time; what's more, some DeFi developer teams are not aware of the security issues involved.

Chainlink oracle machines collaborate on work order distribution between on-chain contracts and off-chain distributed nodes, and request and feed data through a reward and punishment mechanism (reputation contracts to help select the most matching oracle machines) and an aggregation model (aggregation of data from multiple data sources); compared to the centralization of MakerDAO oracle machines, Chainlink is clearly more in line with the guidelines of blockchain decentralization than the centralized MakerDAO oracle machine. Currently, the Chainlink oracle machine mainly provides smart contract developers with some simple off-chain data, such as price information, website API data, and so on. In simple terms, the Chainlink oracle machine uses the method of "feeding data" to the on-chain contract to upload offline data (prices) to the chain and then feed it back to the data caller, so we call this type of oracle machine solution "indirect" oracle machine.

There is a fundamental problem with the indirect oracle machine in that the validation of the data is not direct, but indirect by way of validating the uploader to ensure that the data is genuine and valid. Another problem with the indirect propagator is that the credit risk of the node uploading the data determines the cost of attacking that propagator's data. If a $1 trillion asset is derived based on the price provided by the oracle machine, the credit of the oracle machine nodes should also match it, which is obviously impossible in reality and cannot be guaranteed regardless of the randomness of the nodes used, which is an essential problem, not a technical one, so indirect oracle machines can only be used in small-scale, non-financial scenarios.

The third category: "price fact" oracle machine represented by NEST

NEST is a distributed “price fact” oracle machine network, which defines and implements a new mechanism for generating on-chain facts on the blockchain, synchronizing the off-chain market price facts on the chain by means of bilateral asset quotes from miners, and combining with the NEST quote mining mechanism to incentivize miners, making it a logical closed-loop distributed quote system, perfectly generating off-chain price facts on the chain. We call this type of NEST oracle machine a "price fact" oracle machine.

Mechanism

The NEST oracle machine solution uses a new idea of reverse verification, where the quoting miners have to take real money to participate in quoting, not just uploading price data to the on-chain contract. For an example of how the NEST oracle machine works, let's take the ETH/USDT price as an example.

Any participant can pass their approved price into the offer contract, for example, 1 ETH = 200 USDT, and then punch the two assets into the offer contract in proportion to the price, generally in the scale of 10 - 100 ETH, and charge 1% of the ETH scale as a fee to mine and get NEST incentives.

After punching in, wait for T0 time (currently 25 blocks, 5 minutes or so), during this time period anyone can use the offeror’s price to buy away ETH or USDT, if no one deals within T0, the offer is accepted by the system, and if someone deals, the price is invalid. After this time, the asset can be retrieved.

If someone is willing to deal with the offeror, then he closes the deal and also quotes a new price in accordance with the above criteria, thus forming a chain of p1, p2 ... prices behind the initial offer P0.

The size of the offer of the deal maker is an integer multiple of the beta of his deal size, where beta > 1, which means that the price chain must eventually terminate (shut down) as the size increases and the cost of the evil doer increases geometrically, thus countering the attack.

NEST value: mining fees and the use of oracle machines need to pay a certain ETH fee, unified to the dividend contract, distributed to all circulating NEST.

Such a NEST distributed price fact oracle machine solution is characterized by concrete results: its data has accuracy, sensitivity, resistance to attack, and the ability to directly verify the data, and the verifier can be any third party without threshold restrictions; in addition, the NEST oracle machine network system is highly distributed, and anyone can become an offer miner, participate in offer mining, and freely enter or exit.

Conclusion

Finally, we make a small summary of the current state and development trend of oracle machines.

  • The centralized oracle machine scheme inevitably has the risk of centralized system, and it is impossible to get rid of it.
  • The essence of price data on the chain is not to "upload" data information to the chain, but to form (generate) price facts on the chain; whether it is a centralized upload of price information or in a decentralized way, it means that the price facts under the chain are generated before the chain. A real oracle machine system, on the other hand, should have to achieve simultaneous generation of off-chain price facts on the chain.
  • NEST distributed price fact oracle machine gives a groundbreaking oracle machine solution, which is unique in that it forms a price fact directly on the chain, while other indirect oracle machine systems just upload a price fact to the chain, which is the essential difference!
  • In addition, the cost and credit scale of the oracle machine price formation, to be able to support far more than that scale of DeFi, is the right oracle machine; NEST distributed price fact oracle machine generated by each piece of data is verified by miners with real money, and its chain structure has high resistance to attack.

Regarding the overall oracle machine market development trend, as Vitalik emphasized in his article "Reviewing the Progress of Blockchain Economics in the Last 5 Years, and the Emerging Issues", the focus of the oracle machine problem should be on the element of "getting real data", and the NEST distributed price fact oracle machine solution has indeed done this, which represents a new trend in the development of the oracle machine industry. We hope that oracle fans will pay more attention to the NEST oracle machine solution and its development.

· 3 min read
NEST Protocol

Introduction

Referring to previous bull markets, we will find that whenever the bull market starts to speculate on copyright, authentic right and music chains etc. that are particularly close to reality, the bull market is coming to an end. What is the reason? Because we all understand that hype is prevalent, and these are products designed for the most peripheral group of people. This work of magical realism is carefully designed and deliberately pushed by many people behind the scenes. It is the result of all worthwhile ideas being consumed.

Therefore, everything that does not capture value on the chain is a desecration of the blockchain!

Static NFT

NFT as a separate stream of information, if it were completely static, I find it hard to imagine how much or even what kind of contract such a string of information could charge; I don't think it could consistently create a revenue stream, and therefore could only generate value as a scarce stream of information.

However, a string of code that hosts a subjective utility (value), in full transparency, has almost the same amount of information if replicated on the chain with equal GAS, except for the difference in timestamp and the HASH at the corresponding moment. Thus, the difference in value between the two is determined by nothing more than the HASH and timestamp at that moment (since other information can be replicated). For this to map to reality, there must still be a trusted agent to confirm some internal information, i.e., it has only a point-to-point transfer value: that value depends on the information related to the HASH and timestamp and the party (or agent) vouching for that information.

We can take this anonymous static information and deliver it as a medium with some kind of cipher or witness, so as to give it a historical meaning at a specific moment, and thus preserve it as a scarce artifact (similar to some letters or documents). The reason why this preserved scarce information stream is valuable is that the more valuable information behind it has been recognized as a kind of public information, or as private information by the authority, if only the timestamp and HASH value are still meaningless.

Thus, an NFT based on a static message is essentially just a record of the presence of an off-chain authority or public authentication, without which it would be meaningless. This means that this NFT has no substantial value in itself; what has value is the authentication of outside authority or public knowledge, which is a note of such authentication.

Dynamic NFT

If the NFT is generated with dynamic information, and such dynamic information cannot be reproduced again by the contract or the computational resources and time costs required for reproduction are too high, then this type of NFT truly realizes the scarcity plus the possibility of value capture on the chain. Such NFTs need to have a random flow of information plus huge computational resources or time consumption.

How to get random flow of information

The NEST Oracle machine provides an interesting random flow of information for the on-chain world: the price information flow. Designing dynamic NFT with NEST will reduce a lot of unnecessary processing and is an ideal dynamic stochastic information flow.

· 3 min read
NEST Protocol

With the advent of hype and shrewdly designed traps, blockchain products with no real value are given a vain artificial value. This phenomenon undermines the positive development of the industry; therefore, this article believes everything that does not capture real value on-chain is a desecration of the blockchain!

One particularly valuable aspect of blockchain from an information perspective is that the on-chain world can charge for information and is not dependent on third parties, which is not possible in the traditional off-chain world. Therefore, information being replicated would result in information no longer being scarce and thus unpriced. But in the on-chain decentralized contract - that is, from the perspective of the information users - the ability of replicate the information is constrained. While many emphasize that information from the entire blockchain can be copied off-chain and passed on to the chain in a centralized way, I want to remind you not forget that such contracts cannot build a non-cooperative game: because of the introduction of centralized agents, which is not in the realm of our discussion of decentralized information (no one is stopping you from using the blockchain in a centralized way, there is just little interest in that in our Crypto Native world).

Thus, only on-chain information can be charged in a decentralized way, while off-chain information can only be charged if there is some kind of centralized agent or regulatory guarantee of replication scarcity.

For this reason, the information can also be reflected in the NFT. This paper argues that the difference between NFTs based on static information lies more in the HASH and timestamp. This is essentially just a presence record for off-chain authority or public authentication, without which it would be meaningless. Conversely, NFTs generated with dynamic information are unlikely to be reproduced again by contracts or require higher computational resources, or time costs. Therefore, dynamic NFTs will truly capture value.

The NEST Oracle machine provides a decentralized flow of price information to the on-chain world. Without considering various complex transaction costs and realistic costs, stochastic information based on GBM (Geometric Brownian Motion) or Brownian motion has various properties such as reliable, constant, independent, Markov property, etc. It can even be said to be a time series with the highest information entropy. Using it to design dynamic NFT will reduce a lot of unnecessary processing and is an ideal dynamic stochastic information flow. In the future, the NEST community will also give rise to such NFTs, either as a new art form that never ends and is used without stopping, or as a kind of event library that records the changes of a group, instead of a few meaningless static picture signatures.

· 6 min read
NEST Protocol

A traditional mortgage is simple. For example, John gives Amy a valuable asset against which Amy can lend John some cash or other assets. At the end of the term, John pays the principal and interest to Amy, and Amy gives John the collateral. If it is not repaid at maturity, Amy has the right to dispose of or auction off the collateral. On the other hand, if the price of the collateral fluctuates dynamically, Amy has the right to ask John to replenish the collateral as the price changes, otherwise it does not have to wait until maturity for Amy to dispose of the collateral.

However, the difficulty of matching, the cost of time for both borrowers and lenders, makes p2p matching very inefficient, which is the reason why most DeFi lending could not be done in the early days. So, people started looking for a way out, one option is to make a pool with high capital utilization, and the other one is to directly let the borrower pledge into some kind of stable coin. As you can see, the former is the model of Compound and the latter is the model of MakerDAO. Both models ensure the stable existence of one of the lending parties before seeking a counterparty to the transaction: Compound ensures that the lender's pool of funds is sufficient, while MakerDAO creates a pool of borrower's assets first; one being investment-oriented and the other borrower-oriented. However, if the collateral operation is on-chain and is done in a decentralized manner, the above process immediately raises the following questions: firstly, who will complete the matching of collateral and lending? Secondly, who will complete the margin call or liquidation once the price changes?

Liquidation risk

In a funding or asset pool model, liquidation risk from mortgage price fluctuations is always important. If the liquidity of the collateral asset is infinite and the price is always valid, then there is never a liquidation risk no matter what the collateral rate is, as long as the value of the collateral asset is higher than the amount borrowed. That is, whether you have a 60% collateralization rate (interest-bearing borrowing size divided by the collateral value) or 90% will always be the same. However, in the real world, liquidity is neither infinite, nor are prices always valid. In some extreme cases, price fluctuations directly cause the value of the collateral asset to fall below the size of the borrowing. This is known as a wearing: since everything is decentralized and you can't demand a wearing payout by locking out the borrower, this loss can only be taken by the lender. In addition, in a pooling model, clearing cannot be done by a designated person because it leads to some kind of trust risk: failure to clear when it should be done results in greater losses. Therefore, the clearing operation must be decentralized. This means that the incentives are designed to ensure that any third party has an incentive to complete the operation, and in the current DeFi project, the clearing residual is designed for this incentive.

Liquidation risk is a typical tail risk. In the Compound and MakerDao, this is addressed by having everyone share the risk. This introduces an increase in lender risk and instability in the intrinsic value of the DAI (no longer equal to $1). The best solution to tail risk like this is to introduce a decentralized insurance mechanism: for the most part, collect insurance premiums and pay out in case of such extreme situations, the whole process is decentralized and anyone can become a participant in the insurance fund or exit it at the right time. The insurance fund is equivalent to the collateral operator selling the tail risk to a third party, which can guarantee the safety of the lender or the stability of the DAI. This design represents that part of the interest on the borrowing, as well as the so-called stabilization fee, should be paid to the insurance fund. Considering that the size of the insurance fund is dynamic, the ability here to determine the risk consideration of the market through the dynamic size of the insurance provides an indicator to view the liquidation risk of the whole pool.

Reinvestment risk

If the lender never has anyone to lend money in the pool, it will cause its own composite return to fall, which is what we call reinvestment risk: after earning interest for a period of time, it needs new opportunities to pay interest rather than a stable long-term return.

Combining the liquidation risk we just discussed with the insurance fund, which in this model will have less ongoing stabilization fees or interest because some of its collateral assets are liquidated, implies a term structure with different liquidation times: the earlier the liquidation, the higher the reinvestment risk, and the later the liquidation, the lower the reinvestment risk. Given the price model, the time to start liquidation is related to the collateral ratio or liquidation line, and given that the two often remain linear, we will measure the composition of the time to start liquidation in terms of the collateral ratio: the higher the collateral ratio (note that it is the borrowed assets divided by the collateral assets), the shorter the time to do liquidation, and the lower the collateral ratio, the longer the time to do liquidation. In this way the mortgage rate constitutes a measure of reinvestment risk, which means that the insurance rate can be set based on the mortgage rate, for example a simple solution is a linear formula. Of course, if strictly speaking, it is perfectly possible to give a more precise formula.

In this way, the insurance fund, the insurance rate associated with the collateral rate (in Compound a part of the interest rate, in MakerDAO a stabilization fee), constitutes the most basic risk management scheme for decentralized collateralized lending or collateralized stable coins. This scheme is fundamental and atomistic. We will see more and more collateral-based programs in the future to make such adjustments.