Smart Contracts are the building blocks of decentralized applications. But these programs cannot work perfectly without receiving some external data needed in processing the transactions on a blockchain. To solve this problem, a way of facilitating the external communication needed is through the creation of blockchain “Data Oracles”.
Pyth network aims to deliver accurate, timely and valuable financial market’s information in a decentralized way to help with ease of trading decision-making that depends on real-time data.
By building on Solana, Pyth is able to leverage the speed and scalability on Solana blockchain (it has future plans of integrating multiple protocols that will enable a support from Ethereum, Terra, BSC etc.). Data Oracles like Pyth are not the external data source but they provide these data from teams and different organizations who publish them on the Pyth network data oracle in real-time. The network is used to scan, verify and administer the data received for smart contract usage.
Some of the first-party providers of the network are Jump Trading, FTX, Bitso and many more. The following are some of the main features that enables Pyth deliver this functionality to smart contract:
Every product offered on Pyth has a ‘price feed’ for example, and the data is updated on the Pyth network by a category of users called “Publishers”. These are the organizations with real-time data of the trading activities going on in a market. Since the data oracle functions with these data, the publishers are incentivized with the monetization of their accuracy and timely pricing information they can provide. They earn from the data fees generated by the protocol. The more pricing information they share, the more publishers’ rewards they get.
These are the end-users of the data accessible on the network. They can be on-chain decentralized products (dApps) or normal off-chain applications. This category is for those who need the real-time data to make appropriate trading decisions in their applications. They may have to pay some fees for data access.
This category of users is for those who stake their tokens in the protocol. Just like publishers, they also earn from the protocol’s data fees but there is a risk of losing their stake in the network if the data oracle is inaccurate.
Modes of Interaction by Network Participants
It is possible for any of the participants as stated above to assume different roles in the network. This means you are not fixated into one category alone. To be flexible in the roles available, Pyth provides four mechanisms through which participants can interact.
The price aggregation mechanism is a combination of all the individual publisher’s price and with the consideration of other factors, the single aggregated price is used for the oracle’s price feed. An example given from the whitepaper states that “if one publisher may say that the price of BTC/USD is $52000 ± 10 and another that it is $53000 ± 20, the price aggregation mechanism may combine these two prices into an aggregate price of $52500 ± 500”.
The data staking mechanism is for data fees collection (and fee distribution should the oracle publish an incorrect price for a product). It is also responsible for granting their data staking payout. This staking mechanism will allow:
- Consumers opt to pay for a product (data fees)
- A staking requirement of PYTH tokens for Publishers per products they price’
- Delegators use their staked tokens to back products
The data staking mechanism will distribute a portion of the data fees generated by a particular product into its respective reward pool. The reward distribution mechanism will determine the share of the reward pool that is to be earned by participants. The following are the goals of this reward distribution mechanisms:
- Preferential reward for higher-quality publishers: Publishers provide value in varying degrees to the network and those providing the most accurate and timely data will be rewarded more.
- Penalize bad actors: Some publishers might want to maliciously manipulate prices to the disadvantage of the network. Once discovered, they will be penalized so as to reduce the risk that will occur on the protocol.
- Honest report: Publishers possess knowledge about the recent trades they have made, these kinds of information when honestly published to the Pyth will result in rewards for them.
Currently, the Pyth Data Association is in charge of the protocol’s governance. The governance system will be switched to an on-chain mechanism soon. This will facilitate the approval or rejection of proposals using a coin-voting system. As long as a user has the minimum amount of PYTH token required, they will be able to vote. Once there is a switch to on-chain governance mechanism, the following are some of its responsibilities:
- Approval of the tokens to be used for data fees
- Approving the types of products to be listed on Pyth
- Approving Software updates to the on-chain program etc.
The three categories of the PYTH network participants have different incentivizing methods that encourages their active participation.
- Publisher: This category of participants are rewarded so that they can publish accurate and timely data. To become a publisher on the network, you must have staked some PYTH. The reason for this is that if a publisher updates price feeds with price that is far from the reference point, a part of their staked tokens will be deducted. If they also publish prices that causes issues in the oracle’s price feed, their tokens can be deducted. This possible penalties encourages the publishers to provide correct market prices. They also earn from the data fees generated from the product they price.
- Consumers: These participants are incentivized to pay data fees in two ways. Firstly, the data fees paid enables the Pyth application have a reduced risk of using Pyth price feeds. Secondly, by paying data fees, more publishers will be interested in participating and this will provide a strong price feed on the data oracle.
- Delegators: This category is for those who stake in the network so that they can also earn in the data fees. One major responsibility for them is to apportion the influence possessed by publishers in the provision of price feeds. If the publishers do not provide accurate data, the delegators also risk losing their stake.
With a fixed supply of 10,000,000,000 PYTH tokens, 85% will be locked. They are to be unlocked monthly over a period of 7 years with an initial 1-year cliff. This will help in the gradual emissions of the token supplied. The PYTH tokens are allocated in the following ways:
- On-chain Rewards 22%
- Ecosystem Participation 33%
- Team and Advisors 25%
- Launch Partners 10%
- Private Sale 10%
A decentralized data oracle solution such as PYTH is designed to self-coordinate data publishers and consumers. This will go a long way in sustaining the thriving decentralized finance ecosystem. With easy access to accurate and timely market data, developers can ‘bank’ on a solution like this for limitless financial innovation.