Switchboard V2 (pt.3) — Incentives

Switchboard
8 min readNov 3, 2021

When designing a decentralized protocol, it’s not enough to ensure your code is well tested — you must also align the various parties so no single entity can game the system. Today’s article will walk through the design of Switchboard V2 and how incentives are aligned to minimize trust in the protocol. Check out some of our past articles for more background on Switchboard, and how it works.

Incentives are mechanisms to influence an individual or group to behave in a certain manner. For example, tax cuts are a government incentive that reduces an entity’s operating cost to promote spending. Similarly, many food delivery companies subsidize delivery fees to capture future market share. These are all extrinsic incentives because you expect some kind of reward for your actions. Extrinsic incentives can only get you so far; eventually the food delivery companies will need to turn a profit. Decentralized projects cannot operate in the same manner as traditional companies where a single group can make the decision to sacrifice profit for future market share. Instead the incentives must be baked into the protocol and be known to all parties up front.

Switchboard was created to level the playing field and provide equal access to on-chain data which allows anyone to suggest, approve, and update feeds. We hope the community will be intrinsically motivated to support this vision and actively participate to bring this to fruition. Switchboard will never whitelist participants and will rely on the community to make improvements as the network matures. The following paragraphs detail how Switchboard is designed and how the community is able to tweak the protocol to align everyone’s incentives.

Governance

Let’s begin with the governance system. Switchboard is governed by its stakeholders via a democratic DAO (Decentralized Autonomous Organization). Switchboard participants are free to propose changes that fall into two categories: Protocol proposals and Queue proposals.

Protocol proposals impact the overall architecture of Switchboard and have deeper impacts on the network. An example of this might be increasing the number of oracles a single queue can support or upgrading the on-chain program to add additional features requested by the community. Protocol proposals impact all queues on the network so changes should be carefully laid out and discussed before reaching consensus.

Queue proposals impact a single oracle queue and can change various queue parameters to help reach equilibrium between oracles and data feed updates. Some of these parameters include:

  • Minimum stake required for an Oracle to join the queue
  • Criteria for a data feed to be automatically approved to use the queue
  • Admitting additional data feeds to use the queue’s Oracle resources
  • Slashing rates for misbehaving Oracles

Giving the users of the protocol a stake in the network (“skin in the game”) aligns their incentives toward a common goal: providing permission-less on-chain data for smart contract developers to reliably build upon. It is NOT in the best interest of the switchboard community to implement changes that could weaken the protocol or allow oracles to report dishonest data. Therefore it is up to the community to remain an active participant and propose improvements that align with the common goal and keep all parties happy.

Upon the launch of V2, the Switchboard DAO will provide at least three oracle queues with varying levels of security based on the publisher’s needs. Switchboard is a permission-less network so anyone can spin up their own Oracle queues and control these parameters themselves. This is especially useful for projects needing data from private endpoints or projects needing more centralized control over their data. The rest of this article will be focused on the Switchboard DAO and how oracle queues will be managed by the community.

Initially, the Switchboard DAO quorum will consist of oracle operators as they are the most familiar with the protocol constraints. There is no shortage of potential data feeds that developers want on-chain, so it’s the number of oracles that will be the limiting factor as the network scales in the early days. Oracle operators are best positioned to evaluate the impact of new feeds and how it may impact their oracle’s performance or how changing oracle rewards may entice their peers to game the system. It is important to keep the initial quorum smaller in the early days of the network as it allows changes to be implemented faster. Future DAO proposals will expand the DAO and include the other network participants.

Incentives

Switchboard at its fundamental level is a data provider for smart contracts. Developers expect to receive a single result that is sourced from multiple endpoints, confirmed by multiple oracles, and updated at a set interval. The publisher is usually an on-chain consumer of the data so they are responsible for setting the data feed configuration up-front to meet their use cases. The following paragraphs detail how the Switchboard protocol leverages incentives to give developers more confidence in the final oracle result.

Job Diversity

As we are all too familiar with, the classical web lacks redundancy meaning a single network failure can crash an entire corporation, as we saw with Facebook a few weeks ago. This is not a concern for blockchains but being as Switchboard is the gateway between the two, it is up to the protocol to mitigate any outside network disruptions. To deal with potential data sources being unreachable, Switchboard incentivizes Curators to scour the internet and find redundant data sources. Switchboard will provide the initial, open source reference implementation that will allow anyone to submit potential data sources into a registry for the Publishers to aggregate and build data feeds from. In return, curators are rewarded with a percentage of the fees generated from a data feed. The goal is to give everyone a role in the network and reward them for improving the integrity of the network. When building a data feed, publishers can also specify the minimum number of endpoints that must respond before accepting a result. This flexibility gives the publisher more control over how a result is derived and gives them more confidence in the protocol.

Rate Limiting

Requested data feed updates will often be hitting the same endpoint fairly frequently (e.g. FTX.com). To mitigate rate limiting, some level of pseudo-randomness jitter is introduced to the feed scheduler to prevent requests hitting the same endpoint at the exact configured update interval. This helps the network optimize for the lowest queries per second (QPS) and distributes external requests more efficiently.

Approving New Feeds

Data feeds are added to the network by either a DAO vote or having a sufficiently long enough update interval. The update interval threshold is set by the DAO and ensures new feeds joining the network can only consume a finite amount of oracle resources in a set timeframe.

Publishers are responsible for funding a lease contract which provides the upfront capital to reward oracle operators for processing their scheduled updates. This up-front capital incentivizes publishers to only publish feeds that are worthwhile and provide them some kind of value. A publisher is free to propose any feed and eat the capital cost, as long as the oracles are rewarded for their work. The lease contract amount is proportional to the length a publisher expects to receive updates, the number of oracles processing a given feed update, as well as the oracle rewards set by the DAO. Oracle rewards are an upfront agreement between the publisher and oracle operators and should remain static, at least in the initial DAO quorum where oracle operators could collude to raise prices. Publishers are free to choose a queue with a lower cost but they may be sacrificing security so it’s up to the publishers to find the right balance.

Extraneous Feeds

There may be a need for multiple data feeds resolving the same value but needing different configurations depending on the publisher’s use case. For instance, one feed may need a higher fidelity of confidence requiring a greater number of oracle and job responses to dictate a final result, which in turn requires a higher up-front capital cost for the publisher and could cause slower updates in the event the set number of jobs fail to respond. Another feed may just need the closest approximation as fast as possible. Switchboard’s flexibility gives publishers a wide array of options to control how a value gets derived but like all products, a publisher’s use case may change over time. In this event, a publisher may elect to extend another publisher’s lease and spread the capital cost to multiple on-chain consumers. This results in the feeds with the most use having the lowest capital cost to the on-chain consumers. This also further incentivizes curators to find resilient endpoints that get used frequently. This positive feedback loop creates an environment where the strongest feeds get extended and the remaining fall off the stack.

Oracle Incentives

Switchboard is an open network allowing anyone to run an oracle but there are many reasons an oracle may be incentivized to game the system. For example, if we know a smart contract is using a particular feed to calculate a collateral ratio, an oracle could under-report the asset price and cause a liquidation or cause someone to not get the fair market rate for a trade. There’s a myriad of reasons an oracle could try and cheat so careful consideration was given to incentivize honest oracle behavior.

Oracles are required to stake the set amount of capital specified by the Queue’s DAO, which acts as an insurance policy to entice oracle operators to report honest results. Each oracle queue can have different staking requirements to influence its security. If the staking requirement is set too low it could attract dishonest oracles, but if set too high oracles may find a better use of their capital elsewhere.

An oracle’s reward for a given round is determined by how many oracles respond and the oracles response compared to the accepted, median result. Oracles are rewarded each time they submit a result and then reevaluated when an accepted result has been accepted.

When a result has been accepted, the oracle rewards are redistributed to the oracles that responded within the acceptable range. The median result filters the outliers and means an attacker needs to control the majority of the assigned oracles in order to skew a result. This is why increasing the oracle stake requirements increases the security of the network because the attacker will need more up-front capital to fund the attack. Oracle’s get assigned to data feeds in a round robin fashion with feeds scheduled at varying intervals and oracle amounts so even if an attacker controls 10% of the oracles, there is no guarantee their oracles will get assigned to the same feed.

Slashing

After the on-chain contract has accepted a result, it rewards the oracles who responded within the acceptable range, which is set when the queue is initialized. Any oracle who responded outside the acceptable range will be slashed and lose a portion of their staked capital. The slashing amount can be changed by the DAO to further incentivize honest oracle behavior.

Conclusion

Switchboard was designed to let the community dictate the protocol parameters at the protocol and oracle queue level to meet any developers use case. Stay tuned for more information on the initial DAO implementation.

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