Author: Chaos Labs Founder; Translator: Jinse Finance xiaozou Last Friday, the DeFi sector experienced perhaps one of its most severe black swan events yet. Theoretically, liquidations on centralized and decentralized exchanges for perpetual swaps exceeded $19 billion, though the actual figure is likely much higher. Surprisingly, on-chain lending markets remained largely unaffected, but appearances can be misleading. Markets experienced significant dislocations: On Binance, for example, the price of PAXG plummeted to $3,600. The price of EURC on Coinbase is $1.085. The price of USDE on Binance fell to $0.65. 1. It's not a depegging. A pricing misalignment on a single trading platform doesn't equate to a loss of structural parity. However, if the price difference persists, the price impact will spread to decentralized exchanges and lending markets, leading to a liquidity shortage and a cascading liquidation cycle that will far exceed the system's capacity. On the Aave platform alone, $4.8 billion in positions are at risk, with potential liquidation penalties reaching $180 million. If these liquidations were executed, assets would be reduced to zero before the stabilization mechanism is activated. We were able to avoid this outcome thanks to prudent design decisions regarding risk management. A key measure was our insistence on a 1:1 pricing of USDe and USDT (kudos to the LlamaRisk team!). 2. Limitations of Traditional Oracles Traditional price oracles are a pale reflection of what a true oracle should be. They aggregate quotes from the secondary market and assume that these order books reflect fair value. This assumption works for highly liquid, homogeneous assets, but it doesn't hold true for the new asset-backed tokens and mechanism-dependent tokens that dominate DeFi today. For the following token types: USDe, Liquidity Re-collateralization Tokens (LRTs), Principal Tokens (PTs), and Tokenized Real-World Assets (RWAs), their value depends on underlying liquidity, reserve composition, and redemption mechanisms. Treating all tokens as homogeneous assets ignores the embedded dependencies and redemption paths that determine their true economic value. A true oracle must delve into the underlying layers. It must integrate every structural layer—reserves, counterparties, redemption logic, protocol logic, and dependencies—to produce a risk-aware measure of value. Otherwise, you're not pricing an asset, you're quoting volatility. 3. Integration of Price, Proof of Reserves, and Risk Mechanisms This is the intersection and integration of price oracles, proof of reserves oracles, and risk oracles. They are not independent systems, but rather interdependent within the same framework. For asset-backed tokens, their value cannot be defined solely by price oracles. It is born from the combination of market pricing and verified reserves, the product of the interaction between market observation data and provable existence. Price oracles emerge on the surface of external market signals, reflecting secondary market behavior. Proof of Reserve oracles anchor these signals to verifiable collateral assets, confirming the economic backing that gives meaning to the token's value. Risk oracles contextualize these two, ultimately determining the actual value of an asset within a specific system based on its asset structure, liquidity, and correlation with other risk exposures. In other words, prices without proof are merely speculation, and proofs without context are tantamount to static data. True valuation in the DeFi space depends on the real-time coordination of three layers: market pricing, asset backing, and risk measurement. Proof-of-reserve oracles are certainly progress, but we are still far from the endgame. Currently, there are no standards for proof frequency and no in-depth regulations. The gaps between proofs create blind spots for inferring solvency based on assumptions rather than verification. The ideal state would be continuous, real-time proofs, allowing reserves to be dynamically observed and updated as conditions change. We are moving in this direction, but we haven't reached the end yet. In the complex world of DeFi, oracles should be risk measurement tools tailored to specific use cases, not universal truth machines. Lending markets don't necessarily need to use the same oracles as perpetual swap exchanges. Each system needs to clarify what volatility it is prepared to internalize and what risks it is willing to pass on downstream. There's no such thing as a free lunch: pricing stability always comes with the transfer of volatility elsewhere. The key question is who absorbs this risk and when. For lending systems that prioritize depositor safety, a hard-coded 1:1 parity may be a reasonable trade-off, but it's not the optimal or ultimate solution for all situations. Underlying net asset value (NAV) risk doesn't disappear; it simply shifts. Good risk design should make this transfer process explicit, transparent, and reasonably priced. 4. The Path of Self-Regulation If you are an asset issuer issuing tokenized RWAs, stablecoins, or money market instruments, you must establish a Proof of Reserves system and collaborate with oracles to provide PoR oracles. Without this safeguard, aggregators like lending markets, perpetual swap DEXs, and treasury managers are effectively granting blind credit based on your solvency assumptions. If you're an aggregator: Exchanges, lending protocols, or treasury managers, you need to work directly with asset issuers and risk partners to gain a deep understanding of each asset's structure, redemption logic, and reserve mechanisms. Otherwise, risks that should be managed at the protocol level will be borne by your users. 5. The Road Ahead Yesterday could have been "worse" for DeFi. We are building systems on a scale comparable to those in traditional finance, but we haven't yet established the corresponding self-regulatory standards. The real progress of financial infrastructure comes not from speed, but from accuracy, transparency, and shared standards. Every oracle, asset, and market design is a collection of trade-offs.
The next phase of DeFi will belong to those teams that recognize this essence early and develop and build with rigor—not those who move the fastest, but those who move the right direction.
Kikyo
Weatherly
Catherine
Anais
Joy