The prediction market Oracle Machine is not the culprit, but rather the definition of the event has been manipulated.

The original intention of the Oracle Machine's design is to accurately report the truth, but it was never designed to determine what the truth actually is.

Written by: Aradtski

Compiled by: AididiaoJP, Foresight News

For prediction markets, the "Oracle Machine problem" is not actually a real problem; stop blaming UMA for it. This conclusion may be somewhat counterintuitive.

The "Oracle Machine problem" is one of the oldest issues in the crypto space; like all things, it can be traced back to the early bitcointalk forum. In discussions about prediction markets, this issue is always at the core: people expect the Oracle Machine to provide the truth on-chain based on real-world outcomes and to ensure that on-chain financial programs operate correctly.

The Oracle Machine problem has never been simple, but it seems even more tricky for prediction markets, and there are several reasons for this. The most obvious one is that malicious Oracle Machine reports can lead to catastrophic consequences! Incorrect contracts can cause significant users' funds to go to zero.

Polymarket has had many controversial Oracle Machine rulings, some of which have even led to strong dissatisfaction among users, making them feel blatantly deceived:

1. Will Zelensky wear a suit before July 1, 2025?
2. Israel's military operations in Syria
3. The winner of the 2024 presidential election in Venezuela
4. LayerZero Airdrop
5. Did Barron participate in Shkreli's Trump memecoin?
6. Approval of Ethereum ETF
7. Is Sam Bankman-Fried in prison?
8. Will Trump tweet?
9. Israel invades Lebanon
10. Is the gold of Noxburg lost?
11. Will the Titan submersible be found?
12. Will the United States and Ukraine sign a mining agreement by the end of the month?

There are many such examples.

Every market has its unique story and a group of innocent users who have been scammed. In a few markets, the funds involved can reach millions or even tens of millions of dollars. Usually, most of the bets flow in after the relevant event occurs, just to wager on how the UMA Oracle Machine will adjudicate that event.

How should we solve this problem?

As practitioners in the crypto space, our first reaction is: "Alright, to solve this problem, we need to make the Oracle Machine trustless and decentralized as well, right?"

However, this is not the case in reality. For prediction markets, this approach doesn't make much sense. It may sound strange at first, but please be patient and let me explain.

We need to clearly distinguish between regular Oracle Machine data sources and event Oracle Machines:

A) Price Data Source (General): The liquidity price has a clear definition, and the truth is widely recognized. Disputes over the prices of liquid assets are rare, as their definition has been broadly understood for centuries; the price is usually the last transaction price or the midpoint of buy and sell in an active market.

Even in extreme situations where the order books of a few exchanges become blank or distorted, participants are still well aware of the actual market prices of these liquidity assets. Furthermore, even in scenarios of high volatility where all order books become so sparse that market prices are unclear, this is only a temporary situation; Oracle Machine price data sources can usually pause and restore shortly thereafter without causing serious impacts on DeFi protocols.

In short, the price data source Oracle Machine needs to be concerned about activity and how to filter malicious reports. However, they do not need to worry about the definition of "price."

B) Event data source: The event Oracle Machine does not need to worry about activity. It does need to be concerned about malicious reporting, but most importantly, it must focus on defining the issues. For price data source oracles, the definition of "market price" is implicit, known, widely understood, and permanent. However, the definition of events in prediction markets is man-made, and each event's definition can vary greatly. For event oracles, the question of "the truth itself" often exists in controversy at the most fundamental level.

When reporting the results of events, the Oracle Machine issue seems trivial compared to the definition issue. Prediction markets can have the most honest, trustless, decentralized, and neutral Oracle Machines, but if there are fundamental logical disputes about which outcome should be reported, then a decentralized Oracle Machine is like providing frosting on a cake without the cake itself, which is meaningless.

In other words, since the birth of the cryptocurrency field, the original intention of the Oracle Machine was to accurately report the truth, but it was never designed to determine what the truth actually is.

When clearly defined assumptions collapse, the Oracle Machine becomes useless.

Let me relax for a moment, let's take a step back and think.

How did we get to this point?

It is understandable that the design of the Oracle Machine is always based on clearly defined assumptions. The market has a demand for indicators such as price data sources, TVL (Total Value Locked), interest rates, and sequencer uptime, all of which are replicable empirical data sources.

The principles described by Vitalik in a 2014 blog post titled "SchellingCoin: A Minimally Trusting General Data Source" still form the basis of all Oracle Machine protocols today: if everyone knows what the value of the Schelling point is, and participants are confident about what others might report, then the protocol can reward those who report close to others and punish outlier reporters, as they can be presumed to be malicious or lagging.

However, if there is no obvious Schelling point, the entire design will collapse.

In summary, for prediction markets, the oracle problem is not actually an oracle problem, because crypto oracles were never designed for things like world events.

Now, if trustlessness and decentralization are not important for prediction market Oracle Machines, because the most common dispute is defining the dispute, then what is important? How can we improve?

Recognize the following two practical guiding principles:

Oracle Machine participants need to directly bet on the platform's long-term success. This is a well-known fundamental principle in consensus mechanisms, yet it has somehow been overlooked. A proprietary, centralized Polymarket Oracle Machine is more desirable than an externally "decentralized" UMA Oracle Machine composed of hired capital.

Definition! Definition! Definition again! The importance of the Oracle Machine is second only to providing a rigorous definition for events. Among the many controversies at Polymarket, almost all the roots stem from a persistent neglect of definitions.

One must acknowledge that the real world is not perfect; even the best initial definitions may overlook certain edge cases. In such situations, clarifications should be provided immediately to prevent the problem from worsening.

The most important thing is to scoff at those who try to sell you complex decentralized Oracle Machine mechanisms. I can guarantee that they have not solved the real issues plaguing prediction markets.