Pyth Whitepaper Summary
Following the Pyth network whitepaper release and coverage by the Financial Times on Jan 18, 2022, we wanted to provide the Pythian community a summary:
Growth in DeFi requires high-fidelity, time-sensitive, real-world data, direct from the source and made available on any L1 blockchain.
Financial market data, however, is often accessible to only a limited set of institutions and users. Traditional markets typically maintain strict control over and access to both live and historical price feeds. Consequently, only a selected group of users has access to the most timely, accurate, and valuable information.
The Pyth network is a next-generation oracle solution that aims to bring this valuable financial market data to the general public.
The network does so by incentivizing market participants — trading firms, market makers, and exchanges — to share directly on-chain the price data collected as part of their existing operations. The network then aggregates this first-party price data (on-chain) and makes it available for use by on- or off-chain applications.
End-users (Consumers) of Pyth data can elect to pay data fees to gain protection against a potential oracle failure. Data publishers must stake tokens in order to publish data for a product, and the stake of at-fault publishers (if they make the aggregate price erroneous) will be used as a payout to those end-users voluntarily paying fees.
Delegators choose which product (price feed) and a publisher to stake on top of in order to earn data fees (or lose their stake if the oracle is inaccurate due to publisher faults). Initially, 80% of the data fees will go to delegators while the remaining 20% will be shared among publishers — this, among other parameters, will be subject to change through a PYTH governance.
The design and mechanics around the PYTH utility and governance token aim to make the Pyth network self-sustaining and decentralized.
3 different types of stakeholders will interact within the network:
- Publishers publish price feeds and earn a share of data fees in exchange. Publishers are typically market participants with access to accurate, timely price information. The protocol rewards publishers in proportion to the quantity of new pricing information that they share.
- Consumers read price feeds, incorporate data into smart contracts or dApps, and optionally pay data fees. Consumers can either be on-chain protocols or off-chain applications.
- Delegators stake tokens on a specific product and publisher to earn a share of the data fees in exchange for potentially losing their stake if the oracle is inaccurate.
Any actor may have multiple roles within the network. For instance, data publishers (or consumers) may additionally decide to delegate tokens to earn additional data fees.
How Will Participants Interact in the Network?
The Pyth protocol consists of 4 on-chain core mechanisms:
- Price aggregation combines the reported prices and confidence intervals of individual publishers into a single price feed and confidence interval feed for a specific product (e.g. BTC/USD feed). This mechanism is designed to produce robust price feeds — feeds whose prices cannot be significantly influenced by small groups of publishers.
- Data staking allows delegators to stake tokens to earn data fees. The delegators in aggregate also determine the level of influence (stake-weight) that each publisher has on the aggregate price. In addition, this mechanism determines whether delegators’ stakes are slashed. Finally, the mechanism collects data fees from consumers and distributes a share to delegators (initially set at 80%). The remainder (20%) goes into a reward pool that is distributed among publishers.
- Reward distribution determines the share of the reward pool earned by each publisher. Each product has a reward pool that delegators can stake into. The reward distribution mechanism preferentially rewards publishers with higher quality price feeds and reduces the likelihood that uninformed publishers will earn rewards.
- Governance will be using a coin-voting system that will help determine the high-level parameters of the three mechanisms above. Parameters include what types of tokens may be used for data fees; which products are listed on Pyth; the share of data fees allocated to publishers, delegators, and other uses; the number of PYTH tokens that publishers must stake or enable claims to be filed against a product, and more.
Claims Process: A HUMAN Touch
One should expect there to be times where the Pyth network must verify and resolve apparent conflicts between an on-chain aggregated market price that may be deemed erroneous when compared to real-world reference prices.
A seemingly obvious yet subtle point: when a set of publishers quotes potential outlier prices which then generates an aggregate price that consumers deem to be wrong, the network must determine whether those who paid data fees must receive a payout. If the aggregated price is ratified as wrong, the specific at-fault publishers are identified, and their stakes are slashed and paid out to the end-users.
Overall, the claims process will determine whether a payout occurs. The purpose of this process is to verify that the aggregate price and confidence interval for a product were incorrect in comparison to some ground-truth off-chain data. The process will use HUMAN protocol — an open-source software package provided by Pyth — to collect the necessary off-chain information from impartial judges and then feed that information into a predetermined algorithm that determines the outcome of the claim. Finally, PYTH token-holders will vote to ratify the output of the algorithm.
Anyone will be able to file a claim against the protocol to (possibly) trigger a payout by bonding PYTH tokens. The latter is returned if the claim is ratified by governance; this requirement prevents spam.
This section summarizes the benefits for the various Pyth network stakeholders:
Publishers are incentivized to stake PYTH tokens to participate in the protocol and earn a share of the rewards. Publishers earn a share of the data fees for the products they price. The data fees for a product will likely grow in proportion to consumer usage of the price feed. Publishing erroneous data (voluntarily or not) to the network may lead to the publisher's stake being slashed.
Consumers are incentivized to pay data fees for two reasons. First, data fees enable applications to reduce the risk of using Pyth price feeds as they would receive a payout in case of failure. Second, paying data fees attracts more publishers to the product, which improves the robustness of the price feed.
Delegators are incentivized to participate in the protocol to earn data fees (coming from consumers’ data fees). Delegators will initially earn attractive payments, but competition between them will reduce the payments over time as the market becomes more efficient.
The future is bright for DeFi. For the space to flourish, we need a truly decentralized oracle solution that delivers real-world data on-chain and on a sub-second timescale (previously inaccessible whether on- or off-chain). Pyth network is about delivering data directly from the source with no middlemen or intermediaries. That’s what it means to be a publisher network as opposed to a reporter network.
An oracle built on-chain that delivers more complete data, faster and with more confidence to the whole world. That’s why we are building with Pyth.
If you’re building a DeFi project or are excited by the future of decentralized finance, please check out our whitepaper, visit our website, docs, or our own DefiLlama Wiki for more details. Finally, don’t forget to join us on Discord or Twitter to give us your feedback.