Daily Update: December 6, 2023

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

Blockchain Oracles Create Risk and Opportunity

The promise of decentralized finance has been a trustless system in which contracts and trades are executed without interference and intermediaries. Blockchains are the fundamental technology upon which decentralized finance runs — a way to manage transactions without human variability. Fortunately, or unfortunately, not every aspect of finance has been decentralized on blockchains. Even smart contracts, which are executed on a blockchain, may require information from an off-chain system or another blockchain. The name for the technology that takes this off-chain information and inserts it into a smart contract is an oracle. Researchers at S&P Global Ratings and S&P Global Market Intelligence examined the risks and the opportunities that oracles offer decentralized finance in “Utility at a cost: Assessing the risks of blockchain oracles.”

Imagine a smart contract, encoded on a blockchain, that automatically sells a block of a technology company’s shares if the price falls more than 10%. This isn’t an unusual type of transaction as many traders set up “sell stop orders” to avoid catastrophic losses in the event of large market events. The problem is that the price of the technology stock isn’t on the blockchain. Instead, that information exists in traditional financial markets. An oracle is set up to monitor the public market price so that the smart contract can initiate the sale when the price threshold is reached. This is good news for decentralized finance since it allows smart contracts to interact with traditional financial markets while retaining the benefits of a trustless system.

However, imagine that in the example given above, someone manipulated the information fed to the oracle so that it sold too early or too late. Or imagine that there were problems with the network connection, so price changes weren’t communicated in a timely manner, or that a single company came to dominate the market for oracles and they became a single point of failure. Suddenly, oracles, which had seemed like such an elegant solution, are introducing uncertainty and the potential for manipulation into smart contracts. Keep in mind that the technology of smart contracts does not allow transactions to be reversed if it turns out the oracle was manipulated. 

S&P Global’s researchers examined each of these risks and proposed potential risk mitigations that can reduce the challenges of oracles for decentralized finance. The potential for concentration risk in the oracle market is serious. Chainlink is the most widely used oracle network in decentralized finance, and its total value secured exceeds that of the two next largest, WINkLink and Chronicle, combined. According to S&P Global, developers of smart contracts should diversify their oracle use across different projects and be vigilant in evaluating the governance structure and source code of the oracles they use. 

When the information provided by an oracle is false or out of date, this is a manifestation of data quality risk. To avoid these risks, data such as price information should be derived from a range of sources of proven reliability. If many sources for off-chain information are aggregated, then outlying values can be discarded.

Finally, there are the technical risks associated with transmitting data from an oracle. Network connection or latency issues can be damaging to the efficacy of smart contracts if slow transmission leads to the late execution of a contract. The solution, once again, is diversification. Using multiple oracles can mitigate the risk of technical failure and allow the smart contract to execute effectively.

Today is Wednesday, December 6, 2023, and here is today’s essential intelligence.

Written by Nathan Hunt.

Economy

Week Ahead Economic Preview: Week of Dec. 4, 2023

A busy build up to the holiday season includes worldwide services and sector PMI data and the November US labor market report in the week ahead, in addition to trade and inflation figures from mainland China. Central bank meetings in Canada, Australia and India will also unfold alongside third quarter GDP releases from the Eurozone, Australia, Japan and South Korea.

—Read the article from S&P Global Market Intelligence

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Capital Markets

Global Credit Outlook 2024: New Risks, New Playbook

Looking ahead at 2024 and after, it’s clear that the events since the COVID-19 pandemic have brought on a profound transformation for the global economy and financial markets. While some of the same challenges remain, other risks have emerged — all of which require a new playbook for issuers and investors in the debt markets.

—Read the report from S&P Global Ratings

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Global Trade

Singapore Closes 2023 On A High Note As Manufacturing Output Surges

Having commenced 2023 with weak economic momentum, the Singapore economy is closing the year on a high note. Manufacturing sector output showed a strong rebound of 7.4% year-over-year (y/y) in October 2023, after 12 consecutive months of year-over-year contraction. Singapore's non-oil domestic exports to China rose sharply in October, up 38.5% y/y, buoyed by non-electronics exports. Real GDP growth momentum improved to a pace of 1.1% growth year-over-year in the third quarter of 2023, compared with 0.5% y/y in the second quarter of 2023.

—Read the article from S&P Global Market Intelligence

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Sustainability

Listen: At COP28, Solving For Water Challenges Through Public-Private Collaboration

Water is a throughline for nearly every subject covered on the ESG Insider podcast, and it is a key feature of the thematic program at the UN's big climate summit, COP28, which kicked off in Dubai on Nov. 30. In this episode, hear about how the private sector is approaching water risks and opportunities around the world — and how it can use partnerships to drive progress.

—Listen and subscribe to ESG Insider, a podcast from S&P Global Sustainable1

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Energy & Commodities

Listen: Winter Is Coming: Can Gas, Power Sectors Move From Finger Pointing To Joint Coordination?

Heading into this winter, relatively mild weather is forecast, but utility regulators have warned that an extended bout of extreme winter weather could stress infrastructure and present problems once again. Though progress has been made to enhance winter preparedness, the interconnected nature of the gas and power industries remains a key concern.

—Listen and subscribe to Capitol Crude, a podcast from S&P Global Commodity Insights

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Technology & Media

Is Japan's Subscription Video-On-Demand Industry Ripe For Further Consolidation?

Prime Video and Netflix account for nearly half of Japan's total SVOD subscriptions and subscription revenue as of the third quarter of 2023. Together with DAZN Group Ltd. and Disney+ of Walt Disney Co., international streaming services add up to 58% of the market's total subscriber base. Kagan estimates that the rest is split among other companies, with 11 major local platforms totaling slightly over 40%.

—Read the article from S&P Global Market Intelligence

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