Oracle Machine Innovation: Exploring New Frontiers of On-chain Price Discovery

In the summer of 1954, in a house in Manchester, England, computer science pioneer Alan Turing consumed an apple laced with cyanide, ending his legendary life. To commemorate this scientist who made tremendous contributions to the fields of computer science and artificial intelligence, the American Computer Association established the "Turing Award."

In Turing's research, there was a notion: the existence of a device that could continuously provide data to computers. In a centralized world, inputting information is not difficult, but ensuring the authenticity of the information and preventing human intervention has become a technical challenge.

The blockchain field has been pursuing "information authenticity" and has begun new explorations of Turing experiments. With the booming development of decentralized finance (DeFi), the "Oracle Machine" providing price data for DeFi products has shifted from niche to mainstream, attracting widespread attention from the crypto community.

Currently, there are a variety of Oracle Machine projects, each with its own characteristics. Among them, NEST Protocol adopts a unique approach by placing the price formation process on the blockchain. It forms the "fact price" through user participation in different trading pairs' "quote mining" and arbitrage games, eliminating the trust cost of off-chain processes. The NEST system provides sufficient token incentives for quote "miners", allowing participants to earn NEST tokens or nToken, and share ETH earnings weekly.

The "Quote Mining" of NEST Protocol combines the simplicity and reliability of Bitcoin's POW, while its token economic mechanism is similar to the currently popular "Liquidity Mining", providing sufficient incentives for participants. It can be said that NEST Protocol completes the entire process of the Oracle Machine on-chain, representing the ideal form of an Oracle Machine.

The Potential of Oracle Machines

Most Oracle Machine designs rely on off-chain game systems, providing data and reaching consensus through external node networks. This method incurs a certain trust cost, as users must trust the off-chain data acquisition process. Therefore, many projects are committed to ensuring the authenticity of off-chain network data and the credibility of nodes through mechanism design, but the mechanisms tend to be complex and uncontrollable.

The NEST protocol aims to eliminate uncontrollable factors and conduct games directly on-chain, forming a true "price fact". In the system, "price facts" are primarily generated by two types of participants: quoting miners and verifiers.

Quotation miners deposit two types of tokens (such as ETH and USDT) into the NEST contract based on what they consider a reasonable market price, and pay a handling fee. There is a minimum threshold for bidding, with the current minimum bid unit being 30 ETH, and a 1% handling fee must also be paid.

After the quote is completed, the price will be announced and open for challenge within approximately 5 minutes. If there are no arbitrageurs taking advantage of the price, it is deemed reasonable and can be considered the current market price. Otherwise, the arbitrageurs will correct it to the market price and provide a quote that is double the size of the funds used for the order, available for subsequent arbitrageurs to challenge.

This mechanism for price discovery using "real money" greatly reduces the risk of price manipulation, forming "price facts" entirely on-chain. Data callers can see the entire process without needing to trust the data source. Correct quotes will be rewarded, while malicious quotes will incur losses due to arbitrage. As the liquidity pool increases and the scale effect of NEST becomes apparent, the cost of malicious quoting will be very high, corrected by the entire market.

In addition, NEST token holders can regularly share the fees collected by the system, playing a more important role in NEST 3.0. For example, when creating and bidding for new ERC20 Token/ETH trading pairs, NEST tokens are required, and unsuccessful bidders can even retrieve their bidding funds in excess, thereby incentivizing market participation.

Comparing the entire sector horizontally, NEST's current position does not match its value. Its rich and完善 token economic model shows great growth potential. In terms of project valuation, the Oracle Machine sector currently has a dominant player, with the leading project’s circulating market cap being 48 times that of NEST. As a pioneer of the "price fact" solution, NEST has significant upside potential. With the booming development of the DeFi field, NEST is expected to become the preferred solution for more projects.

Token Economic Model Analysis

The token economic model is a key indicator for assessing the development potential of a project. A diversified incentive model can provide positive feedback to ecosystem participants from multiple angles, promote the prosperity of the secondary market, and even become a long-term stable investment choice for users.

NEST not only introduces incentives and game mechanisms in the data generation phase but also designs a unique incentive scheme for token holders. NEST and nToken holders can deposit their tokens into the contract and receive the system's ETH earnings for that week on a weekly basis. This dividend mechanism incentivizes token holders to participate in ecological construction and attracts more people to use NEST.

Currently, the earnings of NEST and nToken mainly come from the transaction fees of quoting miners and the usage fees from downstream applications calling data. All fee collection and distribution are completed by smart contracts, ensuring full transparency throughout the process.

Based on historical data, the cash flow discount model is used to evaluate the NEST token. A two-stage free cash flow discount model is adopted to forecast the growth of NEST's free cash flow and provide the cash flow growth rates for the two stages.

Assuming that in the first stage, the weekly revenue of NEST maintains a linear growth for 5 years, with a weekly increase of 138 ETH. After 5 years, it enters the second stage, where the growth rate of revenue drops to 0. When the discount rate is set at 7%, the current valuation of NEST is 0.005 ETH; when the discount rate is 10%, the valuation is 0.0035 ETH.

According to the latest data, the current price of NEST is approximately 0.000151ETH, which means the valuation is 23-33 times the current price. This indicates that both NEST and nToken have long-term growth potential, with their steadily growing quoted cash flow providing strong support for the price.

In addition, the nToken system in the NEST protocol supports quotes for any ERC20/ETH trading pairs. Users can initiate the creation of Oracle Machine trading pairs and enter the auction process. Once the Oracle Machine is successfully auctioned and activated, the auction funds will be permanently destroyed. This gives NEST the possibility of "infinite deflation." As more quality projects are integrated and trading pairs increase, NEST tokens will continually be destroyed, enhancing the value of the tokens.

Building a New Infrastructure for DeFi

Compared to the simple "information flow" Oracle Machine, NEST's path to forming "price facts" on-chain is much more difficult. Most Oracle Machine systems choose a lower-threshold consensus model for rapid expansion. However, regarding the question of whether to "trust data" or "trust facts," NEST has its unique answer.

By forming a sandbox quotation market through the actual funding quotes of on-chain miners, the interests drive validators (arbitragers) to continuously correct data, making it the true price. As the quotation market flourishes, the NEST protocol ecosystem will become even stronger. However, the information-importing Oracle Machine field may become a red ocean due to low barriers to entry, and the emergence of malicious projects during the competition may reduce people's trust in "price information."

NEST is not simply moving data on-chain, but generating real data in a decentralized manner on-chain. This trustless approach will scale further with the development of the DeFi ecosystem, which in turn can enhance data efficiency and accuracy, creating a positive feedback loop. As the number of validators and arbitrageurs increases, the migration costs of the project will continue to rise, and the first-mover advantage of the NEST protocol is expected to establish a competitive position in the Oracle Machine track.

There is a famous saying in the crypto community: "Don’t trust, verify." The NEST network is a practitioner of this philosophy. When building a "perfect" quoting system, one must assume the presence of the most lies and the greatest malice. Only when real on-chain information can still be formed in such a harsh environment can it be considered an excellent Oracle Machine system.