Choosing the right price oracle

This document is intended to serve as a decision-making aid for Atomists when selecting the appropriate price oracle.

As an Atomist, the choice between a Market Price Oracle and a Fundamental Oracle (e.g., wstETH/stETH conversion rate) defines the vault’s internal accounting logic. This decision directly dictates how the Share Price is calculated and how users experience volatility and liquidity.

At a Glance: Impact on Vault Mechanics

Feature	Market Price Oracle	Fundamental Oracle
Share Price Behavior	Directly reflects secondary market volatility and depegs.	Decoupled from market noise; tied to programmatic asset backing.
UX Impact	Real-time transparency of liquid value.	"Synthetic stability" that prevents panic during market dips.
Arbitrage Risk	Sophisticated actors can "snipe" the vault during dips to dilute long-term yield.	Neutralizes predatory arbitrage by ensuring shares are minted at intrinsic value.
Primary Use Case	Transparent value tracking for liquid assets.	High-leverage looping strategies (e.g., LST/ETH).

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1. Market Price Oracles: Transparency & Liquidity

Market oracles (like Chainlink) reflect what you would receive if you sold the asset immediately.

• Impact on Share Price: Every market fluctuation—including "scam wicks" or temporary liquidity imbalances—is immediately visible in the vault’s share price. While this provides absolute transparency, it can lead to high volatility in leveraged vaults.

• User Experience: Informed users can track the exact market value of their investment. However, uninformed users may be deterred by seeing their portfolio "crash" during a temporary de-peg.

• The "Sniping" Risk: If the share price drops due to a market dip, new users can enter the vault cheaply. Unless onboarding contributions are adjusted, this dilutes the realized returns of existing depositors.

2. Fundamental Oracles: Stability & Protection

Fundamental oracles ignore market prices in favor of the programmatic exchange rate (e.g., how much stETH backs one wstETH).

• Impact on Share Price: The share price remains stable even if the secondary market panics. This creates a "hold-to-maturity" environment where the vault's internal value is protected from external liquidity shocks.

• User Experience: This provides a much smoother UX, preventing psychological panic and unnecessary offboarding during market stress.

• The Exit Liquidity Gap: A stable share price can be misleading during a crisis. While the vault says a user is "in the green," the actual underlying liquidity might be insufficient to fulfill a withdrawal at that price. This can create a "first-out" advantage where early withdrawers drain liquid reserves.

Best Practices for Atomists

For Leveraged Looping strategies, fundamental oracles are generally preferred. They prevent liquidation risks caused by "market noise" and stop savvy traders from acquiring cheap shares during temporary depegs.

Market oracles prioritize absolute transparency and are best when users need to see the real-time liquid value of their investment. They are particularly suitable when the vault is private or targets sophisticated investors who understand the underlying protocol risk.

Protecting the Net Asset Value (NAV) with dynamic contributions

The choice of oracle requires different automated contribution strategies to protect the vault's NAV:

1. With Market Oracles: The vault (automatically executed by Alpha) should increase onboarding contributions during a depeg dip to ensure new entrants do not exploit the lower share price at the expense of existing users.

2. With Fundamental Oracles: The vault should increase offboarding contributions if the market price deviates from the fundamental rate. This ensures exiting users compensate the vault for the "liquidity gap" rather than leaving the remaining depositors to shoulder the cost.

Dynamic contributions, the amount of which is constantly adjusted by the Alpha based on exchange rate oracle prices, ensure that users can only withdraw the current market value of their position. This ensures that the share price is not affected by withdrawals.