TL;DR: the burden of “knowing” the price is on the user, who will still use oracles.

Oracle-less systems in DeFi, specifically input price oracles, don't rely on outside sources for price updates. This means they can be more secure, save money, and offer more control. They also have some new features and a lower chance of being tampered with. But, they can be tricky to set up and might not always give the most accurate prices. Plus, users might have to check prices themselves. There can also be issues with keeping prices stable and some limits when trying to pull out funds. Is going oracle-less really the future, or are we overlooking the tried-and-true benefits of oracles?

Let’s look at the pros and cons:

a) Oracle Independence

Oracle-less protocols in the DeFi space offer a plethora of advantages. One of the most significant benefits is enhanced security. By eliminating the reliance on Oracles, these protocols inherently reduce the risk of manipulation and potential attacks that exploit Oracle vulnerabilities. Since there's no dependence on external sources of information, the system becomes self-reliant.

b) Cost Efficiency

Cost efficiency is another notable advantage. Without the need to rely on Oracles, there's no associated fee for their services. This cost-saving aspect is complemented by the protocol's immutability. It operates based on its own predefined rules, free from external influences. Furthermore, these protocols lean on arbitrageurs to maintain interest rates and collateral debt positions, paving the way for a more capital-efficient ecosystem.

c) Flexibility with Dynamic Borrow Rates

Speaking of flexibility, platforms like Uniswap v4 are leading the charge. They empower users by allowing them to set their own liquidation threshold (LT) ranging from 50% to 99%. This not only offers users a higher degree of flexibility but also adjusts the borrow rate in proportion, creating a dynamic system tailored to individual risk profiles.

d) New Revenue Streams for LPs

For Liquidity Providers (LPs), there's a silver lining too. They stand to earn additional income from liquidation penalty rates paid by borrowers, ushering in a new revenue stream. Interestingly, unlike traditional lending protocols, direct liquidation penalties are absent in this system. Instead, positions experience 'decay,' where collateral diminishes over time. This design also ensures minimal losses during transient price drops, adding another layer of security. The innovative "hooks" feature in Uniswap v4 further augments the functionality of two-token pools.

e) Mitigated Manipulation Risks

And lastly, the risk of manipulation is significantly reduced. Even if someone tries to push the borrower's position into the liquidation range, there's no direct incentive for them to do so.

a) Complexities of Oracle-less Protocols

However, it's not all rosy. Oracle-less protocols come with their set of challenges. Building such a protocol is complex and demands a high level of expertise from the team behind it. But moreover, users, are expected to familiarize themselves with fairly complex dApps and in some cases act as the oracle themselves.

b) Issues with Accuracy and Versatility

Accuracy is another concern. In the absence of external data, obtaining precise price information becomes a challenge. This limitation extends to the types of data the protocol can leverage, potentially affecting its versatility. For instance, the PWN protocol doesn't support liquidations and mandates a 50x collateral for lending.

c) Shifting Burdens to Users

The onus of addressing issues like oracle hacks, price manipulation, and other discrepancies now falls on the user. While the underlying assumption is that the market will determine the price, in reality, it translates to users having to develop their own oracle-driven bots. The system's efficacy is also tied to the stability of collateral prices.

d) Challenges with Liquidity

Liquidity poses another challenge. Not all LPs can simultaneously withdraw liquidity. Moreover, users who opt for a higher LT, implying more risk, will find themselves paying a steeper borrow rate. This can lead to net liquidity constraints, adversely affecting trading on platforms like Uniswap v4 due to insufficient liquidity.

e) Over-Reliance on Token Economics

Lastly, there's an evident over-reliance on token economics. For example, Timeswap uses six native tokens, some of which support the oracle-less protocol.

Wrapping Up: Why Oracle-less Might Not Be the Perfect Solution for DeFi

While oracle-less protocols in DeFi showcase an innovative approach with several advantages, the practical implications for users cannot be overlooked. The shift of responsibility to users, who inevitably find themselves turning to oracles for accurate price data, underscores the inherent limitations of going completely oracle-less. As the DeFi ecosystem matures, it becomes increasingly evident that a balanced design incorporating trusted oracles might offer a more user-friendly and reliable solution. After all, innovation should simplify processes, not complicate them.