Information-Theoretic Limits of Settlement Verification in Oracle-Based Decentralized Finance

Abstract

Decentralized finance (DeFi) protocols that depend on external settlement facts (whether asset prices from oracle networks or off-chain payment confirmations) must make irreversible on-chain state transitions based on information they cannot directly verify. This settlement verification problem is governed by a fundamental tension between safety (rejecting false claims) and liveness (accepting true claims promptly), mediated by the capital, latency, and trust assumptions a protocol is willing to absorb. We formalize settlement verification as a binary hypothesis-testing problem over an adversarial multi-publisher channel and establish three main results. (1) Oracle Verification Trilemma. For any settlement verification mechanism operating over an adversarial oracle channel with adversarial fraction ϕ δ], where δ is the mechanism’s error-absorption capacity. For hyperbolic funding rates, the singularity at the solvency boundary provides robustness amplification: a β-fraction capacity utilization tolerates oracle errors up to (1 − β) times the total capacity.