# Oracles & Risks

## Price Oracle

Smilee has been designed to function directly using **DEX prices,** which are obtained by **directly swapping on the DEX**.

To avoid to incur in excessive slippage or market manipulation, DEX prices are **checked against a Price Oracle**. Anytime DEX prices and Oracle prices deviate more than an accepted threshold, swaps revert ensuring no risk of loss to the Earn Vault or the protocol. 

{% hint style="warning" %}
Current price deviation thresholds:

* ETH & BTC: 1.5%
* ARB: 2%
* GMX: 2.5%
  {% endhint %}

{% hint style="info" %}
Smilee uses **Chainlink** as Price Oracle and **Uniswap v3** as DEX. Other Oracles and DEXs will be added in future.
{% endhint %}

## Volatility Oracle

The Volatility Oracle provides the **initial volatility for each epoch.** The initial volatility is used to:

* Define the range of the Earn Vault for that epoch (as described in [Vaults](/arbitrum-docs/protocol-design/vaults.md#earn-vaults)).
* Compute the price of Impermanent Gain Options in the [Synthetic AMM](/arbitrum-docs/protocol-design/synthetic-amm.md). \
  The AMM takes the initial volatility as the starting value for the epoch and then adjusts it based on market dynamics.

Oracle data is obtained as follows: 

* For **ETH** and **wBTC:** data is taken from Deribit.
* For **Other Tokens:** fully **on-chain data** is computed as the average volatility set by the[Synthetic AMM](/arbitrum-docs/protocol-design/synthetic-amm.md) in the previous epoch. \
  You can find the full methodology at section 3.2 of Smilee Bonding Curve [research paper](https://drive.google.com/file/d/1OYlt8TUED1gx0xGflNIjToaopK34JSS8/view).

{% hint style="info" %}
The term "Oracle" is used for simplicity. Smilee can essentially compute volatility data fully on-chain through its AMM.

ETH and wBTC volatility data is taken from Deribit because of its huge liquidity and market relevance. In any case, Smilee can switch to fully on-chain data for ETH and wBTC as well.
{% endhint %}

{% hint style="warning" %}
At the smart contract level, the Volatility Oracle is part of the Market Oracle.
{% endhint %}

## Free Risk Oracle

The Oracle provides the data used by the [Synthetic AMM](/arbitrum-docs/protocol-design/synthetic-amm.md) to price Impermanent Gain Options.

Given the limited role of such data in the pricing formula, the value is simply set at launch and updated in case of major market changes.

{% hint style="warning" %}
At the smart contract level, the Free Risk Oracle is part of the Market Oracle.
{% endhint %}

## Financial Risks

* *S*milee LPs have the same financial risk as DEX LPs — they have a delta exposure to the underlying assets and suffer Impermanent Loss, while earning an APY.
* Impermanent Gain buyers have the same financial risk as of option buyers—they pay a premium that may be lost if the options expire out-of-the-money.
* Funds deposited in [Vaults](/arbitrum-docs/protocol-design/vaults.md#earn-vaults) are only swapped on DEXs, and never leave the protocol.
* There are no liquidation risks.
* Earn Vaults & DVPs are isolated (as seen in [Liquidity-to-Volatility Engine](/arbitrum-docs/protocol-design/liquidity-to-volatility-engine.md))


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