With the rise of new performance-oriented public chains, the race for oracle solutions has intensified. Recently, there has been a voice in the market claiming that API3DAO is surpassing Chainlink. So, what does API3 do? Will OEV Network really reshape the MEV oracle market?
When it comes to the oracle race, Chainlink is the dominant player. However, with the emergence of new high-performance public chains and lightweight modular projects, competition in the oracle market has become fierce.
Recently, there has been a voice in the market claiming that API3DAO is killing Chainlink. So, what does API3 do? Will OEV Network really reshape the MEV oracle market? In this article, based on a perspective of popularization and business competition, I will share my understanding.
Usually, oracle services like Chainlink consist of data sources (exchanges), data collection nodes (API service providers), data processing centers (oracle chains), and end users (smart contract projects).
It can be seen as a bridge that connects data sources to blockchain applications. Oracle nodes collect data from different channels in parallel, and the oracle network coordinates the processing, verification, and aggregation of this data to reduce errors. Finally, the price is fed to the end users of smart contracts.
There are two key points in the current oracle workflow:
The more API data collection nodes, the more diverse, accurate, and decentralized the data sources. However, API nodes can only mechanically collect data and do “mining” work.
The more smart contract projects connected to the oracle network, the more “centralized” the oracle prices become, increasing the intervention in data and raising the trust cost for end customers.
Essentially, the oracle network acts as a third-party intermediary platform. Therefore, the role and space for API service nodes are relatively limited, and the more authoritative the oracle platform itself becomes, the more it will be questioned for its “centralization.” This is an almost irreconcilable contradiction.
The first-party oracle proposed by API3DAO actually removes the intermediate step of “pre-processing” by the oracle platform, directly connecting data sources and project parties.
For API nodes, this upgrade allows them to take on a more important role and operate and develop on top of data collection. It enhances the service capabilities of API nodes and enables them to collect more customized data sources to serve specific project needs.
For end project parties, they can cooperate with API nodes at a lower cost and in a more flexible way, customizing and developing special data requirements to provide necessary oracle support for their innovative application products.
It is clear that API3 is entering a more decentralized and flexible long-tail market for oracle solutions. It aims to enable API service nodes to provide comprehensive operational services by using a lightweight infrastructure and a web3 native (lightweight + modular) approach to bridge the gap between oracle demand and supply.
API3 primarily consists of two core components:
Airnode provides a basic infrastructure for API node service providers to set up oracle nodes and connect with project parties. It allows API nodes to deploy oracle services in a low-cost and lightweight manner, simplifying the configuration and management process, making it easier for API providers who are not familiar with blockchain technology to become oracle node operators.
dAPI is a decentralized DAO organization. API nodes continuously collect and update data from data sources using signatures, and smart contract projects can securely and transparently call data and pay on-demand. The entire management and operation of dAPI is provided by a decentralized DAO organization, which transparently governs through a mechanism of staking and slashing.
In summary, API3 attempts to build a decentralized oracle market with lightweight infrastructure services and DAO staking and slashing mechanisms. Meanwhile, mature players like Chainlink, with their large customer base and stable price preprocessing methods, are already unshakable.
API3’s business strategy, together with Celestia’s competition for Ethereum’s layer2 market, is aimed at capturing a share of the market. After all, Chainlink cannot serve all smart contract customers, and there is always a segment of lightweight customers who prioritize cost-effectiveness. Additionally, some customers require more timely and customized data source services, and some API nodes want to explore more comprehensive and rich business models.
Instead of thinking of API3 as a Chainlink killer, it is more appropriate to consider API3 as a strong complement to Chainlink, jointly segmenting the market. The choice between stable and mature Chainlink services and the low-cost and flexible API3 services ultimately depends on the market. In my opinion, it is difficult for API3 to threaten Chainlink in the short term, but in the long run, with the increasing modularity of blockchain applications, API3’s approach is worth considering.
Recently, API3 has built a layer2 public chain called OEV Network based on the Polygon CDK. How should we understand the application scenarios of this public chain? Many API nodes have the permission to update data. In the DeFi context, if a smart contract triggers a certain price point, liquidators can choose to purchase the assets pledged by users and gain arbitrage value when the price stabilizes.
Normally, the liquidators are API node service providers, as they have the authority to update the price of the smart contract protocol. Before the governance model of OEV Network came out, this liquidation process could be chaotic. API nodes might compete to update the data in order to gain liquidation rights, and multiple API nodes might intensify the “volatility” of market prices. The objective data supplier becomes an arbitrageur who disrupts normal market order, deviating from the original intention of dAPI to serve end customers in an open market. What can be done?
OEV Network functions as a governance mechanism that allows dApps users with positions close to liquidation to participate in auctions on the dAPI3 network. The highest bidder obtains the next oracle data update right and earns MEV profits from liquidation.
Why do I say this is an upgrade and modification for MEV? The original version 1.0 of MEV was actually a naturally occurring market phenomenon. In the collaboration between API nodes and smart contracts, there would inevitably be situations where price fluctuations trigger liquidations. By default, API nodes that monitor liquidation points would compete to seize the cake.
In this case, a market would emerge, specializing in handling various MEV liquidation demands, similar to MEV-Boost. As a result, some API nodes would focus on arbitrage as their main appeal, which deviates from the original intention of dAPI to serve end customers in an open market. What can be done?
MEV version 2.0 transparentizes the existence of MEV. Since MEV opportunities always exist, API node service providers can participate in liquidation by bidding, and the bidding income is distributed to the users of dApps protocols. This means that the value originally obtained from users is returned to them.
This actually opens up a new business landscape for the MEV market. Previously, MEV was only for the benefit of a few arbitrageurs, but now it becomes an opportunity for the general public.
In conclusion, API3 is not the only one trying to redefine MEV in this way. Flashbot 2.0 is also attempting to tell a similar story. After all, the existence of MEV damages the fair rights of users on the chain. Changing the focus from benefiting a few to benefiting the masses can really open up new possibilities.
Note: The strategic positioning of the oracle race is extremely important. #Link, #Pyth, #API3, #Band, and others. Although Chainlink monopolizes a large part of the market, the disputes in the oracle race have always existed, and there will definitely be dark horses emerging. It is worth long-term attention.
Related reports:
The first oracle for Bitcoin, Alex Labs, opens the door to BTC’s DeFi.
Is the DeFi oracle a new hit? In-depth analysis of Pyth Network.
Chainlink CCIP goes live on the mainnet, can “oracles + cross-chain” create a chemical reaction?