The OEV concept is gaining popularity: Will the end of the bear market and the oracle track open up a wave of innovation to welcome the bull market?
Is there another important innovation in the oracle market? API3 launches OEV Network.Author: DeMan
During the bull market in 2022, the leading oracle project LINK saw its asset price rise from $0.35 to $53, an increase of 168 times, which opened the eyes of many developers to the huge opportunities and business prospects in this sector.
As the bear market in 2024 seems to be coming to an end, oracle projects are starting to take action again, aiming to earn excess returns by addressing industry pain points. Recently, the representative oracle project API3 announced the launch of the ZK-Rollup technology-supported OEV Network. OEV Network is a dedicated auction platform for order processes that sells the rights to execute specific data source updates to the highest bidder, with the winning bidder paying fees when executing data source updates, allowing Dapps to receive revenue immediately on their native chains.
The following will introduce this platform and its related important concepts, aiming to help readers grasp the value creation opportunities in the DeFi world.
First, clarify the concept of OEV to understand what changes OEV Network aims to bring to the DeFi data field
According to the official statement, OEV Network will be used to capture the OEV generated by Dapps using API3 data sources on-chain. Therefore, before introducing what kind of project OEV Network is, we need to understand the concept of OEV.
OEV stands for "Oracle Extractable Value," a proprietary concept proposed by API3. OEV is part of miner extractable value (MEV) and focuses on applications that rely on oracle updates to exploit state inconsistencies. By bringing external data (such as market prices) on-chain, oracles create opportunities for arbitrage and liquidation, thus becoming part of the MEV lifecycle.
Unlike MEV that is independent of oracles, OEV relies on oracle updates to trigger value capture opportunities. For example, when the price changes on a centralized exchange, MEV bots may choose to liquidate accounts that are underwater on lending protocols, which is a typical application scenario for OEV.
In traditional MEV models, validators and stakers usually benefit, but this often comes at the expense of users (such as liquidity providers). In contrast, OEV allows protocols and applications to capture and redistribute these profits, enhancing user loyalty and increasing the competitiveness of the protocols.
Setting aside the complex concepts, OEV is more user-friendly for liquidity providers, which means ordinary users, and aligns better with the interests of the general public. Therefore, this concept and gameplay, once launched, are undoubtedly more welcomed by the outside world.
Understand the workflow of OEV Network to discover a series of potential value opportunities
OEV Network naturally has a more attractive incentive mechanism, but for users, understanding its mechanisms in depth is more persuasive. Next, let’s introduce the specific workflow of OEV Network.
OEV (Oracle Extractable Value) represents a significant innovation in the value capture mechanism in the DeFi space. The core of OEV lies in utilizing the inconsistencies between on-chain and off-chain data to create value capture opportunities. The working principles of this part can be divided into the following key points:
Arbitrage opportunities from state inconsistencies: The emergence of OEV is based on a simple fact: the state of on-chain applications (such as price information) sometimes does not align with the actual market state off-chain. The role of oracles is to bring this external data on-chain, but during the update process, this state inconsistency becomes an arbitrage opportunity.
Changing the role of oracles: In traditional MEV scenarios, arbitrageurs gain profits by reordering transactions. In the case of OEV, the data updates from oracles become the key to value capture. When oracles update new market data on-chain, they provide applications with opportunities to exploit these information discrepancies.
Automation and auction mechanism: To effectively capture OEV, API3 has proposed an automated auction system. This system allows the rights to update oracles to be sold to the highest bidder through an auction. Thus, the auction winner can not only execute data source updates but also capture value from it.
Cross-chain operations and scalability: A notable feature of OEV is its cross-chain capability. With the help of ZK-rollup technology, OEV Network can operate efficiently across various chains, thereby expanding the range and potential of OEV capture.
Distribution and redistribution: The captured OEV not only benefits validators and stakers but, more importantly, can be redistributed to all parties participating in the protocol, including users and liquidity providers. This distribution mechanism increases the attractiveness of DeFi protocols and enhances user participation motivation.
Through these mechanisms, OEV not only provides a new way of value capture but also increases the overall efficiency and fairness of the DeFi ecosystem. With the development and improvement of API3's OEV Network, OEV is expected to play an increasingly important role in future DeFi applications.
The oracle data revenue distribution market is vast; activating this sector helps stimulate user engagement
Oracle projects involve data clearing processes in the Web3 world, especially the capture of on-chain data information value, which actually has a huge market. However, these services cover various roles from liquidation triggers to block producers, and third parties often exploit vulnerabilities in these services to extract maximum value from DeFi protocols.
For example, Aave has liquidated positions worth $2 billion over the past three years, with over $100 million used as liquidation bonuses. Although liquidation is necessary, there is still room for improvement in the value distribution during this process.
In this regard, OEV Network can improve this series of issues to some extent, optimizing and enhancing the data distribution process, and further benefiting ordinary users, encouraging more people to build a more prosperous and robust DeFi world.
