Technical Analysis of API3: Another Dark Horse in the Oracle Track?

Written by: Haotian

When it comes to the oracle track, people naturally think of @chainlink as the leader. However, with the rise of new performance public chains and the emergence of various lightweight projects, the oracle track has also started to become competitive.

Recently, there have been voices in the market suggesting that @API3DAO could kill Chainlink. What exactly is API3 doing? Will OEV Network really trace back the MEV oracle market? Next, based on a perspective of popular science and business competition, I will share my understanding.

How to Understand API3's First-party Oracle?

Typically, 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 project parties).

This essentially builds a bridge from data sources to blockchain applications, where oracle nodes concurrently collect data from different channels, and the oracle network coordinates, processes, verifies, and aggregates this data to reduce errors, ultimately feeding prices to the end smart contract clients.

There are two key points in the current oracle workflow:

1) The more API data collection nodes there are, the richer, more accurate, and sufficiently decentralized the collected data sources will be. However, API nodes are doing the hard work of mechanically collecting data for "mining";

2) The more smart contract project parties that the oracle network connects to, the more "centralized" the oracle price processing becomes. The greater the intervention in the data, the higher the trust cost for end clients.

Essentially, the oracle network acts as a third-party intermediary platform, so the role and potential of API service nodes are relatively limited. The more authoritative the oracle platform itself, the more it falls into the vortex of "centralization" doubts, which is almost an 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 represents an upgrade to a master role, allowing them to operate and refine their services on top of data collection, enhancing the service capabilities of API nodes, enabling them to collect more customized data sources and better serve the special needs of project parties;

For end project parties, they can collaborate directly with API nodes at a lower cost, more flexibly customize and develop special data needs, thereby providing necessary oracle support for their innovative application products.

API3 Chooses a Decentralized and Flexible Long-tail Market for Oracles

It is not difficult to see that API3 is cutting into a more decentralized and flexible long-tail market for oracles, aiming to activate the comprehensive operational service capabilities of API service nodes as a starting point, and building a bridge between oracle demand and supply in a more web3 native (lightweight + modular) way. How is this achieved?

API3 mainly consists of two core components:

1) Airnode provides a set of basic infrastructure for API service providers to build oracle nodes and connect with project parties, allowing API nodes to deploy oracle services in a low-cost and lightweight manner. Through simplified configuration and management processes, API providers who are not familiar with blockchain technology can easily become oracle node operators;

2) dAPI acts as a decentralized DAO organization. API nodes continuously collect and update data from data sources using signatures, while the data demand side's smart contracts can securely and transparently call the data and pay as needed. The entire management and operation of dAPI is provided by a decentralized DAO organization, which uses a staking and slashing reward mechanism to ensure transparent and secure governance;

In summary, API3 attempts to build a decentralized oracle market without intermediaries using lightweight basic infrastructure services and a DAO staking reward mechanism. In contrast, the mature Chainlink has a super loyal customer base, a stable price pre-processing method, and is already an unshakable presence.

API3's business strategy thinking is similar to how Celestia has sparked a DA War, continuously seizing the layer2 market of Ethereum. After all, Chainlink cannot serve all smart contract clients; there will always be a portion of lightweight clients who care more about cost and value for money. There will always be clients who need more timely and customized data source services, and there will always be API nodes looking to explore more comprehensive and rich business models, etc.

Rather than saying API3 aims to be the killer of Chainlink, it is more accurate to view API3 as a strong complement to Chainlink, jointly splitting the market.

As for whether end clients prefer the stable and mature services of Chainlink or lean towards the cost-effective and flexible services of API3, the choice is entirely in the hands of the market. In my view, it is difficult to threaten Chainlink in the short term, but in the long term, considering the increasingly modular blockchain application market, API3's choices are also worth watching.

Is OEV Network an Upgraded Modification of MEV?

Recently, API3 has built a layer2 public chain called OEV Network based on Polygon CDK. How should we understand the application scenarios of this public chain? Many API nodes have the authority to update data. In DeFi scenarios, if a smart contract triggers a certain price point, a liquidator can choose to purchase the assets pledged by the user, thereby obtaining arbitrage value once the price stabilizes.

Under normal circumstances, the liquidator is actually the API node service provider, as they have the authority to update the smart contract protocol prices. Before the governance model of OEV Network is established, this liquidation behavior may be chaotic. API nodes might rush to update data to gain liquidation rights, and multiple API nodes competing for liquidation rights could exacerbate market price "volatility," turning the original objective data suppliers into potential disruptors of normal market order, which is clearly a distortion.

However, this cannot be curtailed. Directly connecting API nodes with smart contract project parties is intended to reduce platform intervention and enhance market operations. In response to the internal competition and chaos in arbitrage, no third party can effectively intervene; it can only be constrained through governance mechanisms.

OEV Network serves as a governance mechanism that stipulates that when dApps users' positions are close to liquidation, they can participate in auctions on the dAPI3 network. The highest bidder gains the right to update the next oracle data, thus obtaining the MEV profit from liquidation.

Why do I say this is an upgraded modification of MEV? The original version 1.0 of MEV naturally existed in the market. During the collaboration between API nodes and smart contracts, there would inevitably be situations of price fluctuations leading to liquidation, with API nodes that detected the liquidation point competing to seize the opportunity.

In this case, the market would generate a pipeline similar to MEV-Boost specifically to handle various MEV liquidation demands, which would lead some API nodes to prioritize arbitrage as their main objective, clearly deviating from the original intention of dAPI to serve end clients in an open market. What to do?

Version 2.0 of MEV simply makes the existence of MEV transparent. Since MEV opportunities always exist, it makes sense to be upfront about it. With MEV arbitrage opportunities, API node service providers can bid to participate in liquidations, and the auction revenue will be distributed by OEV Network to the users of the dApps protocol, effectively returning the value originally extracted from users back to them.

This actually opens up the commercial landscape of the MEV market. The original MEV served a niche group of arbitrageurs, while the new MEV has become an opportunity for the general public.

That's all.

In fact, not only is API3 attempting to legitimize MEV in this upgraded manner, but Flashbot 2.0, which is in the works, is also trying to tell a similar story. After all, the existence of MEV undermines the fair rights of on-chain users, and transforming the service from benefiting a small group into one that benefits the public can truly open up new horizons.

Note: The strategic positioning in the oracle track is indeed very important. #Link #Pyth #API3 #Band, etc. Although Chainlink monopolizes a large portion of the market, the disputes in the oracle track have always been ongoing, and there will definitely be dark horses emerging, which are worth long-term attention.