With the rise of new performance public chains, the oracle race has also begun to heat up. Recently, there has been a voice in the market claiming that API3DAO has surpassed Chainlink. So, what exactly is API3? Will OEV Network really reshape the MEV oracle market?
When it comes to oracles, most people naturally think of Chainlink, but with the emergence of various new lightweight projects on the new performance public chains, competition in the oracle race has intensified.
Recently, there has been a voice in the market claiming that API3 has surpassed Chainlink. So, what exactly does API3 do? Will OEV Network really reshape the MEV oracle market? In the following discussion from the 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 project parties). It is like building a bridge from data sources to blockchain applications. The oracle nodes collect data from different channels in a multi-channel and concurrent manner, while the oracle network coordinates, verifies, and aggregates this data to reduce errors, and finally feeds the price to the end users of smart contracts.
Currently, there are two key points in the oracle workflow:
The more API data collection nodes there are, the more diverse, accurate, and decentralized the data sources are. However, API nodes perform tedious tasks and can only mechanically collect data for “mining.”
The more smart contract project parties the oracle network accesses, the more centralized the oracle price processing becomes, and the greater the interference with the data, resulting in higher trust costs 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, the more it will be questioned for its centralization. This is almost an irreconcilable contradiction.
The first-party oracle proposed by API3DAO actually removes the “pre-processing” intermediate link of the oracle platform and directly connects the data source and the project party. For API nodes, this upgrade allows them to take on a more important role and enhance their service capabilities by operating and developing on top of data collection. They can collect more customized data sources and serve project parties with special needs. For end project parties, they can cooperate with API nodes at a lower cost, customize and develop special data requirements more flexibly, and 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 oracles, using the comprehensive operation and maintenance service capabilities of API service nodes as an entry point to build a bridge between oracle demand and supply in a more web3 Native (lightweight + modular) way. How is this achieved?
API3 primarily consists of two core components:
Airnode provides a basic infrastructure for API node service providers to build oracle nodes and connect with project parties. It allows API nodes to deploy oracle services in a lower-cost and lightweight manner, simplifying the configuration and management process, making it easy for API providers who are not familiar with blockchain technology to become oracle node operators.
dAPI functions as a decentralized DAO organization. API nodes continuously collect and update data from data sources using signatures. Smart contracts of data demand parties can securely and transparently call data and pay on-demand. The entire management and operation of dAPI is provided by a decentralized DAO organization, and transparent security governance is achieved through the Staking and Slash incentive mechanisms.
In summary, API3 attempts to build a decentralized oracle market with lightweight infrastructure services and DAO Staking incentive mechanisms, creating a decentralized intermediary for oracles. However, mature platforms like Chainlink, with a large customer base and stable price preprocessing methods, are already an unshakable presence.
API3’s business strategy, like Celestia’s competition for the Layer2 market, is not necessarily about killing Chainlink, but rather about being a powerful complement to Chainlink and jointly segmenting the market. As for whether end customers prefer stable and mature Chainlink services or low-cost and flexible API3 services, the choice is entirely up to the market. In my opinion, it is difficult for API3 to threaten Chainlink in the short term, but in the long term, as the blockchain application market becomes more modular, the choice of API3 also holds promise.
Recently, API3 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 permission to update data. In the DeFi scenario, if a smart contract triggers a certain price point, liquidators can choose to purchase the assets pledged by users and profit from arbitrage when the price stabilizes.
Normally, liquidators are API node service providers because they have the authority to update the price of the smart contract protocol. Before the governance model of OEV Network came out, this liquidation behavior might have been chaotic. API nodes might update data in advance in order to obtain liquidation rights, and multiple API nodes might intensify the “volatility” of market prices in order to seize liquidation rights. The objective supplier of data becomes a potential disruptor of normal market order, which is obviously undesirable.
But there is no way to stop this. Allowing API nodes to directly connect with smart contract project parties is to reduce platform intervention and enhance market operation. No third party can effectively intervene in the market’s concentration and confusion in arbitrage. It can only be restrained through governance mechanisms.
OEV Network is a set of governance mechanisms that allow users of dApps to participate in auctions in the dAPI3 network when their positions are near liquidation. The highest bidder obtains the next oracle data update right and obtains the liquidation MEV profit.
Why do I say it is an upgrade and transformation of MEV? The original version 1.0 of MEV is actually a naturally existing market mechanism. In the process of collaboration between API nodes and smart contracts, there will inevitably be situations of price fluctuations and liquidation. In this case, the market will generate a MEV-Boost-like channel specifically for handling various MEV liquidation demands, and some API nodes will focus on arbitrage as their main demand. This deviates from the original intention of dAPI to provide open market services to end customers. What should be done?
Version 2.0 of MEV transparentizes the existence of MEV. Since there will always be MEV opportunities, they might as well be made transparent. With the opportunity for MEV arbitrage, API node service providers can participate in liquidation auctions, and the auction income will be distributed to the users of dApps protocols. This means that the value that was originally extracted from users is now returned to them.
This actually opens up the commercial pattern of the MEV market. Originally, MEV served a small group of arbitrageurs, but now MEV has become an opportunity for public benefit.
In conclusion, not only API3, but also Flashbot 2.0 is attempting to tell a similar story, as the existence of MEV undermines the fair rights and interests of users on the chain. Transforming the service of profit-seeking from a small group into a business pattern that benefits the public can truly open up new possibilities.
Note: The strategic positioning in the oracle race is extremely important. #Link #Pyth #API3 #Band, etc. Although Chainlink monopolizes a large part of the market, the disputes in the oracle race have always existed and there will inevitably be dark horses emerging. It is worth paying long-term attention to.
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