This article is brought to you by API3.
Since its launch in 2020, API3 has been positioned as a challenger to Chainlink and has been dubbed the “Chainlink killer.” From the beginning, API3 has been on a mission to transform the blockchain oracle landscape by building solutions around first-principles like data source transparency and the verifiable decentralization of onchain data. Along with developing solutions to bring verifiable, decentralized data onchain directly from the data providers themselves, API3 also introduced a solution to recapture oracle extractable value (OEV) in their 2022 litepaper, showing how lending protocols such as Aave are leaking millions of dollars a year due to maximal extractable value (MEV) as a result of oracle architecture.
Over the past year, API3 has demonstrated remarkable growth. Last year they launched the API3 Market as a developer-centric marketplace for onchain data. Scaling across 17 blockchain networks and offering over 160 data feeds, API3 has grown to a Total Value Secured (TVS) of over $600M. This significant progress highlights the success of API3’s developer-first strategy and the impact of oracle solutions in the world of onchain finance.
Central to API3's developer-first approach is the upcoming introduction of a Data on Demand marketplace, complemented by a soon to be launched built-in solution to protect all its data feeds against MEV with the OEV Network. With these innovative solutions, API3 is not just challenging the status quo, but setting out to fundamentally redefine the oracle landscape. Just as Netflix rapidly transformed home entertainment in the early 2000’s, this could be the moment when the blockchain oracle landscape changes forever.
Evolution to Data on Demand
The API3 Market was developed as an open, self-serve marketplace for utilizing decentralized data feeds, or dAPIs. Developers looking to power their protocol with verifiable, decentralized data served directly onchain from first-party oracle nodes can visit the API3 Market, where they can seamlessly browse, access, and manage a wide variety of data feeds, including crypto, forex, equities, and commodities.
As part of a significant upgrade to the API3 Market, API3 is launching a Data on Demand marketplace for data feeds, mirroring the ease of a web2 experience many developers are used to. This next evolution of the API3 Market automates the purchase and configuration of data feeds with a straightforward Pay-and-Go process. This means that developers on blockchain networks and decentralized applications (dApps) will no longer need to go through an intermediary or speak to a human to begin accessing our wealth of data feeds, simplifying the process of accessing off-chain data for developers.
The API3 Market makes it easy for developers requiring oracle services to get the data they need when they need it. Rather than having to manage their own infrastructure, developers can simply read data that is directly maintained onchain.
Visualize this transition as similar to going from the era of DVD rentals at Blockbuster to the convenience of Netflix’s on-demand streaming service BUT for blockchain developers.
API3’s data on demand model not only democratizes access to the data needed to power many DeFi protocols, but also facilitates the rapid scaling and adoption of these data feeds across new chains. With the upgrade of the API3 Market, API3 will be able to commence on its ambitious goal of scaling its oracle stack to over 40 total blockchains this year with a heavy focus on Layer 2s.
The capability for scaling horizontally to new chains stems from API3’s EVM-compatible first-party oracle architecture and standardized dAPIs. This design allows API3 to quickly integrate with new networks, thereby eliminating the bottlenecks experienced with third-party oracle models. With the rapid deployment of onchain data to new chains, API3 employs a vertical scaling strategy that enhances data accessibility on each network. Designed with a focus on cost-effectiveness, dAPIs allow developers to directly read onchain data without incurring extra fees, lowering the barriers to entry for new projects on the network.
The network effects of the API3 Market amplify its utility. As the go-to destination for onchain data, it minimizes the complexity and work traditionally associated with designing a tech stack. API3 enables developers to focus more on what they do best, which is building their applications, without the distraction of running extra unnecessary infrastructure or having to coordinate with intermediaries.
Data on demand on the API3 Market is going to transform the developer experience, similar to how Netflix transformed content consumption by making a vast library of content available at a few clicks of a button.
Improving Lending Protocol Performance With the OEV Network
Along with upgrading the API3 Market to optimize the developer experience, API3 is soon going to be launching their OEV Network to optimize lending protocol efficiency.
Oracles are used by blockchain applications for bringing off-chain data, like price feeds, onchain. Most protocols that rely on oracles become targets for value extraction, or MEV, through frontrunning, arbitrage, and liquidations. Lending protocols are now waking up to how much value is leaking out of their ecosystem, with lending protocols losing millions of dollars every year.
In the last three years, Aave alone has had over $2 billion in liquidations across all chains, with over $100 million paid out in liquidation incentives. These liquidation bonuses, while necessary to maintain protocol health, result in significant value leaking to searchers and block builders and lead to a negative user experience.
The OEV Network will be introduced to recapture this value, creating an efficient market where oracle service providers and searchers come together to mitigate the negative impact of MEV through specialized order-flow auctions. With OEV Network, searchers don’t need to wait for the price to update onchain, they can trigger the price update when it is most valuable. As an application-specific solution, it captures up to 90% of the MEV created at the protocol level due to oracle updates and gives it back to the dApp that generated the value.
OEV Network gives every lending protocol a built-in MEV solution by improving upon critical inefficiencies in the current oracle design space. By creating an efficient market for oracle updates, it not only improves the efficiency of lending protocols but also allows them to capture a multi-million dollar opportunity.
Lending Protocols Will Never Be the Same
The OEV Network introduces a simple change in market dynamics that will revolutionize the liquidation game for lending protocols, improving their health and minimizing the negative externalities of bleeding value due to liquidations. The design maintains the security guarantees of the data feed while allowing the value that the oracle update generates to be auctioned off and recaptured.
The OEV Network presents an evolution in oracle architecture, enhancing the performance, efficiency, and sustainability of lending protocols. By recapturing up to 90% of the MEV that is currently leaking out of lending protocols, the OEV Network opens the door to innovation, improving the onchain lending experience by creating opportunities for protocols to offer better yields, lower fees, or experiment with new features.
Lending protocols will never be the same.
Netflix didn’t set out to kill Blockbuster, they were playing two different games. Blockbuster was comfortable as the dominant market force. Netflix was focused on innovation. In the end, one of them was easy to use, easy to work with, gave you what you needed when you needed it, and saved you money.
In hindsight, the choice was obvious.
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