Oracle Machine Innovation: How API3 Creates New Opportunities in a Competitive Market

Although Oracle Machine and DeFi are not emerging fields and the competitive landscape is relatively stable, API3 has still successfully found a breakthrough in these two red ocean markets.

Growth Shown by Data

The collateral value of the API3 Oracle Machine ( TVS ) is expected to show significant growth in 2024. In terms of market share, API3's performance is even more impressive. Data shows that in May 2023, API3's TVS accounted for only 0.02% of the Oracle Machine market, while the latest data indicates that its market share has reached 0.22%, a tenfold increase. Although a ratio of 0.22% may seem low, considering that the newly launched OEV network is still in the testing phase, there is great potential for future growth.

Advantages of First-party Oracle Machines

First-party oracles and third-party oracles may seem similar in terms of data flow, but there are significant differences in their implementation. The Airnode lightweight node program developed by API3 allows data source providers to establish nodes more easily, without needing to have an in-depth understanding of blockchain technology, and it has lower hardware requirements.

Compared to third-party Oracle Machines, first-party Oracle Machines eliminate the step of aggregating and filtering data through a third party, theoretically reducing security risks. At the same time, by reducing one layer of charging entities, first-party Oracle Machines may have a cost advantage, although specific cost comparisons are difficult to determine.

Innovation of OEV Network

OEV (Oracle Extractable Value) is an innovative concept relative to MEV (Miner Extractable Value). API3's first-party Oracle Machine can execute operations such as liquidation earlier by obtaining and updating price information in advance, thus converting some of the value originally belonging to MEV into OEV.

OEV Network is a ZK-rollups Layer2 network developed based on Polygon CDK, with its core function being decentralized auctions. Auction participants search for captureable value in the data published by API3 through automated bots and participate in the auctions. The highest bidder gains the right to execute meta-transactions, including updating dAPI and triggering the corresponding trading actions.

Beneficiaries of OEV

In the OEV model, most of the proceeds from auctions will be returned to DeFi applications (such as AAVE), while DeFi applications will also reduce risks due to more timely and efficient price data updates. The OEV network receives a portion of the revenue, primarily as income for first-party Oracle Machine providers. This model incentivizes both data sources and DeFi applications to actively participate in the OEV network.

Market Potential of OEV

From the data of major DeFi lending protocols, the market space for OEV is quite considerable:

• MakerDAO has cumulatively auctioned assets worth over $600 million.
• AAVE has had approximately $2 billion in assets liquidated over the past 3 years, with an average liquidation amount between $1 million and $10 million per month.
• Compound has had $76 million in collateral seized in the past year.

Although the application of OEV is not limited to lending protocols, the liquidation operations of lending protocols may be its main market.

Summary

API3's innovative combination of "first-party Oracle Machine + ZK-rollup Layer2 + OEV" is not only conceptually appealing but also demonstrates great potential in practical applications. By leveraging the data advantages of first-party Oracle Machines, API3 has transformed the way Oracle Machine data updates occur, and through the decentralized auction mechanism of the OEV network, it has achieved a more reasonable and fair distribution of value.

This innovative strategy is expected to gain support from data sources and DeFi applications, opening up new development space for API3 in a competitive market. By converting a portion of MEV into OEV and reasonably allocating it to relevant participants, API3 demonstrates its foresight in product strategy design, bringing new possibilities to the Oracle Machine and DeFi fields.