API3's Innovative Strategy: First-Party Oracle Machines and OEV Network

Although Oracle Machine and DeFi are not emerging sectors and the competitive landscape has basically taken shape, API3 is still exploring new opportunities in these two mature markets.

Data Performance

The collateral value of the API3 Oracle Machine ( TVS ) is expected to show significant growth in 2024. In terms of market share, API3's TVS accounted for only 0.02% of the entire Oracle Machine market in May 2023, while the latest data shows its market share has reached 0.22%, a tenfold increase. Although this proportion is still relatively small, the OEV network recently announced by API3 is currently in the testing phase and is expected to bring substantial growth.

Advantages of First-party Oracle Machines

First-party Oracle Machines and third-party Oracle Machines are similar in data flow, both involving data providers transmitting data to demand parties. However, there are differences in implementation. First-party Oracle Machines utilize the lightweight node program Airnode, allowing data source providers to establish nodes more easily without needing in-depth knowledge of blockchain, and with lower hardware requirements.

Compared to third-party Oracle Machines, first-party Oracle Machines eliminate the step of third-party data aggregation and filtering, potentially reducing security risks. Logically, reducing a data transmission step adds an extra layer of protection. In addition, first-party Oracle Machines may be more favorable in terms of costs for users, although specific comparisons are difficult to quantify.

OEV Network Overview

OEV (Oracle Extractable Value) refers to the value that can be captured by the Oracle Machine, which is an innovative concept in contrast to MEV (Miner Extractable Value) that can be captured by miners. The OEV network leverages the data advantages of first-party Oracles, converting a portion of MEV into OEV by updating price data more quickly and executing related operations.

How OEV Network Works

OEV Network is a ZK-rollups Layer2 network developed based on Polygon CDK. Its core function is decentralized auctions. Auction participants use automated bots to search for captureable value in the data provided by API3 and participate in bidding. The highest bidder gains the right to execute meta-transactions, which means updating the dAPI and triggering corresponding trading actions to obtain profits.

Beneficiary of OEV

The majority of the auction proceeds are returned to DeFi applications (such as AAVE), while a small portion is obtained by the OEV network, mainly as revenue for the first-party Oracle Machine. This mechanism incentivizes both data sources and DeFi applications to actively participate in the OEV network.

Market Potential of OEV

The liquidation market of lending agreements demonstrates the enormous potential of OEV. Taking MakerDAO as an example, the total value of collateral auctioned exceeds $600 million. AAVE has had a total of $2 billion in assets liquidated over the past 3 years. Compound had $76 million in collateral seized in the past year. Although the application of OEV is not limited to lending agreements, this type of liquidation is undoubtedly its main market.

Innovative Highlights

API3's innovation lies in the combination of "first-party Oracle Machine + ZK-rollup Layer2 + OEV". Among these, the first-party Oracle Machine and OEV are conceptual innovations, while ZK-rollup Layer2 is currently a popular track.

API3 leverages the data advantages of first-party Oracle Machines to change the way Oracle data is updated, while also executing operations such as liquidation, converting part of the MEV into OEV. Through the decentralized auction mechanism of the OEV network, most of the value is returned to DeFi applications, with a small portion allocated to network participants. This mechanism enhances the rationality and fairness of value distribution, contributing to the stability of DeFi applications.

Conclusion

In the context of a stabilized competition landscape between Oracle Machines and DeFi, API3 has found a breakthrough in the market through innovation. The strategy design that transforms part of MEV into OEV and reasonably allocates it to relevant participants is quite insightful, opening up new development space for API3 in a mature market.