How to view API3, the dark horse in the oracle track

Author: Haotian, independent researcher Source: X, @tmel0211

What do you think of @API3DAO, which is known as the dark horse in the oracle track? Recently, the news that DWFlabs led the investment of $4 million in API3 has aroused market discussions about the growth potential of API3. Compared with oracle service providers such as Chainlink and Pyth, the "lightweight" integration method of the API3 protocol and DAO governance models such as API3 Market + OEV Network have shown it a broader business imagination space. Next, let me talk about my opinion:

1) In short, API3 is an Oracle connector that directly connects API data providers and DApp smart contract data demanders, driven by open source protocols and incentivized by DAO economies. Different from Chainlink's "middleware" node service third-party network, API3's first-party oracle eliminates the "trust" link of the third-party network.

Entering the Oracle market through open source protocol integration means: More lightweight and customized, API3's Airnode allows "nodes" that meet basic operation and maintenance capabilities to deploy oracle services in a lightweight way, especially some API providers who directly own data sources can directly supply raw data to DApp smart contract demanders through Airnode.

For example: the main network and even test network of some new public chains can integrate some Price data information. If you want to become a data source for Chainlink, API nodes can only wait passively, but through the API3 protocol, you can take the initiative and even customize exclusive Oracle price services. In theory, as long as the API3 node conforms to the integration framework of the Airnode protocol and follows the pledge governance process of API3 DAO, it can quickly, cost-effectively and efficiently join the Oracle service network.

If Chainlink and other oracles will gradually prefer to provide oracle services to mid- and head DApp application projects as their brands strengthen, API3 is targeting a broader long-tail DApp application market.

Some people say that open source protocols should also collect, aggregate and adapt data, and should also be regarded as a "middleware". Yes, the problem is that this intermediate protocol focuses on providing integration methods, governance standards and specifications integrated into Oracle services. They are all open source and transparent standards, and can be "actively" selected by API data providers. Other third-party Oracle intermediate service networks have independent nodes and governance mechanisms. What data to screen, how to feed prices to contracts, and how to deal with potential liquidation arbitrage opportunities are completely controlled by third-party networks. The "high efficiency" and "reliability" service tenet of this middleware network is essentially different from the "transparency" and "trustlessness" pursued by open source protocols.

2) API3 Market and OEV Network built on Polygon CDK are crucial to changing the Oracle oracle market landscape, which is equivalent to putting the potential "arbitrage" cake in the oracle business process on the table with more open, transparent and orderly governance rules.

API3 Market aims to provide developers with convenient and low-cost data integration services that can be quickly integrated with new networks, which is equivalent to an Oracle Stack stack service, providing developers with seamless and friendly tool services. This will lower the threshold for data sources to become API data suppliers and data demanders DApp, and further expand the scale effect of API3 in the long-tail Oracle market.

As a layer2 oracle public chain, OEV Network has not yet been officially launched, but its goal is to return the big cake of "arbitrage" opportunities that Oracle data suppliers can obtain through data clearing rights to users through a set of open and transparent governance mechanisms in the form of public auctions and profit distribution.

In my opinion, this is the inevitable trend of the Oracle oracle market and the key to changing the business landscape of the MEV market.

To deeply understand the significance of Oracle disruptors such as OEV Network, you can carefully savor Vitalik's latest words: "DAO" means project, and "Official" means scam. The significance of the existence of a decentralized governance mechanism is to distribute the hidden profits in a more fair mechanism, and not to allow it to become a "motivation" for individual nodes to nourish corruption and disrupt the normal market order. Imagine that if the Oracle node feeds the price to the DApp, there will inevitably be a liquidation opportunity. The node suppliers and liquidators with liquidation qualifications can conspire to jointly gain MEV profits, which will make it impossible for fairness to exist.

If the liquidation qualification is made public as an "auction" mechanism, the highest bidder can obtain the right to update the oracle data next time, that is, MEV profit, and then OEV Network will distribute the profits obtained from it to DApp users, which is equivalent to returning the profits taken from users to users. In this way, it will not affect the motivation of API nodes to be liquidators, nor will it harm users, killing two birds with one stone.

3) From a purely commercial perspective, API3 will have a higher ceiling in the oracle track. Because it cuts in with a low threshold of open source protocol + seamless integration tools, as long as the "node operator" has basic node operation and maintenance capabilities, it can choose to join the Oracle decentralized governance network provided by API3 to participate in "mining". This means that the Ethereum ecosystem AVS (Active Verification Service) node service provider, this type of "enhanced" node, can fully access the API3 oracle network, expand new business growth directions for its AVS network, and then consolidate its underlying Restaking economic model.

The logic is not difficult to understand. Choosing the lightweight integration method of the open source protocol will definitely have a broader business prospect. Moreover, major Oracle competitors such as Chainlink and Pyth have chosen to favor DeFi financial scenarios. For them, choosing DeFi customers who occupy the vast majority of liquidity also limits the ability to extend their business tentacles in broader application scenarios, and these are all places where API3 can expand its associations. In addition to DeFi, it can also play a role in RWA, foreign exchange, stocks, futures, smart transportation, smart medical care, smart home, and even real-time feeding and training of large model data.

In short, open source technology protocols and DAO governance frameworks will indeed have more commercial imagination space. Oracles, zkVM, ZK cross-chain bridges and any other fields that urgently need "trust-free" can use this method to break through.