Research Summary
The report discusses the role of oracles in the crypto world and the inefficiencies of Oracle Extractable Value (OEV). It introduces API3, a blockchain oracle provider, and its products designed to reduce OEV and improve protocol performance. The report also explains the concept of first-party oracles and decentralized APIs (dAPIs), and how they can benefit decentralized applications (dApps).
Key Takeaways
API3’s Role in Reducing OEV
- API3’s Solution: API3 is a blockchain oracle provider that aims to reduce OEV and improve protocol performance. It offers first-party oracles, decentralized APIs, and the OEV Network, which allows dApps to recover funds typically lost to MEV.
- First-Party Oracles and dAPIs: API3 introduces first-party oracles, hosted directly by the API provider, and dAPIs, on-chain data feeds sourced from first-party oracles. These offer several advantages to dApps, including enhanced security, cost efficiency, and transparency.
Understanding OEV and the OEV Network
- OEV Explained: OEV, or Oracle Extractable Value, is a subset of MEV extracted from any DeFi application using oracles. It can be worth up to hundreds of millions of dollars annually.
- The OEV Network: API3’s OEV Network is an auction platform that sells the rights to execute specific data feed updates for dApps to the highest bidder. This helps to capture and reduce OEV, and the auction revenue is returned to dApps.
Benefits of API3’s OEV Network
- Reduced Protocol Fees: Once the OEV Network is live, protocols can recover and use funds typically lost due to MEV, which can significantly reduce protocol fees. For instance, liquidation fees on lending protocols can be reduced by as much as 99.99%.
- Security and Accessibility: API3’s OEV Network creates a transparent, secure, accessible, and auditable process for dApps data feed updates. It does not require any additional layer of trust and allows for the continuous auctioning of real-time market data.
Actionable Insights
- Consider the Potential of API3: Given its innovative approach to reducing OEV and improving protocol performance, API3 could be a significant player in the blockchain oracle space. Stakeholders should monitor its progress and consider its potential impact on the DeFi ecosystem.
- Explore the Benefits of First-Party Oracles and dAPIs: The advantages of first-party oracles and dAPIs, such as enhanced security, cost efficiency, and transparency, could make them an attractive option for dApps. Developers should explore these technologies and consider their potential benefits.
- Understand the Implications of OEV: OEV represents a significant amount of value that can be extracted from DeFi applications. Understanding its implications can help stakeholders make informed decisions about their involvement in the DeFi space.
