Beyond Traditional Oracle Machine? An Analysis of the Innovative DAO Governance and Business Potential of API3 Protocol

Author: Haotian

Recently, the news of a $4 million API3 funding led by DWFlabs has sparked renewed discussion about the potential of API3 rise. Compared with Oracle Machine service providers such as Chainlink and Pyth, API3 protocol "lightweight" integration methods, as well as DAO governance models such as API3 Market + OEV Network, allow it to show a broader business imagination short. Now, let me say what I think:

1. In simple terms, API3 is a Open Source protocol-driven, DAO economy-incentivized Oracle connector that directly connects API data providers and DApp smart contracts data demanders. Unlike Chainlink's "middleware" node service third-party networks, API3's first-party Oracle Machine eliminates the "trust" of third-party networks.

Integrating with an open-source protocol to enter the Oracle market means: more lightweight and customizable. API3's Airnode allows "nodes" with basic operational capabilities to deploy oracle services in a lightweight manner. In particular, API providers that have direct access to data sources can directly supply raw data to DApp smart contract users through Airnode.

For example, some cutting-edge public chains, including mainnets and even testnets, can integrate price data information. If you want to become a data source for Chainlink, API nodes can only passively wait, but through the API3 protocol, you can actively 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 staking governance process of the API3 DAO, it can join the Oracle service network quickly, at a low cost, and efficiently.

If the likes of Chainlink and other oracles will gradually prefer to provide oracle services for middle and top DApp application projects as their brands strengthen, API3 is targeting a broader long-tail DApp application market.

Some people say that open source protocols also need to collect, aggregate, and adapt data, and should be regarded as an 'middleware'. Yes, the problem is that this middleware protocol is mainly focused on providing integration methods, governance standards, and specifications for integration into Oracle services, all of which are open and transparent standards that can be 'actively' selected by API data providers.

Other third-party Oracle intermediate service networks have autonomous nodes and governance mechanisms, and what data is filtered, how to feed contracts, and how to deal with potential liquidation arbitrage opportunities are completely controlled by the third-party network. There is an essential difference between the "high efficiency" and "reliability" service tenet of this middleware network and the "transparency" and "trustlessness" pursued by middleware Open Source protocol.

2. The API3 Market and OEV Network built on Polygon CDK are crucial in changing the Oracle Machine market, equivalent to putting the potential 'Arbitrage' cake in the Oracle business process in a more open, transparent, and orderly governance rules.

API3 Market aims to provide developers with convenient and cost-effective data integration services, enabling fast integration with new networks. It acts as an Oracle Stack service, providing seamless and user-friendly tool services to developers. This will lower the barrier for data sources to become API data providers and DApps in need of data, further expanding the scale effect of API3 in the long tail Oracle market.

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

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

To understand the significance of Oracle game-changers like OEV Network, take a closer look at Vitalik's latest remark: "DAO" means project, and "official" means scam. The meaning of the existence of the decentralization governance mechanism is to distribute the hidden profits in a fairer mechanism, and not to let it become the "motive" for individual nodes to nourish corruption and disrupt the normal market order. Just imagine, if the Oracle Node feeds the DApp price, there will inevitably be a chance of liquidation, and the Node supplier and liquidator with liquidation qualifications can collude to jointly win MEV profits, which cannot be fair.

If the liquidation qualification is made public as an "auction" mechanism, the highest bid will get the right to update the next Oracle Machine data, that is, the MEV profit, and then the OEV Network will distribute the profit obtained from it to the DApp users, which is equivalent to the profit taken from the users and returned to the users. In this way, it will not affect the motivation of the API Node to be a liquidator, nor will it hurt the user, killing two birds with one stone.

3. From a purely business perspective, API3 will have a higher ceiling on the Oracle Machine track. Because it starts with a low threshold of Open Source protocol + seamless integration tools, as long as the "Node Operator" with basic Node operation and maintenance capabilities can choose to join the Oracle Decentralization governance network provided by API3 to participate in the "Mining". This means that Ethereum ecosystem AVS (Active Authentication Service) Node service providers, such "enhanced" Node can be fully connected to API3's Oracle Machine network, develop new business rise directions for its AVS network, and then consolidate its underlying restaking economic model.

The logic is not difficult to understand. Choosing a lightweight integration approach with an open-source protocol will definitely have broader business prospects. Moreover, major Oracle competitors such as Chainlink and Pyth have chosen to focus on the DeFi financial scenario. For them, choosing DeFi customers who occupy the majority of liquidity also limits their ability to expand business opportunities in broader application scenarios. These are all areas where API3 can be associated. In addition to DeFi, it can also play a role in RWA, forex, stocks, futures, smart transportation, smart healthcare, smart home, and even real-time feeding and training of large-scale model data.

In short, Open Source technical protocol and DAO governance framework will indeed be more commercially imaginative short and any field that urgently needs "trustless" such as Oracle Machine, zkVM, and ZK cross-chain bridges can use this method to seek a breakthrough.