dApps to Recapture Millions in MEV with API3’s New Oracle
Because MEV searchers trigger data updates when there’s an extraction opportunity, OEV offers profit opportunities missed by deviation thresholds alone. For lenders, OEV-enabled data feeds mean collecting collateral from liquidations that would be missed by their current data providers
API3 Oracle Extractable Value
API3’s application of Oracle Extractable Value to data feeds creates a partnership between dApps and the MEV Searchers that have taken over $675M to date.
The concept will revolutionize data provision in Web3, in part by making oracles a source of revenue instead of an operating expense, and by increasing data granularity beyond what deviation thresholds can do alone.
Extractable Value
When people think of oracles, they usually think of live data points on a chain, always ready to be used. Unfortunately, the only thing certain about a live data feed is that it is outdated (compared to the underlying APIs), if only by milliseconds.
This issue allows arbitrage, frontrunning and various other kinds of value to be extracted from dApps and is collectively referred to as MEV, or Maximal Extractable Value.
The traditional solution has been to update data feeds as frequently as possible with low deviation thresholds, yet the associated costs make it extremely difficult to justify providing a large number of data feeds, hampering innovation.
Because oracles have first access to data, OEV has priority over any other value extraction opportunity. It’s clear to API3 that this position must be used to return lost value to dApps.
OEV over MEV
However, OEV is more than oracles having primary rights to MEV.
Because MEV searchers trigger data updates when there’s an extraction opportunity, there are new opportunities for profit from spreads too granular for deviation thresholds alone.
For lenders, OEV-enabled data feeds mean collecting collateral from liquidations that would be missed by their current data providers, a costly aspect of traditional oracle architecture.
With OEV, any dApp, with any data feed, on any chain, will be able to open a practically permissionless OEV extraction auction and withdraw proceeds through a trustless smart contract.
API3 OEV works for dApps and searchers
API3 will run an API that announces data feed updates for auction. MEV Searchers will periodically check to see if they can use an update to extract any value. Searchers can then bid in the native currency of the chain, and win a cryptographically-signed meta-transaction.
This works like a key when sent along with the winning bid amount, so the winner of the auction can update the on-chain value via the dAPI, triggering their profit in the same transaction. Since the update will be signed to a specific Searcher it will be compatible with any block-producing, or validation, scheme.
More competitive auctions will result in more efficient value extraction, which will be achieved by making the auctions publicly accessible. A staking-based security mechanism will be used for newly onboarded participants, which will dynamically shift to a reputation-based system to ensure capital efficiency. This auction layer is particularly suitable for monetization by first-party oracles (API providers) as it’s essentially a Web service provided to Searchers.
Recap
With an OEV-enabled data feed, dApps will be able to retain a large portion of what’s being currently being extracted by MEV to block producers and MEV searchers. This will turn oracles (that offer OEV) into a source of revenue, instead of an expense, for the dApps that use them.
The way API3 has designed their OEV data feeds allow for practically real-time updates in liquid markets; when there is a profit to be had, searchers will trigger the update and make money.
In these new OEV auctions, when searchers make money so do dApps.
Resources
About API3
API3 builds decentrally governed and quantifiably secure data feeds that power Web 3.0 applications without employing third-party intermediaries. Powered by Airnode-enabled first-party oracles, API3’s dAPI’s are fully decentralized and blockchain-native APIs with quantifiable security. Read our full whitepaper here.
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