In-depth Analysis: How First-party Oracle Machines Capture OEV Value

Although Oracle Machine and DeFi are mature sectors with a basically stable competitive landscape, API3 can still explore new opportunities in these two red ocean markets.

Data Performance

The guaranteed value of a certain Oracle Machine project (TVS) has seen significant growth in 2024. Moreover, its market share has risen from 0.02% in May 2023 to the current 0.22%, a tenfold increase. Although this proportion is still relatively small, the latest OEV network announced by the project is expected to bring substantial growth.

Advantages of First-Party Oracle Machine

First-party Oracle Machines and third-party Oracle Machines are similar in data flow, both involving data providers transmitting data to the demand side (primarily DeFi smart contracts). However, the implementation methods differ:

• Third-party Oracle Machine: Data is provided to the demand side after being aggregated and filtered by a third party.
• First-party Oracle Machine: Developed the lightweight node program Airnode, allowing data source providers to more easily establish nodes without needing in-depth knowledge of blockchain and with lower hardware requirements.

The first-party Oracle Machine reduces a data transmission link, which may enhance security and lower costs.

OEV Network Analysis

MEV vs OEV

• MEV (Miner Extractable Value): Miners gain additional revenue by prioritizing high-tipping transactions.
• OEV (Oracle Machine Captured Value): The Oracle Machine uses information advantages to update price data in advance and execute related operations, such as liquidation, to obtain profits.

How OEV Network Works

OEV Network is a ZK-rollups Layer2 network developed based on Polygon CDK, with the main function being decentralized auctions. Participants use automated bots to search for captureable value and participate in the auctions, with the highest bidder gaining the right to execute updates to the dAPI and related transactions.

Beneficiary of OEV

• DeFi applications: Obtain most of the auction profits while reducing risks.
• Data Provider (First Party Oracle Machine): Receives a portion of the auction revenue.

This mechanism encourages data sources and DeFi applications to actively participate in the OEV network.

Market Potential of OEV

The lending agreement settlement is the main market for OEV. Here are some data references:

• MakerDAO: Cumulative collateral auction asset value exceeds $600 million.
• AAVE: The total value of liquidated assets in the past 3 years is approximately $2 billion.
• Compound: Approximately $76 million in collateral was seized in the past year.

Innovations and Prospects

API3 innovates both conceptually and technically through the combination of "first-party Oracle Machine + ZK-rollup Layer2 + OEV". It leverages the data advantages of first-party Oracle Machines to change the data update methods of oracles, converting part of the MEV into OEV. Through a decentralized auction mechanism, most of the OEV value is returned to DeFi applications, with a small portion allocated to network participants.

This model improves the rationality and fairness of value distribution, helping to enhance the stability of DeFi applications. In the future, the OEV network and API3 may gain support from data sources and major DeFi applications, having significant room for development.

In a market where the competitive landscape is already established, API3 has found an innovation point by transforming part of the MEV into OEV and distributing it reasonably, showcasing a unique vision for product strategy.