API3's New OEV Oracle Will Enable dApps to Save What Is Currently Lost to MEV
API3's OEV data feeds for DeFi will capture the value normally extracted by MEV -over $675M to date- and return it to the dApps.
Grand Cayman, Cayman Islands--(Newsfile Corp. - November 1, 2022) - API3 today published a litepaper detailing how the project will enable DeFi applications to recover value lost by their users to MEV. API3 will do this by deploying a novel oracle service design that maximizes value capture for the dApp by both minimizing and retaining MEV. API3 calls the concept OEV, for Oracle Extractable Value, and posits that it will become a major paradigm shift for DeFi, making oracles more financially viable for the projects using them, instead of an operating expense.
Oracle extractable value is a concept as old as oracles themselves and refers to oracles making use of their position to capture value that would otherwise have gone to third parties as maximal extractable value; MEV. The traditional way of extracting MEV is participating in blockspace auctions. Over the last year, Flashbots proved that taking this process off-chain is possible in practice, and the auction has extracted over $675M to date.
Recently, important developments in both oracles and order flow auctions have made it practical to capture the OEV previously extracted by block producers. In API3's design for OEV, the oracle provider auctions off the right to extract on-chain value deriving from oracle updates (such as arbitrage and liquidation fees) to the same third-party searchers who used to bid for blockspace. OEV-enabled data feeds then accurately return the proceeds of these auctions to the dApps that generate the value in the first place.
An additional benefit of OEV-based updates is the increased accuracy of the data feeds when compared to standard designs. Traditionally, the quality of a data feed is gauged by its deviation threshold, where smaller values are better because they result in a more granular, and thus more accurate, data feed. OEV-based updates make this metric obsolete by updating precisely when needed, achieving zero deviation threshold and thus perfect accuracy in practice. This further contributes to improving the financial viability of dApps by minimizing total MEV, and improving their user-experience.
"As someone who has worked with many DeFi protocols over the past year at Polygon, it was always my belief that value accrual for MEV should happen at the app layer and be transferred back to users not rent seekers. OEV is progress in the right direction towards realization of that ideal by doing it at the Oracle level which will benefit all the protocols built on top of it."
- Hamzah Khan, Head of DeFi at Polygon
"Off-chain MEV auctions enforced by on-chain signature checking can bypass the need for gas wars. Instead of leaking value to block producers, the originators of MEV receive that value back. Searchers will compete to return the highest amount of value to the protocol using the oracle. This ultimately leads to a large part of the inefficiency introduced by oracles being mitigated."
- Torgin Mackinga, MEV researcher
"OEV data feeds include multiple improvements that will completely redefine how DeFi thinks of oracles. Instead of being an overhead for the projects using them, with OEV, oracles actually become a significant value-capturing mechanism for the protocols. In addition, OEV feeds are significantly more accurate and gas-efficient than current deviation threshold data feeds. In sum: protocols get more accurate oracle data, and instead of paying for this service, they get paid by it."
- Heikki Vänttinen, Strategy lead at API3
In addition to OEV, API3 data feeds will provide trustless security guarantees through a retrospective, insurance-like service coverage arbitrated by a decentralized third party, protecting its data feed users from oracle attacks and malfunctions.
API3 will make its OEV oracle services available on numerous EVM-compatible networks, including Ethereum, Polygon, Arbitrum, Optimism, BNB Chain, Avalanche, Milkomeda, Fantom, RSK, Moonbeam, Moonriver and many more. For finer detail on the workings of OEV, please see the full litepaper.
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 blockchain-native APIs with quantifiable security. Read our full whitepaper here.
Contact Name: Tommy Watson
To view the source version of this press release, please visit https://www.newsfilecorp.com/release/142635