API3 is a secure and cost-efficient API solution that enables smart contracts on blockchain to interact with reliable real-time real-world data. The solution API3 introduces is Decentralized API (or dAPI for short) - a network of first-party oracles that provide traditional API services in a decentralized and blockchain-native manner.
So, what is dAPI? What is a first-party oracle? And why some media referred to API3 as a “Chainlink killer”. The article will explain in-depth all need-to-know things about API3.
What problems does API3 solve?
The API connectivity problem
The isolation of blockchain from the real world makes it a powerful technology with high security and assurance; however, it limits the potential of smart contracts.
Since smart contracts are built on the blockchain, they cannot use web APIs to access off-chain data the same way that typical web applications can. Instead, they can only operate on the available data on the blockchain (on-chain data). In addition, smart contracts are completely walled-off from off-chain data such as real-world data (weather, temperature, etc.) or crypto market data.
Suppose smart contracts can connect to the off-chain data. In that case, it can help DeFi applications make crucial decisions and allow them to provide meaningful services such as market prediction, swap, or lending…
The oracle problem
Blockchain oracle is introduced to solve the API connectivity problem.
Oracle is a bridge between blockchains and external API, which provides smart contracts on the blockchain with real-time access to off-chain data.
Data sources (from API providers), oracles, and on-chain data consumers (such as smart contracts of a dApp) are the three parties of an oracle problem. However, to tackle the oracle problem, the existing solutions are modeling their ecosystem as solely composed of oracles and data consumers, ignoring the data source.
The problems with third-party oracles as middlemen
The oracles in the above architecture are known as “third-party oracles”- multiple oracles that get information from any unknown data source and then transmit them onto an on-chain aggregator to aggregate the oracle reports into a single data feed.
Chainlink is a good example of this third-party oracle solution.
However, the solution with a third-party oracle as a middleman has its own drawbacks:
- Middleman tax: Some oracles might deliver misreports to smart contracts for financial motives. Therefore, you have to pay them a significant amount of money, known as “middleman tax”, to incentivize these oracles to report honestly.
- Ineffective architecture: Many oracles in the oracle network probably get the information from the same source. As a result, it adds redundancy, operational costs, and security risks rather than data decentralization.
- Lack of transparency: Third-party oracles do not honestly reveal where their data originates from.
- Vulnerability: A group of oracles can collude to tamper with the data for their financial motives.
Solution from API3
dAPI with first-party oracle
The architecture that API3 proposes is decentralized API(dAPI)
dAPI is the network of first-party oracles (oracles operated directly by API providers) that provide traditional API services in a decentralized and blockchain-native manner. In this architecture, API providers put their raw data directly on the blockchain in the first place, allowing the data feed to be created on-chain and become more transparent. dAPI is also a multi-layer, cross-platform data solution that can be connectable to any blockchain to provide smart contracts running on them with trusted off-chain data.
Unlike third-party oracle architecture, API3 data feeds are governed by a Decentralized Autonomous Organization-API3 DAO. This allows dAPIs to be operated with maximal transparency and a trusted-minimized way.
We can see the main difference between first party-oracle and third-party oracle model:
| First-party oracle model | Third-party oracle model |
| Involve the API provider who owns the data source | Ignore the original source of data |
| API providers themselves operate oracle | Oracle is operated by any individual or group who gets information from API providers |
| Data is put directly in the blockchain by API providers | Data get from off-chain unknown source by third-party oracle |
| Data is aggregated securely and transparently on a trustless blockchain | Need to trust the third-party oracle |
| Decentralized governance | Governed by a centralized entity |
Airnode
API providers have difficulty operating their oracle nodes because they are unfamiliar with blockchain technology and don’t want to deal with cryptocurrency.
API3 introduces “Airnode” as a solution for this problem.
Airnode is a fully-serverless oracle node explicitly designed for API providers to operate their oracles. Serverless means it can be deployed on multiple cloud platforms.
One way to see Airnode, as API3 Whitepaper states, is a lightweight wrapper around a Web API that allows it to communicate with smart contract platforms with no overhead or payment token friction.
Advantages of API3
Data-source transparency
API providers operating their oracle node means they would be signing their responses with their private keys, which is the best proof that the data is not tampered with.
Moreover, data consumers can get data directly from a reputable source and not need to worry about the quality of the data. They can also verify whose data they are using at a given time through the identity of the API providers.
More security and efficiency
No middleman means no longer expensive middleman tax. Also, data feeds powered by first-party oracles will need fewer oracles and would be more efficient in gas costs.
In addition, the elimination of mediators avoids Sybil attack (a single actor fabricates multiple oracle node operator identities) or a group of malicious oracles colludes to provide inaccurate data.
Numerous benefits of Airnode
One prominent feature of API3’s solution is Airnode- a light and robust middleware that brings many advantages:
- API providers do not require any specific technical knowledge to operate Airnode because it is designed to be a set-and-forget deployment.
- Airnode does not require daily maintenance.
- The node operators don’t have to pay for hosting when their nodes are not used. This allows any API provider to run an oracle for free and start paying only after they start generating revenue.
- API providers don’t have to deal with cryptocurrency
Conclusion
Existing third-party oracle solutions to solve the “oracle problem” are centralized, expensive, and lack security and transparency. Therefore, API3 has made a great effort to create a new generation of blockchain-native dAPIs.
dAPIs are the network of first-party oracles operated by API providers themselves, thus delivering more cost-efficiency, security, and data-source transparency than alternative solutions that employ middlemen. It is promised that first-party oracles will become the oracle architecture of the future.
dAPIs are currently under active development. To make the dAPI more accessible, API3 will find a blockchain platform with high performance and more scalable. One of the reasons for data feed being done off-chain today is the high cost of Ethereum transaction fees. dAPIs require many transactions, which means you have to pay substantial gas fees. However, with the upgrade of Ethereum to Ethereum 2.0 and layer 2 roll-up solutions, the gas fee of dAPI is no longer going to be a problem.
References
[1] Decentralized APIs for Web 3.0, API3 Whitepaper, accessed June 3rd, 2022.
[2] API3 YouTube Channel, Youtube, accessed June 3rd, 2022.
[3] Crypto Lighthouse #15: API3, coin68 TV, accessed June 3rd, 2022.