Author: DeMan

During the bull market in 2022, the leading oracle project AICoin saw its LINK asset price surge from $0.35 to $53, a staggering 168-fold increase, which has shown developers the enormous opportunities and business prospects in this field.

As the bear market in 2024 seems to be coming to an end, oracle projects have started to become active again, aiming to earn excess profits by solving industry pain points. Recently, the representative oracle project API3 announced the launch of the OEV Network supported by ZK-Rollup technology. OEV Network is a specialized order flow auction platform that sells the right to execute specific data source updates to the highest bidder, who then pays a fee when executing the data source update, allowing Dapps to immediately receive income on their native chains.

The following text will introduce this platform and its related important concepts, aiming to help readers grasp the value creation opportunities in the DeFi world.

First, clarify the concept of OEV in order to understand the changes OEV Network will bring to the DeFi data field

According to the official statement, OEV Network will be used to capture OEV generated by Dapps using API3 data sources on the chain. Therefore, before introducing what OEV Network is, we need to first understand the concept of OEV.

OEV stands for "Oracle Extractable Value," a proprietary concept proposed by API3. OEV is a part of Miner Extractable Value (MEV) that focuses on situations where applications rely on oracle updates to exploit state inconsistencies. By introducing external data (such as market prices) onto the chain, oracles create opportunities for arbitrage and liquidation, thus becoming a part of the MEV lifecycle.

Unlike MEV independent of oracles, OEV relies on oracle updates to trigger value capture opportunities. For example, when the price changes on a centralized exchange, MEV bots may choose to liquidate accounts underwater in lending protocols, which is a typical application scenario for OEV.

In traditional MEV models, validators and stakers typically benefit, often at the expense of users such as liquidity providers. In contrast, OEV allows protocols and applications to capture and redistribute these profits, increasing user loyalty and enhancing protocol competitiveness.

Setting aside the complex concepts, OEV is more user-friendly and aligns more with the interests of ordinary users, especially liquidity providers. Therefore, this concept and gameplay, once introduced, undoubtedly receive more welcome from the outside world.

Understanding the workflow of OEV Network to discover a series of potential value opportunities

OEV Network is naturally more appealing in terms of its incentive mechanism, but for users, a deeper understanding of its mechanism is more convincing. Next, let's introduce the specific workflow of OEV Network.

OEV (Oracle Extractable Value) represents a significant innovation in the value capture mechanism in the DeFi field. The core of OEV lies in creating value capture opportunities by exploiting inconsistencies between on-chain and off-chain data. The working principle of this part can be divided into several key points:

1. Arbitrage opportunities from inconsistent states: The emergence of OEV is based on a simple fact: the state of on-chain applications (such as price information) sometimes differs from the actual market state off-chain. Oracles play a role in bringing this external data onto the chain, but during the update process, this inconsistency becomes an arbitrage opportunity.

2. Changing the role of oracles: In traditional MEV scenarios, arbitrageurs profit by reordering transactions. In the case of OEV, the update of oracle data becomes crucial for value capture. When oracles update new market data onto the chain, they provide applications with the opportunity to exploit these information differences.

3. Automation and auction mechanism: To effectively capture OEV, API3 has proposed an automated auction system. This system allows the right to update data sources to be sold to the highest bidder through an auction. In this way, the auction winner can not only execute the data source update but also capture value from it.

4. Cross-chain operations and scalability: A notable feature of OEV is its cross-chain functionality. With the help of ZK-rollup technology, OEV Network can efficiently operate on various chains, thereby expanding the scope and potential of OEV capture.

5. Allocation and reallocation: Captured OEV not only benefits validators and stakers but, more importantly, can be reallocated to various parties participating in the protocol, including users and liquidity providers. This allocation mechanism increases the attractiveness of DeFi protocols and enhances user participation motivation.

Through these mechanisms, OEV not only provides a new way of value capture but also increases the overall efficiency and fairness of the DeFi ecosystem. With the development and improvement of API3's OEV Network, OEV is expected to play an increasingly important role in future DeFi applications.

The broad market for oracle data revenue distribution can help stimulate user enthusiasm

Oracle projects involve data settlement processing in the Web3 world, especially the capture of the value of on-chain data information, which actually represents a huge market. However, these services cover various roles, from liquidation triggers to block producers, and third parties often exploit vulnerabilities in these services to extract maximum value from DeFi protocols.

For example, Aave has liquidated positions worth $2 billion over the past three years, with over $100 million used as liquidation bonuses. Although liquidation is necessary, there is still room for improvement in the value distribution process.

In this regard, OEV Network can to some extent improve this series of problems, optimize and enhance the data distribution process, and further pass on benefits to ordinary users, incentivizing more people to build a more prosperous and robust DeFi world.

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