What Is API3: Decentralizing APIs To Democratize Real-World Data

An API (application programming interface) is an essential tool for communication between different software applications. It serves diverse purposes, including automating tasks, managing web content, receiving data from external sources and much more. Blockchains need APIs to help source data from the real world, but smart contracts, which are required to operate decentralized applications (DApps), don’t have direct access to APIs, as they only operate using on-chain data.

This data disconnect has prompted the creation of bridges known as oracles that connect smart contracts with APIs to acquire external data. However, many existing oracles are centralized, which makes them vulnerable to compromise. This can affect smart contracts on blockchains as well. The challenge of ensuring the reliability and security of oracles is popularly referred to as the oracle problem.

API3 solves the oracle problem by introducing Airnode, a web3 API gateway that directly connects Web APIs to decentralized applications, thus creating decentralized APIs (dAPIs). To see what this means for the future of web3 oracle design, let’s learn more.

Key Takeaways:

• API3 introduces an innovative approach to solving the oracle problem by creating decentralized APIs (dAPIs), which allow smart contracts on-chain access to external data feeds.

• API3 leverages its Airnode technology to provide serverless cross-chain connectivity to over 120 price feeds across several blockchains.

What Is API3?

API3 is a collaborative project launched in December 2020 to create decentralized APIs (dAPIs) for DApps via Airnode, a decentralized network of first-party oracles.

Simply put, dAPIs deliver traditional API services through a design that directly interacts with and provides off-chain data, such as price feeds. APIs are an established standard in the development of centralized software and applications.

API3’s mission is to usher in an era of dAPIs as the standard for decentralized applications via its Airnode technology.

How Does API3 Work?

API3 views the oracle problem as a misinterpretation of the real problem, which has resulted in the development of ill-suited oracles today. Third-party oracles such as Chainlink pose several problems. First, they may not be transparent about their data sources, meaning that the data they provide may be inconsistent or unreliable. Additionally, they’re expensive for data consumers and prone to exploits and high latency times.

According to API3, if API providers have the data and services that blockchains require but the only problem is obtaining it, then it’s actually an API connectivity problem. This redefinition allows API3 to usher in the third generation of blockchain applications by bringing APIs on-chain as dAPIs.

The project is fully decentralized and secured, and is governed by the API3 DAO and powered by API3 token. API3 is also a multilayered, cross-chain serverless protocol. It’s currently connected to over 120 data feeds and deployed across 11 blockchains, including Ethereum, Fantom, Polygon, Optimism and Arbitrum.

API3 Key Features

Source: API3 white paper

API3 builds APIs that can be managed and monetized at scale to sufficiently serve the needs of the rapidly growing decentralized ecosystem.

Decentralized API (dAPI)

Decentralized APIs (dAPIs) are API services governed by the API3 DAO. Designed to be compatible with smart contracts, they relay data feeds to DApps, whose owners can then pay in a crypto token of their choosing for the API service in a transparent transactional process through the API3 Market. API providers run their own oracles through an automated first-party oracle node called the Airnode, allowing them to earn revenue directly from the API3 DAO.

Since DApps source data from primary Web API providers, the risk of data tampering and the need for rent-seeking middlemen are eliminated. These are issues that currently affect third-party oracle projects such as Chainlink.

API3 also covers DApps against any losses that could occur in case of dAPI malfunctions. This insurance policy makes the dAPI a secure and attractive solution to DApp developers.

Furthermore, API3’s data feeds are OEV extraction–enabled. Oracle extractable value (OEV)–based updates allow for precise, on-demand data feed updates, resulting in cost-effective and accurate data feeds. Additionally, this feature enables API3 to take OEV and return it to the DApps, providing them with a valuable source of income.

Airnode and First-Party Oracles

First-party oracles are a core feature of the API3 project, whose dAPIs use first-party oracle nodes operated by Web API data providers.

With first-party oracles, the API providers sign their responses on-chain, providing the best proof that the data hasn’t been tampered with. Some of the characteristics of first-party oracle data feeds include:

• Higher security, as there are no intermediaries that increase vulnerability to malicious oracle attacks

• Greater cost-efficiency, since there’s no need to pay middlemen for their services and fewer oracles are needed, leading to reduced gas costs

• > 50% efficiency in gas costs, as compared to third-party oracles like Chainlink

• Transparency in terms of origin of data and degree of decentralization

• First-party oracle data providers solve legal issues that may arise from the ambiguity of third-party data licensing, as they receive all the revenue

Airnode is a serverless first-party oracle node specifically crafted for API providers to run their own oracles. API3 intends to optimize the process of enabling API providers to avail dAPIs to DApps via Airnode by making it fully automated, with no need for maintenance. No knowledge of blockchain is needed to run Airnode, thereby lowering the barriers to entry for API providers more familiar with the established Web 2.0 environment.

API providers can initially use Airnode at no cost, with charges incurred only after they start generating revenue from their services. Additionally, providers can choose to accept payment in cryptocurrency or fiat, demonstrating the platform's flexibility and potentially attracting more traditional API providers to offer their services.

Source: API3 docs

An additional feature of API3’s platform is API3 QRNG, an innovative first-party oracle solution that enables DApp developers to create fair, trustworthy and improved user experiences. API3 QRNG allows smart contracts to generate truly random numbers for DApps on-chain at zero cost, except for gas fees. Its optimal standard for generating randomness maximizes security, creates engaging user experiences and ensures fairness in the web3 space. 

API3 vs. Chainlink

API3 is rooted in dismantling the viability of oracle solutions to web3 and replacing them with the solution it believes should have been possible from the beginning. According to API3 co-founder HeikkiVänttinen, API3 represents the next generation of oracles, filling in where Chainlink has fallen a bit short.

Source: API3 white paper

Chainlink is a decentralized network of third-party oracles that combine data off-chain to reduce on-chain transaction costs. Only the final single-value data feed is published on-chain for smart contracts. This model is viable when data needs to be aggregated to capture things like commodity prices or weather reports.

However, as a third-party oracle network, Chainlink acts as the middleman between blockchains and APIs, in opposition to the fundamental ethos of blockchain technology. A middleman incurs higher costs and also makes a blockchain more vulnerable to attacks. In contrast, first-party oracle networks like API3 help reduce costs, redundancy and security risks.

Chainlink and other third-party oracles practice data source obfuscation, which discourages accountability from data providers and keeps them off-chain. With API3, there’s transparency regarding the origin of the data source. The project also enables and incentivizes data providers to bring their businesses on-chain, increasing the trust between web3 applications and API providers.

With API3’s model, API providers stand to benefit because API3 positions them as the project’s engine. They’re incentivized with a data marketplace, direct compensation and an automated system. This allows them to fully reap the benefits of delivering a much-needed service to blockchain applications. As a result, API3 is poised to establish itself as a robust, secure and cost-efficient solution for DApps.

API3 Token and the API3 DAO

API3’s native token (also known as API3) enables the project to create, manage and monetize its dAPIs at scale. The project’s platform is governed by a decentralized autonomous organization (DAO) that oversees the collaborative effort of token holders to secure, govern and benefit from its value capture mechanisms via the API3 token.

Holders of the API3 token gain the right to participate in API3 DAO governance through staking. API3 has implemented an insurance pool in which holders stake their API3 tokens to acquire governing rights in the DAO and receive weekly inflationary staking rewards. The API3 token has three main utilities:

• Staking — Gives token holders membership and rights to inflationary rewards in the API3 DAO

• Governance — Grants direct representation in the DAO

• Collateral — Ensures guaranteed coverage that protects DApp users from qualifying damages due to dAPI malfunctions

API3 Price Prediction

As of Sep 15, 2023, the API3 token price is $1.04, which is 22.99% higher than its all-time-low of $0.85 on Aug 5, 2023, and 89.84% lower than its all-time-high of $10.30 on Apr 7, 2021.

Despite a declining trend over the past year, price prediction experts remain bullish on API3. PricePrediction estimates a possibility of API3 reaching $2.86 in 2025, followed by a mega upswing to a maximum of $18.42 by 2030. Meanwhile, DigitalCoinPrice shares a similar upward projection and estimates API3 will hit a maximum price of $3.91 in 2025, followed by a slower gain that could potentially reach $11.30 in 2030.

Note that optimistic forecasts don’t guarantee identical outcomes for the future. Remember to always invest wisely, including when it comes to cryptocurrencies.

Is API3 a Good Investment?

API3 is going on its third year with the promise of unlocking the next level of value in the web3 economy. However, Chainlink still holds the number one spot as a multibillion-dollar oracle project, with the majority of the DeFi market share in its pocket.

Regardless, API3’s market data shows interest from users. With a market cap of over $100 million, a substantial trading volume and over 75% of its total supply already in circulation, the future looks promising for API3.

Furthermore, API3 OEV extraction is a valuable design feature that delivers a crucial security feature to DApp developers. This attribute is absent from most peer-to-peer oracle networks, including Chainlink.

Where to Buy API3 Crypto

You can buy the API3 token as a USDT Perpetual contract trading pair, API3USDT, with the Bybit exchange, which has a user-friendly and intuitive interface for secure and fast trading.

Closing Thoughts

API3 presents a solution that rethinks the oracle problem and seeks to change the way DApps access real-world data feeds. If Web APIs can be designed into a smart contract–compatible format, thus directly connecting API providers and DApps, third-party oracle networks like Chainlink could cease to be the industry standard for oracle solutions.

API3 introduces the first-party oracle concept, which involves creating, managing and monetizing decentralized APIs (dAPIs) at scale for the benefit of the web3 economy. Thus, APIs can be available for DApps as on-chain data feeds securely in real time and on demand.

By cutting off third-party middlemen and adding another channel of monetization, dAPIs could indeed hold the key to expediting the realization of an expansive web3 ecosystem through blockchain technology.

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