When it comes to solving the so-called “oracle problem,” or the way blockchains are connected to outside data sources, we can do better.
So says API3, a project building a transparent methodology for marrying blockchains to the APIs of data providers, which really means providing an alternative to Chainlink, the decentralized oracle service with something of a monopoly in the world of data feeds and smart-contract blockchains.
Announced Thursday, API3, which promises a decentralized API (dAPI) network, has raised $3 million in a private funding round led by Placeholder and with participation from Pantera and Digital Currency Group (which is also the owner of CoinDesk).
Because blockchain nodes are consumed with the business of reaching consensus, they must obtain outside information via oracle nodes, a sort of middleware between the ledger and the API of some data provider. According to Heikki Vänttinen, co-founder of API3, this intermediary function is handled by rent-seeking middlemen who run nodes on Chainlink, which in turn operates an opaque system of governance.
A better solution is to allow API providers themselves to run their own nodes, said Vänttinen. That way, the process of governing the curation of data feeds can be done in a transparent and decentralized manner.
“We just saw some shortcomings in the way they [Chainlink] basically operate their data feeds on the oracle network as a whole,” said Vänttinen, who was one of the first Chainlink node operators. “The core team is this sort of centralized black box for the data feeds, deciding unilaterally which nodes get to serve which data feeds and also which APIs those nodes serve data from,” he said.
Placeholder’s Chris Burniske turned up the heat.
“Crypto’s largest oracle system by network value, Chainlink, is composed of data-reselling middlemen, where the source and quality of data are suspect,” he said in a statement. “While heavily marketed, Chainlink isn’t well enough designed or maintained to remain a long-term solution for crypto or DeFi’s information needs, and those that rely on Chainlink do so at their own users’ risk. Enter API3.”
The Chainlink advantage
However, a Chainlink Labs spokesman said a quick look at one of the widely used feeds like ETH/USD, shows multiple leading data providers, such as Kaiko, running their own nodes.
“The Chainlink system possesses a key advantage,” the spokesman told CoinDesk via email. “It enables data providers to sell their data to multiple blockchains without the need to run any additional software. Chainlink not only enables data providers to run their own nodes, and many already do on production today, but also enables them to sell their existing APIs into the Chainlink Network with zero changes to their infrastructure.”
This purposeful design decision provides Chainlink users access to a broader selection of data providers, the spokesman said, adding:
“It’s a starkly different improved approach from that of API3, which requires all data providers to operate and manage new infrastructure to even get started. Chainlink’s origin-signed data capabilities are complemented by the even more important capability that allows smart contracts to access any and all APIs, a key feature API3 clearly lacks.”
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Vänttinen says the API3 approach makes it painless and easy for API providers – from crypto-price crunchers to weather forecast APIs that plug into insurance apps – to set up as oracles. The API3 Airnode is “a very simple serverless function that the data provider can deploy on their existing cloud provider platform – you set it and forget it,” said Vänttinen. Alternatively, running a Chainlink node is “basically a full-time job” to keep operational, he said.
Chainlink pointed out that since API3 removes the reliability of having each oracle running its own full nodes would make this approach highly susceptible to things like the recent Infura downtime event.
“API3 doesn’t have oracles that run their own Ethereum or other nodes, which means they are forced to rely on centralized third parties to broadcast their results,” the Chainlink Labs representative said. “This means that API3 is entirely dependent on services like Infura being live, which as we’ve seen recently, can fail for hours at a time, which in API3’s case, would lead to hours of downtime, out of sync market prices and therefore massive losses for users.”
DeFi bonanza
The recent DeFi boom saw Chainlink node operators cashing in. For example, the monthly subsidies earned by each of the top three Chainlink node operators was close to $100,000 per month between August and October this year. According to research carried out by The Block, between August and October, ChainLayer made over $322,000, LinkPool over $306,000, CertusOne over $293,000 and Fiews over $282,000. September was a particularly good month for them, as the top three nodes all made over $160,000 in said subsidies.
By contrast, the API providers are paid a couple of orders of magnitude less and don’t even know their data is being resold in these applications, said Vänttinen. The monthly subscription fees paid to those providers by node operators could range between $100-$200 per month, perhaps running as high as $400, Vänttinen said, adding that the terms and conditions of these subscriptions usually prohibit the third-party reselling of data.
Read more: Flash Loans Aren’t the Problem, Centralized Price Oracles Are
“With its Airnode design, API3 makes it seamless for primary data providers to pipe their information into cyptonetworks with zero blockchain expertise,” said Burniske. “That means the reputation and quality of existing data providers can carry into cryptoland, simultaneously allowing these entities to turn a profit from crypto participation.
“Furthermore,” he said, “API3’s organizational DAO structure provides a framework for truly decentralized on-chain data feeds, which the team calls dAPIs.”
