Ugur Mersinlioglu is the Technical Product Owner at API3. In the presentation below, he examines the differences between first party and third party oracles, the challenges they face, and API3’s take on a potential “solution” to these challenges.
What is API3? API3 is a platform that enables decentralised applications (dApps) on blockchains to access external, real world data by providing what they call “first party oracle” solutions, using an array of decentralised application programming interfaces (API), also known as dAPIs. The API3 token is used to govern and secure the system. Users who want to utilise data provided by dAPIs, will have to stake API3 tokens as collateral for these services. At the same time, holding the API3 token will give governing rights over the API3 DAO and access to rewards. In essence, API3 aims to allow developers to leverage APIs for blockchain applications in a more decentralized and trust-minimized way.
Limitations of third party oracles Typically, oracles exist as third-party services. For a dApp to consume data, the data itself must first be brought on chain by an oracle. Oracles thus do not function as a data source, but instead as a bridge between the data source and the blockchain.
While users can freely choose which oracles to use, according to Ugur, it is still difficult to properly verify the origins or the source that the data is extracted from. Whilst implementing multiple oracles would help with aggregating the data collected, they could all still be drawing results from the same data source. Ugur reiterates that simply having more oracle nodes reporting from a single data source does not help to decentralise the system at all. In fact, if the data source is reporting inaccurate results, it would not matter how many oracles are being used because they would all end up reporting the same incorrect information on chain. This point is illustrated with the example of crypto exchanges Coinbase and CoinMarketCap (CMC) wrongly reporting huge gains on many tokens in December 2021.
Ugur also highlights that third party oracles introduce another layer of trust. While many oracle networks try to address this issue by introducing game theoretical reward structures to incentivise good behaviour, Ugur believes that a better option could be to remove this layer altogether.
Introducing first party oracles If data could be transmitted to smart contracts directly from the data source – they would be acting as both the data source and as an oracle – making them a “first party oracle”. According to Ugur, first party oracles offer some major advantages to users, including minimising the cost of operations and improving transparency and data provenance. Since first party oracles are the data sources themselves, incidences such as the CMC misreport are far less likely to affect these oracles. Consumers would also be able to choose their oracles based on the performance of the data source.
However, there are certain difficulties of operating as a first party oracle that traditional data sources still face. Most significantly, running a first party oracle typically requires a certain level of blockchain expertise as well as handling payment in cryptocurrencies. On top of being slightly intimidating, this can also have additional accounting and legal implications for non-crypto native organisations.
Transitioning from third party to first party oracles API3 aims to lower the barrier to entry for entities to operate as first party oracles by simplifying the entire process through their suite of solutions. They have also implemented additional services to protect end users. Some of these solutions are described below.
Airnode: Known as the “first party oracle node”, the airnode is a piece of middleware infrastructure that directly connects web APIs to the blockchain. Airnodes therefore help to remove the need for any trusted third party to relay API data on chain. Third-party oracles also often charge substantial fees to connect companies to the blockchain. With Airnode, a data provider can serve blockchain applications directly and retain all of the revenue, rather than paying fees to a third party. More information about API3’s Airnode can be found in this medium article written by API3 Co-founder, Burak Benligiray.
dAPIs: dAPIs are data feeds that are constructed on chain, using first-party oracles operated by API providers. The data feeds are governed by the API3 DAO. The decentralized governance structure of dAPIs and the ability for API token holders to stake their tokens and participate in decision-making through the DAO allows for maximum transparency and minimizes the need for trust in centralised operators. It also reduces the risk of centralised attack surfaces. This allows for a more secure and decentralized system for data feed operation. Learn more about dAPIs in the API3 documentation here.
Insurance: API3 has developed an on-chain insurance service to guarantee users of dAPIs that any damages caused by a malfunction will be covered up to a certain amount. This predetermined amount provides a clear measure of the maximum amount that a dAPI can securely handle. Using Kleros as part of the insurance service allows API3 to provide quantifiable and trustless security guarantees to dAPI users. Kleros is a decentralized dispute resolution platform that uses game theory and crowdsourcing to fairly and efficiently resolve disputes on chain. With Kleros, API3 offers a transparent and reliable way for users to resolve any disputes that may arise and ensures that they receive the protection they are entitled to under the terms of the insurance.
Conclusion With the introduction of these solutions, API3 is addressing the obstacles that have previously prevented API providers from operating their own first party oracles. API3 also believes that first party oracles could function more reliably than third party providers. If there are problems with the data source, individual first-party oracles may be more likely to handle them better than third-party solutions, which, according to Ugur, may not reveal weaknesses until there is a major failure. API3 is thus trying to pave the transition from traditional third party oracle networks to first party oracle solutions which they believe will provide much improved security and transparency in terms of data sources.
The Blockchain Oracle Summit was the world’s first conference to fully focus on oracles and their use cases. Leaders from 14 different oracle networks and their users gathered in Berlin to discuss their work and research into the nuances of oracles.