What Is API3?

Smart contracts cannot access data outside the blockchain on their own; services that bring this data on-chain are called oracles. In many oracle networks, data is relayed by third-party node operators rather than the source itself. API3 instead advocates a first-party oracle approach: the organization that produces the data delivers it directly on-chain using lightweight software called Airnode. The project argues that reducing the intermediary layer will increase transparency and lower costs.

The project's data feeds, called dAPIs, supply data such as prices to DeFi protocols. API3 has also developed a mechanism that aims to capture the value that is normally taken by MEV-seeking bots during oracle updates, known as oracle extractable value (OEV), and return it to applications. API3 token holders take part in project governance by staking their tokens in the DAO pool.

API3 operates in the same space as other oracle solutions such as Chainlink and Band Protocol. As with every oracle project, the accuracy of the data ultimately depends on trust in the data provider; faulty or manipulated price data can lead to unjust liquidations in the DeFi protocols that rely on it.