API3’s OEV Network to ‘Recapture Oracle Extractable Value’ for Lending Protocols

Decentralized oracle provider API3 has announced the launch of the OEV Network, billed as “the first on-chain solution to recapture oracle extractable value (OEV) for lending protocols.”

Now live and fully integrated with the API3 Oracle Stack, the OEV Network is a layer 2 platform that aims to establish an efficient market for oracle updates. OEV is similar to maximal extractable value (MEV), but where MEV extracts value during the process of securing transactions, OEV extracts value during the process of updating oracles.

For example, lending markets utilize oracles to retrieve the price of assets used as collateral in loans. Sometimes, when an oracle updates a price, it can lead to liquidations.

With OEV Network, searchers can "bid" on valuable updates, such as a price update that would liquidate a position on a lending market. The proceeds from the auction are then returned to the decentralized app (dapp), potentially recapturing millions of dollars a year and creating a new revenue stream for both lending protocols and the API3 oracle stack.

Efficient liquidation markets

In any lending market, external parties, sometimes called “searchers,” help maintain the health of a protocol by ensuring that liquidations happen quickly and efficiently. Traditionally, searchers get 5-20% of the collateral being liquidated as a fee for their services.

“Lending protocols manage the risk of their loans by incentivizing searchers with liquidation bonuses for timely liquidations,” API3 Strategy Lead Ugur Mersinlioglu told Decrypt. “Data shows that they are severely overpaying for this service, especially for the larger positions that are being liquidated.”

The problem with this model, Mersinlioglu explained, is that searchers compete for blockspace and have to outbid each other aggressively, with much of the value from the liquidations flowing to block builders instead of the lending protocol’s searchers.

“With OEV Network, we are changing where this competition takes place,” he said. “Instead of competing in blockspace auctions to get your transaction included first, searchers will compete for the right to perform oracle updates that allow for liquidations, with the proceeds of these auctions being programmatically returned to dapps.” That, he said, could enable dapps to recapture “multi-million dollar opportunities.”

Data feeds and business models

Typically, oracles function as a cost center, where the provision of data feeds is subsidized by the oracles without directly generating any revenue. The OEV Network aims to change this by creating an efficient and competitive market for oracle updates.

In the past, they argue, the value secured via an oracle didn’t impact the providers' revenue in any way; whether the oracle secured billions of dollars or pennies, their revenue remained the same. With the launch of the OEV network, oracle providers now have a direct link between how much value they secure and how much potential revenue they make.

API3 says there’s a multi-million dollar opportunity in recapturing this value for lending protocols across all chains. To date, Aave V3 has given out $23.4 million in liquidation incentives this year, averaging around $4 million per month, while Venus has paid out $5.8 million in 2024, averaging $1 million a month—a “significant portion” of which could go towards boosting the profitability of lending protocols.

The API3 Oracle Stack provides oracle services over 37 networks, securing over $1 billion in transactions in May 2024 alone. With the integration of the OEV Network into the Oracle Stack, API3 feeds now come with a “built-in solution to recapture significant value,” creating new revenue streams that can fund operations, growth, and expansion onto new chains.