Crypto Startup Wants to Break Chainlink’s Grip on Oracle Market

Who needs Chainlink? Well, most blockchain-based projects that use oracles in order to get external data on their apps.

API3, a new oracle provider, hopes to cut into Chainlink’s market share. The startup announced on Thursday the closing of a $3 million seed funding round led by Placeholder. The round also drew participation from Digital Currency Group and CoinFund. The funding round shows that, despite Chainlink's dominance, the oracle problem is far from solved, and that there’s still plenty of debate over the best way to bring real-world data into decentralized applications.

Oracles are providers of external data to blockchain-based applications, which typically require more information to function than is readily available from any given blockchain itself. Since most code for these applications is executed automatically via smart contracts, it’s vitally important that external data is trusted and resistant to manipulation.

In networks like Chainlink, many different users run nodes that collect asset prices and other data from the original source, like an exchange or data analysis agency (called first-party providers by API3). These users charge fees for replicating data to prevent tampering, but in so doing increase the data price and complexity of the network. 

API3, using existing cloud API providers, aims to cut out the middlemen and lower costs by providing aggregated data directly from first-party data sources.

API3 co-founder Heikki Vanttinen explained the benefit to Decrypt: “This allows us to leverage the data providers’ off-chain reputation as collateral, which is only possible with the first-party oracles that we propose. This gets rid of all of the security risks of a third-party oracle node layer and makes the first-party oracle exactly as trustworthy as the API it is getting its data from.”

API3 will allow first-party data providers like stock exchanges and credit reporting agencies to run “airnodes”, applications that run on the same cloud hosting platform that host their API services. Airnodes are open-source software that transmit data from first-party providers. Airnode code will be built and maintained by a decentralized autonomous organization (DAO), where stakeholders share responsibility for governance and maintenance of the API3 framework.

API3 should act as a simple “set-and-forget”’ API gateway for Web3 applications, according to Vanttinen. Multiple first-party API data feeds will be combined into decentralized APIs (dAPIs) to ensure data integrity without the use of an extensive network of middlemen providing data confirmation.

In an email to Decrypt, a Chainlink Labs spokesperson said, "Chainlink has had origin-signed data functionality live and working since launch. Chainlink enables data providers to run their own nodes, and many already do on production today. Chainlink’s origin-signed data capabilities allow smart contracts to access any and all APIs.”

“While API3 is a new effort, the engineers, builders and community members behind the network have been pursuing crypto's general-purpose oracle problem for years now,” Placeholder founder Chris Burniske told Decrypt. 

“With that experience, comes knowledge about what's working, and what's not working, in existing systems,” he said. “For them, it's less about the ‘oracles’ and more about the ‘APIs’, and that distinction makes all the difference for getting all the world's data piped into blockchains at low-cost.”

In addition to Placeholder, venture capital firms Pantera Capital, Digital Currency Group, Hashed, and more participated in the API3 seed round. With high-profile investors around the crypto space helping fund the upstart oracle solution, existing providers like Chainlink may need to watch their back as the battle to be the data provider of choice enters a new phase.

Editor's note: This article has been updated to include comments from Chainlink Labs.