By Chris Kilbourn | Crescent City Capital Market Analyst Intern
As intermediaries between blockchain networks and off-chain data sources, oracles are essentially required for any new use cases to be brought to the crypto space. Current oracles act as third-party intermediaries between smart contracts and data sources and come with associated costs and security risks. By introducing a solution that removes third-party oracles and allows data providers to fill the role of both oracle and API, API3 simultaneously dispels the security concerns associated with intermediaries while providing additional benefits in terms of cost and transparency. For many of the use cases we will see opening up in the future, this will provide a better alternative to today’s dominant on-chain oracles.
True widespread adoption of crypto will occur when smart contracts begin to replace established business processes and the use cases of web 2.0 are adopted on-chain. The overwhelming majority of these future use cases require blockchain networks to use external data as conditions for the execution of smart contracts, but this data can only be supplied by on-chain oracles that can source data from off-chain providers.
Currently, the dominant use case of on-chain oracles is providing pricing data from centralized exchanges for use in defi applications, and these oracles have been designed with this use case in mind. Chainlink, for example, employs an aggregating contract that draws price data from multiple sources in order to escape the risk of data from a single source being somehow compromised. It then draws this data through multiple nodes on its network and averages the results together. In the case of pricing data, this is a valuable decentralizing step that mitigates the risk of using a third-party intermediary.
In situations where an oracle is only drawing from one data source to begin with, however, the use of third party oracles doesn’t add value, it simply introduces additional costs and extra points of failure where a bad actor oracle could be incentivized to misrepresent data. In situations where a smart contract is requesting data that is specific to a single source – a future lending protocol requesting tax information from the IRS, an aggregator of academic data requesting information from a peer-reviewed journal, a government entity requesting specific GIS data from a contractor – it’s difficult to think of a reason why unique data sources shouldn’t simply run their own distributed API and interact directly with the requesting smart contract, monetizing both their data and its provision instead of paying a redundant number of oracle nodes to do the work for them.
In the case of API3, token price is used as payment for data provisioning. As API3 appears to have a competitive advantage over third-party oracles in specific use cases, its token can be expected to appreciate as it continues to attract data sources to serve these use cases and new smart contracts are developed that engage with them. As we stand at the absolute outset of “real world” business processes being transferred onto blockchains, API3 is poised to capitalize on the coming explosion of on-chain commerce that relies upon off-chain data.
Relation to the Broader Market
With the total crypto market cap in broader decline since November, speculative liquidity is still leaving the crypto space and any alt coin has a decreasing pool of liquidity to draw from. As oracles are designed to bring off-chain data onto the blockchain, they stand to be a focal point for new liquidity entering the space as they are a gateway through which any new use cases must pass. Regardless of where we are in a market cycle, more and more functions that occur on web 2.0 will be ported onto smart contracts, and thus the role played by on-chain oracles will continue to grow regardless of what the market is doing.
API3 has a circulating supply of 36.9M and a total supply of 110.9M. 20M of the circulating supply came from a sale to the public at the token generation event in November of 2020. Pre-sale investors account for 15% of the total supply and are vested over a two year period, resulting in 0.625% inflation per month. Founders, partners, and contributors account for 40% of the total supply, and are vested over a three year period following a six month cliff. This cliff occurred in May of 2021, so as of that date there is a current monthly inflation of 1.735% between both tranches. Thus a considerable proportion of the tokens remain locked for the immediate future, with 60.3M currently staked. Token vesting is done block by block, which means they will be released linearly, i.e. with no outsized opportunities for sudden dumps.
Comparable oracle projects have less desirable supply schedules. Chainlink, for example, has 467M tokens in circulation out of a 1B total supply, with 533M held by the development team. There is no vesting period for these tokens, and if the team has any planned emissions schedule, they have not communicated it to the outside world. There is no way to know whether a large portion of LINK tokens will be dumped on the market at any time.
API3 has performed consistently well since its TGE in December of 2020, with its initial price listed at $1.50 after a $0.30 sale to pre-ICO investors. It has never returned to its ICO price since, trading at a high of $10.50 at the time of the April ’21 peak. Its current price is $5.80, representing a 288% gain from its ICO low. Looking at other oracle projects over the same time period, RLC has increased by 117.54% and Chainlink by 35.28%, while DIA has fallen by -24.24% and BAND by -22.22%.
API3 appears to significantly outperform other comparable tokens and have a greater proportion of its supply locked with a reasonable emission schedule.
The current market cap for API3 is $214.06M and the fully diluted market cap is $643.7M. Chainlink’s current market cap is $6.5B; if API3 attains this level when all of its tokens are unlocked in 2024, its price would reach $59.30. This would represent a 10x from current valuation, but two points deserve to be made in this regard: first, that factors surrounding LINK’s mysterious emissions schedule have likely suppressed its price for a considerable length of time, and second, that blockchain oracles have truly tapped a small fraction of their foreseeable client base. What these points suggest is that the valuation of LINK is itself currently understated, and that API3 has the potential to reach considerably higher than the current valuation of LINK.
In the past, API3 has shown support and resistance around the 0.382 and 0.5 fib levels at $4.986 and $6.048, so these may be good levels to buy. The 1.618 and 2.618 fib levels lie at $16.110 and $25.110, which might be opportune points to take profit. As a bet on the continued integration of blockchain technology into mainstream business processes, however, blockchain oracles are decidedly a long-term investment and might be best considered as long-term holds. When one considers that oracles are a necessary pre-requisite for any future protocol that involves the use of off-chain data for the service it provides, and that API3 optimizes its costs and security for institutions that want to provide their own data to clients and consumers, the idea of opening a position while it still has a market cap of $214M begins to look very attractive.