We recently caught up with Heikki Vänttinen, Co-founder at API3, a collaborative initiative focused on delivering traditional API services to smart contract platforms in a decentralized and “trust-minimized” manner.
It’s governed by a decentralized autonomous organization (DAO), and its code is open-source and its operations are “completely transparent,” the project’s developers claim.
Our conversation with Heikki Vänttinen is shared below.
Crowdfund Insider: Why are APIs important? What is API3?
Heikki Vänttinen: Many people don’t realize the importance of APIs as a glue that connects various applications to exchange information and services. So, for example, when you visit Kayak to book a trip, in the background, Kayak is connecting to the APIs of the airlines to find and book the flight and the payment provider to complete your purchase.
The ability that APIs enable, to compose functionality by combining pre-existing components, has accelerated the legacy web far beyond developers building every function of their applications from scratch. APIs will have the same impact in the blockchain-based Web3, beginning with DeFi, but extending to all kinds of applications.
The hurdle is that web APIs are incompatible with the blockchain. That’s where API3 and other oracles like Chainlink come in. In the simplest terms, oracles accept data from external sources and make it compatible with the decentralized consensus mechanisms of blockchains.
API3 in particular makes it extremely easy for data and service providers to take their current APIs that work with existing web infrastructure and make them available to blockchain-based decentralized applications. Rather than relying on third parties, API3 enables providers to become their own blockchain oracles.
At the same time, the result of making this easy is two-fold. First, providers have been quick to join the API3 Alliance, aiming to use our Airnode technology to offer their APIs to the blockchain. In just a few short months, we have welcomed over 150 members participating in the Alliance. Second, by gaining fast provider adoption, API3 is providing a bridge to a variety of functionality that is helping to accelerate the development of Web3.
To get a bit more into specifics, API3 offers two avenues for providers and DApps to connect. For data and services where there is a single source, a personal bank account, for example, API3 empowers providers to seamlessly wrap their APIs into what we call “first-party oracles.” In these cases, API3 skips the needless aggregation, unnecessary fees and potential delays and allows the connection to happen directly.
In the instance of a price quote, where there are multiple sources, aggregation may be desired. In these instances, API3 offers dAPIs, which are blockchain-native API services combining multiple first-party, provider-operated oracle nodes into aggregated data feeds.
By rejecting the one-size-fits-all approach that has been the standard among oracles, API3 enables more secure decentralized data feeds (dAPIs) and a vast amount of new Web3 use cases via its first-party APIs.
Crowdfund Insider: Your website references the “Web3 API economy.” How would you explain that term to someone who is unfamiliar with APIs?
Heikki Vänttinen: The API economy refers to the exploding wave of business models designed around APIs that are fueling the exponential growth of Web2. The Web3 API economy expands this to the next generation of the web that will be built on blockchain technology. API3 is the infrastructure that enables the API economy to be used by decentralized apps on Web3.
API3’s API3 Alliance is the largest association of API providers on Web3, with over 150 providers connecting Web3 blockchain-based applications with real-world data and services. Traditionally, APIs have been forced to either build their own facilities or rely on untrusted external oracles to make their data and services compatible with the blockchain, but API3 offers the tools for Alliance members to go directly to the consumers on Web3.
Crowdfund Insider: How is API3 different from Chainlink? How is API3 attracting API providers to the platform?
Heikki Vänttinen: First of all, I want to acknowledge Chainlink as an innovator in illustrating the blockchain’s need for oracles to make external data available on blockchain-based applications. API3 represents the next generation of oracles, and our model fills in where Chainlink has fallen a bit short.
The first major distinction between API3 and Chainlink relates to who manages the connection between the external API and the blockchain application.
As I mentioned, Chainlink is a peer-to-peer network of 3rd-party oracles. In Chainlink’s formulation, the data from these oracles is typically combined off-chain to reduce blockchain transaction costs and then a single value is published on-chain to be used by smart contracts. This works well for data such as commodity prices and weather but it doesn’t make sense when the data comes from a single off-chain source. In that case, it makes far more sense for the data provider to run its own oracle and avoid the security risks and costs of involving a 3rd party oracle network.
In the Chainlink model, which has been adopted by most existing oracles, third-party oracles act as middlemen between the data source and the blockchain. This structure obfuscates the true data source and there is less accountability from providers, who are typically off-chain businesses with reputations to uphold, to ensure that the data is valid. API3 has taken a different, more transparent approach which focuses on empowering providers and Web3 applications to connect directly.
Under API3’s model, first-party oracles are operated by the API providers themselves, communicating directly and transparently with blockchains. As known sources, they have every incentive to offer valid data.
With Chainlink, even when the data comes from a single source, the opaqueness of 3rd-party oracles creates a trust problem that Chainlink addresses using decentralization. The data from a single, trusted source is duplicated across a decentralized network of oracles and then routed through a consensus validation which could have been avoided entirely by letting the data source be its own oracle. In this case, Chainlink’s duplication adds cost and increases security risk factors.
API providers come to API3 because our unique approach places them at the center of our success, incentivizes them with a marketplace and compensation and empowers them to reap the full rewards of offering API-delivered data and services directly to blockchain applications. As a result, we have established a broad ecosystem of secure, robust, cost-efficient and flexible functionality.
Crowdfund Insider: What are the Airnodes that API3 provides to API owners? Is it cross-platform?
Heikki Vänttinen: For background, Web3 is the biggest growth opportunity for businesses since the inception of the Internet, and it is firmly rooted in decentralization. This creates a problem for traditional API companies, as Smart Contracts cannot directly connect to APIs for real-world data and services. However, Airnode facilitates API connectivity by acting as a bridge between the smart contract and the API.
Airnode is API3’s first-party oracle software. It’s a Web3 middleware — a wrapper that allows any existing web API to connect directly to blockchain applications.
Airnode is serverless and maintenance-free, and extremely simple to set up to work on any Ethereum Virtual Machine (EVM)-compatible chain.
Crowdfund Insider: What sectors or industries can benefit most from first-party oracle solutions?
Can you give an example of when first party oracles would provide benefits over the traditional architectures?
Heikki Vänttinen: Sectors like parametric insurance could benefit greatly. For example, a smart contract for insurance could access first-party oracle data that only comes from one source like a flood meter in someone’s home, and, if a certain condition is met, disburse insurance money instantly to the beneficiary.
Open banking is another example where first party oracles make a lot of sense. Most people are familiar with banks making customers’ accounts available via the traditional web to connect additional services such as credit checking or payment processing.
API3 connects those open banking APIs to Web3 making this accessible to smart contracts/dApps where their decentralized structure is more secure. And in the case of interacting with a single bank account, all of the data and services relate to that single source, so the one-size-fits-all structure of traditional oracles adds cost and insecurity that are not present with API3’s first party oracles.
Crowdfund Insider: How does API3 ensure data remains secure for users?
Heikki Vänttinen: API3’s data security operates on three levels. At the level of individual Airnodes corresponding to individual providers, there is complete transparency of where the data is coming from so there is a huge incentive for the providers to ensure that the data they provide is uncorrupted.
The second level relates to the way we convey aggregated data to the decentralized web. In some cases, for example getting a price quote for a token that trades on multiple exchanges, the best approach is to consolidate the data to provide the median or other algorithmically-determined single value to the blockchain. The question is how to ensure the validity of that data.
In traditional oracles, the data is typically aggregated off chain in a way that is not transparent on chain. The sources of data and the formulae of aggregation are hidden. Traditional oracles employ off-chain validator nodes to achieve consensus which increases the potential for collusion and corruption. API3’s approach is to perform the aggregation on chain with the sources and methods in full public view of the network, resulting in a more secure output.
Finally, API3’s DAO enables the consumers of data to purchase insurance so that even in the event that invalid data somehow is passed on, they will be made whole while at the same time incentivizing the API3 network participants who are the insurers to police the data for fraudulent activity.
Crowdfund Insider: How do the data and services enabled by API3 help to power Web3 and the next phase of DeFi?
Heikki Vänttinen: API3’s provider-centric approach — making it easy for API owners to offer data and services to Web3 is accelerating the growth in functionality in this next generation of the web.
The narrow set of data feeds that DeFi currently depends on such as asset price feeds have so far constrained DeFi’s development, but now it’s time for DeFi to broaden. The vast array of APIs that API3 will make available to DeFi applications will enable it to reach its full potential.