Oracle Extractable Value (OEV) is a type of Maximal Extractable Value (MEV) that oracles can control.
Oracles can also sell the right to extract OEV to others, making money without directly extracting the value themselves.
Here's a practical example:
Imagine a DeFi protocol as a machine that needs constant updates from the outside world to function properly. That's where oracles come in - they're like messengers bringing this crucial information. But here's the catch: these updates can't happen continuously. They come in bursts, at specific moments.
Now, while trustworthy oracles make sure no one tampers with the information itself, there's still a weak point. The block producers - think of them as the postal service of the blockchain - get to decide the order of deliveries. This means they can choose when exactly the oracle's update arrives within a block of transactions.
Why does this matter?
Well, the DeFi protocol acts differently before and after it gets new data. Clever block producers can take advantage of this, manipulating the order to extract value for themselves. It's like they're peeking at the contents of the messages and rearranging them to their benefit.
But there's a clever workaround. While block producers can shuffle the order, they can't open and change the "envelopes" once they're sealed. Oracles can use this to their advantage by packaging their updates with actions that capture the value first. It's like sending a self-executing package that does its job the moment it's opened, before anyone else can interfere.
This approach, called extracting Oracle Extractable Value (OEV), essentially beats the block producers to the punch. By the time they get their hands on the transaction, the value has already been extracted fairly.
In essence, while DeFi protocols using oracles are naturally vulnerable to these exploits, extracting OEV first can prevent them, making the whole system fairer and more secure for everyone involved.
In the past, DeFi protocols and oracles had a simple buyer-seller relationship. DeFi protocols paid for oracle services, and oracles often had to use up their project tokens to keep prices low. This wasn't sustainable in the long run.
OEV (Oracle Extractable Value) changes this dynamic. Instead of just providing data, oracles can now capture value that would otherwise be taken by others through MEV (Maximal Extractable Value), and can share this captured value with the DeFi protocols.
This is a win-win situation. The DeFi protocols get extra income they wouldn't have had otherwise, and oracles find a new, sustainable way to fund their services. It transforms the relationship from a simple transaction to a partnership where both sides benefit.
In this new model, oracle services could actually become a source of revenue for DeFi protocols, rather than an expense. At the same time, oracle projects can finally become financially stable and sustainable.
This shift could reshape how DeFi protocols and oracles work together, creating a more cooperative and mutually beneficial ecosystem.
Author: Burak Benligiray is a co-founder of API3. He has worked on various oracle applications since 2018, and acted as the technical lead of API3 since its inception. Coming from an academic background, he authors white papers and articles about oracles, which address both technical aspects and business model concerns. Burak believes that smart contracts are only as useful as they can facilitate the real economy, and is working towards this objective at API3.
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