Decentralized platform Aave is considering incorporating a new Chainlink oracle to channel profits from transaction back-running directly to the decentralized finance (DeFi) protocol users, according to a proposal on Aave’s governance forum.
Chainlink, a decentralized oracle provider, has introduced Smart Value Recapture (SVR), a specialized oracle service designed to capture profits from maximum extractable value (MEV) and redirect them to support DeFi protocols.
“We’re excited to introduce Chainlink Smart Value Recapture (SVR)—a novel oracle solution designed to enable DeFi applications to recapture the non-toxic Maximal Extractable Value (MEV) derived from their use of Chainlink Price Feeds,” the report said.
Aave Proposes SVR
Aave proposed incorporating SVR to recover MEV from Aave liquidations and reinvest it into the Aave ecosystem.
Block builders generate profits from MEV by rearranging transactions before publishing completed blocks on the public blockchain. While this process can occasionally disadvantage users, it does not always do so.
Aave enables users to borrow crypto by pledging other crypto assets as collateral. If the value of the collateral drops significantly, it is seized or liquidated.
The proposal also noted that when a position requires liquidation, a third-party liquidator pays off a portion of the debt and receives an equivalent amount of collateral and an additional percentage as a liquidation bonus.
The liquidation bonus presents a clear opportunity for MEV and leads to substantial profits for the builder, an entity that doesn’t handle most of the work.
Meanwhile, “the protocol users receive way less in proportion,” the proposal mentioned.
A 40% MEV Profit
Aave also explained that Chainlink’s SVR is a service that, through an MEV Share auction, sells “the right to back-run” Chainlink’s price-feed oracle and capitalize on liquidations. Aave estimates that SVR could capture around 40% of MEV profits, which could be redirected to the Aave DAO to benefit its users.
“Based on real-world testing, we believe Chainlink SVR can expect to achieve a realistic value recapture rate of approximately 40% (i.e., for every $100 that would have been leaked via liquidation MEV, $40 was recaptured). While some alternative solutions have claimed to achieve a higher efficiency rate for recapturing liquidation MEV, we have not seen conclusive real-world data to showcase this,” Chainlink added.
Users and protocols throughout the Ethereum network are actively working to mitigate the impact of harmful MEVs. According to an August report by Blocknative, private transactions now make up most of Ethereum’s order flow as users prioritize trade protection.
