According to a proposal on the Aave Governance Forum, Aave is considering a new Chainlink oracle integration designed to pass on profits from transaction front-end execution to users of decentralized finance (DeFi) protocols.
On December 23, decentralized oracle provider Chainlink launched Smart Value Recapture (SVR), a specialized oracle service that captures profits in maximum extractable value (MEV) to benefit DeFi protocols.
On the same day, Aave proposed SVR integration “to reclaim MEV from Aave clearing and return it to the Aave ecosystem.”
Block builders benefit from MEV by reordering transactions before publishing completed blocks to the public blockchain ledger. Sometimes, but not always, it comes at a cost to the user.
source: ghost
Aave’s MEV problem
Aave allows users to borrow cryptocurrencies by depositing other crypto assets as collateral. If the value of the collateral falls too much, the collateral is forfeited or “liquidated.”
“Each time a position needs to be liquidated, the (third-party) liquidator repays a certain amount of debt and receives collateral of an equivalent value and a percentage of the highest liquidation bonus,” the proposal states.
This was an “elegant solution,” but “recently a ‘problem’ emerged that required some kind of optimization called MEV,” the proposal says.
Liquidation bonuses create “a very clear opportunity for MEVs” and bring “quite significant benefits to companies that don’t do most of the work, namely construction companies.”
Meanwhile, the proposal states that “protocol users would receive a much smaller percentage.”
According to Aave, Chainlink’s SVR is a service that sells “the right to backrun” Chainlink’s price feed oracles and liquidation profits through MEV-Share auctions.
Aave estimates that SVR can capture around 40% of MEV profits, which can be redirected to the Aave DAO to benefit users.
Protection against MEV
Users and protocols across the Ethereum network are struggling to avoid the harmful costs of MEV.
Private trading now dominates order flow on Ethereum as users look to secure their transactions, according to an August report from Blocknative.
Private orders involve sending transactions directly to validators in a method known as a “dark pool” instead of a public queue.
According to Blocknative, “Users typically choose to send transactions privately to protect their MEV.”
magazine: The Rise of MicroStrategy Clones, Asia Dominates Crypto Adoption: Asia Express 2024 Review