Decentralized finance (DeFi) protocol Aave is considering the integration of Chainlink’s newly released Smart Value Recapture (SVR) oracle to address the issue of maximum extractable value (MEV) in its ecosystem. The proposal was introduced in Aave’s governance forum, and its main goal is to redirect profits from MEV-related transaction backrunning to benefit the protocol’s users. This is part of Aave’s efforts to optimize its operations and reduce the negative impact of MEV.
On Dec. 23, Chainlink launched the SVR oracle service that is designed to capture MEV profits and return them back to DeFi protocols. On the same day, Aave proposed leveraging SVR to reclaim MEV from liquidation events and redirect the captured value to the Aave DAO for the benefit of its user base.
MEV happens when blockbuilders reorder transactions to maximize profits before finalizing blocks on the blockchain. This often leads to large profits for blockbuilders but can sometimes come at the expense of users.
Aave’s platform allows users to borrow cryptocurrencies by depositing collateral. If the value of the collateral drops too much, it is liquidated. Liquidations involve third-party liquidators repaying a portion of the debt and receiving the equivalent value in collateral along with a liquidation bonus. While this mechanism worked effectively in the past, the proposal pointed out that it created a clear opportunity for MEV that allows builders to extract profits while contributing minimally to the process. This dynamic has led to disproportionate benefits for blockbuilders compared to protocol users.
Chainlink’s SVR offers a potential solution by selling, through an MEV-Share auction, the rights to back-run Chainlink’s price-feed oracle and profit from liquidations. Aave estimates that the SVR could capture around 40% of MEV profits, which could then be redistributed in the ecosystem to enhance user benefits.
Across the Ethereum network, protocols and users are actively looking for ways to mitigate the costs associated with harmful MEV. One of the main strategies involves using private transactions, where orders are sent directly to validators rather than being included in the public transaction pool. These are known as “dark pools,” and they have gained a lot of popularity as users prioritize MEV protection. According to a report by Blocknative, private transactions now dominate Ethereum’s order flow.
December 2024, Cryptoniteuae
