Aave Considers Integrating Chainlink to Return Measurable Extractable Value Fees Back to Users

New Proposal Seeks to Redirect MEV Profits to Aave Users

On December 23, decentralized oracle provider Chainlink released a new service called Smart Value Recapture (SVR). This innovative solution is designed to capture profits from maximum extractable value (MEV) and redirect them back to the DeFi protocol’s users. In response, Aave proposed integrating SVR into their ecosystem, aiming to recapture MEV from liquidations and return it to the Aave community.

What is MEV?

Maximum Extractable Value (MEV) refers to the profit that can be extracted by reordering transactions before they are posted to the public blockchain ledger. This often comes at the expense of users, who may not receive the full value of their assets. Blockbuilders, those responsible for building and validating blocks on the Ethereum network, can capitalize on MEV by manipulating transaction order flow.

Aave’s Liquidation Process

Aave is a DeFi protocol that allows users to borrow cryptocurrency by depositing other crypto assets as collateral. When a user’s position needs to be liquidated due to a decrease in asset value, a third-party liquidator repays the debt and receives the equivalent value in collateral plus a percentage-denominated liquidation bonus.

The MEV Problem

While Aave’s liquidation process has been an "elegant solution," it has created a new problem that requires optimization: MEV. The liquidation bonus creates a clear opportunity for MEV, resulting in significant profits for entities that don’t perform the majority of the work – the builders. Meanwhile, protocol users receive much less than their fair share.

Chainlink’s SVR and Aave’s Proposal

Chainlink’s Smart Value Recapture (SVR) service sells the right to back-run Chainlink’s price-feed oracle through an MEV-Share auction. This allows entities to profit from liquidations, but with a twist – the profits are redirected to the protocol users. Aave estimates that SVR can capture approximately 40% of MEV profits, which could be redirected to the Aave DAO to benefit users.

Protecting Against MEV

The costs associated with MEV have prompted users and protocols across the Ethereum network to take measures against its negative effects. Private transactions now dominate Ethereum’s order flow as users seek protection for their trades. Blocknative reports that private orders involve sending transactions directly to a validator, creating a "dark pool" arrangement.

Benefits of Integrating SVR

By integrating SVR into Aave’s ecosystem, the protocol can capture profits from MEV and redirect them back to its users. This has several benefits:

• Improved User Experience: By recapturing MEV, Aave can provide a more favorable user experience, as users receive a larger share of the profits.
• Increased Transparency: Integrating SVR promotes transparency in the liquidation process, making it clear that profits are being redirected to users.
• Reduced Incentives for MEV: By capturing a significant portion of MEV profits, Aave can reduce incentives for entities to engage in MEV.

Conclusion

Aave’s proposal to integrate Chainlink’s SVR service marks an important step towards mitigating the negative effects of MEV. By recapturing profits from liquidations and redirecting them back to users, Aave can create a more equitable and transparent DeFi protocol. The integration of SVR demonstrates Aave’s commitment to optimizing its processes and providing better value to its users.

Related Topics

• Maximal Extractable Value (MEV): Explore the concept of MEV and how it affects DeFi protocols.
• DeFi Protocols: Learn about decentralized finance (DeFi) protocols and their role in the cryptocurrency ecosystem.
• Chainlink’s Smart Value Recapture (SVR): Discover more about Chainlink’s innovative service, SVR.