$AAVE is considering adopting $LINK Chainlink's new oracle service, Smart Value Recapture (SVR), to return a portion of transaction frontrunning profits, or MEV, back to its users. This proposal, presented on Aave's governance forum on Dec. 23, aims to optimize liquidations and address MEV-related inefficiencies.
The Problem
Aave, a leading DeFi protocol, enables users to borrow cryptocurrencies by collateralizing their assets. However, when collateral values drop significantly, liquidations occur. Third-party liquidators repay debts and earn collateral plus a liquidation bonus.
While this system has worked efficiently, it has inadvertently created an opportunity for block builders to profit from MEV by reordering transactions during liquidations. This often leads to disproportionate profits for builders at the expense of protocol users.
The Solution
Chainlink's SVR service redirects MEV profits by auctioning the right to back-run Chainlink’s price-feed oracle. Aave estimates that integrating SVR could capture up to 40% of MEV profits, which would then be funneled back into the Aave ecosystem via its DAO.
This integration is poised to shift the balance, ensuring that users benefit more significantly from liquidation events.
Tackling Harmful MEV
MEV has become a growing concern across the Ethereum ecosystem, with users and protocols implementing measures to mitigate its impact. Private transactions, often processed through "dark pools," now dominate Ethereum's order flow as users seek MEV protection.
By exploring Chainlink's SVR, Aave joins the broader effort to protect users and maximize the value generated within DeFi protocols.
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Stay tuned for updates on this potential game-changing integration.