Original Title: Introducing Smart Value Recapture (SVR): A Chainlink-Powered MEV Recapture Solution For DeFi
Original Author: Chainlink
Original Source: https://blog.chain.link/
Compiled by: Daisy, Mars Finance
We are excited to launch Chainlink Smart Value Recapture (SVR), a brand new oracle solution designed to help DeFi applications recover non-toxic maximal extractable value (MEV) by utilizing Chainlink price oracles.
The initial version of Chainlink SVR was collaboratively developed by BGD Labs, Flashbots, and other contributors from the Aave DAO, initially focusing on helping DeFi lending protocols recover liquidation-related MEV associated with oracles. SVR is built on Chainlink's infrastructure, systematically reducing reliance on unnecessary third-party dependencies while eliminating the need for intermediary smart contracts in integration, enabling existing Chainlink price oracle users to easily adopt SVR.
The price oracle version supporting SVR leverages Flashbots MEV-Share and an innovative on-chain 'dual aggregator' contract architecture, providing enhanced efficiency and backup security. Chainlink SVR is currently running on the testnet and is set to launch on the Ethereum mainnet soon. A fully customized version is also planned for the future, introducing further improvements, including higher decentralization, a DON-based auction system, enhanced gas efficiency, and cross-chain functionality.
The Aave community is approving the integration of Chainlink SVR through the governance process, and relevant discussions can be found on the Aave forum. The value recovered by SVR not only provides new revenue streams for DeFi protocols but can also facilitate the long-term economic sustainability of Chainlink oracles, ensuring that DeFi protocols can continue to receive highly secure and reliable oracle services.
How oracles create MEV opportunities in decentralized finance
Maximal Extractable Value (MEV) refers to the value that block proposers (nodes in the blockchain network) can obtain by deciding which transactions to include, exclude, or change the order of in a block. Nowadays, opportunities for these transaction orderings are typically discovered by 'searchers,' who compete in auctions for the rights to dictate transaction order in blocks. This value is then captured by roles participating in the block building process, such as searchers, builders, and validators.
As a subset of MEV, Oracle Extractable Value (OEV) refers to the MEV generated during the process of uploading oracle reports to the chain and their subsequent consumption by on-chain applications. The most common OEV opportunities arise in lending protocols, particularly during liquidation processes. Searchers compete for the right to liquidate high-risk positions and earn rewards through liquidation incentives. On Ethereum, this auction process for block space is typically realized through Flashbots' MEV-Boost, allowing searchers to bundle liquidation transactions with updates to price oracle reports to achieve backrunning.
Currently, the value generated by MEV related to oracles (such as liquidation) is captured by searchers, builders, and validators in the blockchain network, and this value is not returned to the DeFi protocols, end users, and oracles that originally generated the oracle-related MEV. Recovering this benign MEV can ultimately return value to its source.
Note: The term 'OEV' may be somewhat misleading as it does not refer to the oracle actively extracting value from users but is related to the existence of MEV associated with the oracle. We use the term 'OEV' here because it has been widely used to refer to such MEV.
Why choose Chainlink SVR?
Chainlink Labs and the broader Chainlink community have been actively researching solutions around MEV for years, such as Fair Sequencing Services (FSS) and Protected Order Flow (PROF) related research. As a subset of MEV, we are also focused on the research of OEV, exploring how DeFi protocols can recover this value and support the economic sustainability of oracles. We have analyzed various OEV designs aimed at maximizing security, reliability, and long-term economic viability.
Through research, we successfully developed an initial version of an OEV solution called Smart Value Recapture (SVR). Chainlink SVR is designed for backrunning trades related to liquidation and cannot be used for frontrunning or sandwich attacks. These harmful types of MEV negatively affect user experience, and the Chainlink network and community have been actively researching solutions to mitigate these issues for years.
Why choose Chainlink SVR?
We believe Chainlink SVR is the best choice for achieving a native MEV recovery solution, as Chainlink price oracles have already provided security for many of the largest DeFi protocols and have a proven track record in terms of security and reliability. By integrating a Chainlink-based MEV recovery solution, DeFi protocols can not only retain the security and reliability provided by Chainlink but also further enhance the economic sustainability of their own infrastructure and the Chainlink infrastructure they rely on.
The main advantages of Chainlink SVR include:
1. Mature decentralized oracle network (DON) support
SVR is based on the same decentralized oracle network (DON) infrastructure as Chainlink price oracles, which has been validated and reinforced over the past 5 years, successfully securing $75 billion in DeFi TVL at its peak and supporting $17 trillion in transaction value.
2. Reducing unnecessary third-party risks
For protocols that are already using Chainlink price oracles, SVR reduces unnecessary third-party vendor risk, lowers the overall attack surface, and prevents unnecessary third parties from siphoning off economic value.
3. No need to integrate intermediary contracts
SVR does not require DeFi protocols to integrate intermediary contracts or 'wrap' Chainlink price oracles, ensuring a more efficient smart contract workflow and preventing DeFi protocols from needing to make substantial changes when using oracle data.
4. Economies of scale
As the most widely used oracle solution in DeFi, Chainlink can drive economies of scale through SVR, allowing searchers and their subsequent DeFi protocols to benefit from the most promising opportunities and highest revenues.
Based on actual test results, we believe the value recovery rate of Chainlink SVR can reach approximately 40% of realistic levels (i.e., able to recover $40 out of every $100 of liquidation MEV leak value). While some other solutions claim to achieve higher liquidation MEV recovery efficiency, we have yet to see compelling real-world data to support this. Therefore, we consider 40% to be a conservative yet realistic estimate, requiring more data to validate through actual operation.
The initial version of SVR is just a start. Over time, Chainlink SVR plans to evolve into a highly configurable, highly decentralized, generalized, and cross-chain OEV solution built entirely on Chainlink's proven infrastructure. We expect the protocol to maximize MEV revenue recovery on any supported chain while eliminating unnecessary risks and time delays introduced by other OEV solutions.
How the initial version of Chainlink SVR works
Chainlink Price Feeds provide the market-wide, volume-weighted average price of crypto assets by using decentralized oracle networks and multiple independent data sources.
The initial implementation of Chainlink SVR will include a set of parallel Chainlink price oracles supported by the same mature DON (decentralized oracle network) architecture currently used to secure existing price oracle services.
Chainlink price oracles that enable SVR will be deployed to recover liquidation-related MEV from lending protocols integrating this solution while maintaining the standard Chainlink price oracle as a backup. The 'dual aggregator' price oracle design allows a single Chainlink data DON to generate oracle reports that are identical to the current ones while transmitting the oracle reports to the chain in different ways. The SVR oracle is built on existing Chainlink contracts and interfaces, significantly reducing the integration burden for current Chainlink users, as the required code changes are minimal (possibly just pointing to the new aggregator or SVR oracle).
Reports from the price oracle enabled with SVR will transmit updates on-chain via Flashbots MEV-Share, where the rights to bundle liquidation transactions with oracle report updates are auctioned to searchers in a permissionless manner. Meanwhile, the same oracle reports are also transmitted to the existing standard price oracle through the public memory pool, serving as a backup to mitigate potential risk scenarios. Users of the standard price oracle will not be affected by any issues related to SVR, as SVR is optional.
The smart contract infrastructure underpinning Chainlink Smart Application Recapture (SVR).
If the price oracle with SVR enabled experiences a transmission failure (i.e., MEV-Share failure), a fail-safe mechanism will ensure that the oracle can still report prices to the DeFi protocol. When the price oracle with SVR enabled is deemed outdated (based on a configurable time period), it will return the latest price report from the standard price oracle before the cutoff point. This delay is necessary to prevent liquidators from bypassing the value recovery mechanism provided by Chainlink SVR, thereby extracting value.
The following diagram provides an overview of how SVR plans to integrate into Aave V3 on Ethereum.
The proposed implementation of Chainlink SVR with Aave v3 on Ethereum.
The flow in the diagram is as follows:
1. Chainlink data DON generates price oracle reports in the same way today (i.e., via heartbeat or deviation threshold). However, the price report will be transmitted twice, from different accounts.
One price report is transmitted to the standard price oracle via the public memory pool (as it is today).
Another price report is transmitted to the SVR price oracle contract via the Flashbots Protect RPC endpoint.
2. MEV-Share is an open-source protocol that selectively shares information about transactions with searchers, such as price oracle updates, with searchers bidding for the right to bundle transactions into the transaction packages shared with builders. Builders then choose the highest searcher bid and include the corresponding backrun and liquidation transactions in a block. If there are no bids, the price oracle report is published directly on-chain without any backrun liquidation transactions.
3. When price reports and backrun liquidation transactions are published on-chain:
The price report updates the SVR price oracle.
Backrun trades use price updates to liquidate related positions.
Most of the value is recovered by Aave and Chainlink.
4. In the example described, the SVR oracle returns an updated price. However, if there is no new price available (for example, if the MEV-Share fails), the oracle contract connected to Aave will have a fail-safe mechanism that returns the price from the standard Chainlink price oracle after a configurable delay.
Economic Model
The MEV related to oracles recovered through Chainlink SVR is planned to be distributed at a standard ratio between the integrated DeFi protocols and the Chainlink network, with 60% of the value allocated to DeFi protocols and 40% to the Chainlink ecosystem. This distribution scheme provides an additional revenue stream for DeFi protocols while supporting the economic sustainability of Chainlink oracles by covering transaction gas fees and other ongoing infrastructure costs. Please note that these ratios may change in the future, aiming to achieve a sustainable economic model between DeFi protocols and the oracles supporting them.
Due to the long-standing deep partnership between Chainlink and the Aave community, as well as Aave's role as a launch partner, the revenue distribution plan provided to Aave in the short term is: 65% of the revenue to the Aave ecosystem and 35% to the Chainlink ecosystem in the first six months after integration in a production environment—this plan needs to be approved by Aave community governance.
We expect Chainlink SVR to be one of the first Chainlink services connected to the payment abstraction system, depending on the results of security audits and deployment status. Payment abstraction is an on-chain smart contract system designed to significantly reduce the billing and payment friction for users and developers interacting with Chainlink services. This system is designed to convert fee tokens into LINK through existing decentralized exchange (DEX) contracts.
Interested in recovering MEV through Chainlink SVR?
If you are a DeFi protocol and interested in integrating Chainlink SVR to recover MEV, feel free to contact us or follow us for more updates in the future.
