The Ethereum lending protocol Aave officially announced on December 23 its intention to integrate a new Smart Value Recapture (SVR) oracle service released by Chainlink. The proposal aims to improve the unfair distribution of profits caused by Maximum Extractable Value (MEV) and to return profits from the MEV liquidation process to Aave community users.
What is MEV?
Maximum Extractable Value (MEV) refers to the additional profits that block validators and miners can obtain by adjusting the order of transactions, front-running, or canceling transactions. However, ordinary users suffer losses such as increased transaction costs and delays due to these unfair trades by block builders, receiving very little in return.
(Ethereum Chain Science | What is the 'Miner Extractable Value' (MEV) crisis? How to improve miners' unconventional trading?)
Introduction to Aave's existing liquidation mechanism and the MEV issue.
Aave states that their current liquidation mechanism uses a fixed ratio of liquidation rewards to attract third parties to execute liquidations. When the value of a user's collateral drops significantly, third-party liquidators will repay part of the user's debt and receive equivalent collateral along with additional rewards to ensure the stability of the protocol.
With the development of blockchain technology, MEV has become a significant issue in the liquidation process. Simply put, if the liquidation profit is set at 3%, and the liquidator only needs a 2% profit to offset costs, the remaining 1% becomes the target of competition among block validators and miners, who will adjust transaction orders or front-run to capture profits, leaving ordinary users unable to benefit.
SVR bidding to recover MEV.
Aave states that Chainlink's SVR service is built on the Flashbots MEV-Share open-source protocol, which recovers MEV profits during liquidation through a bidding process.
Price updates: When Chainlink's oracle needs to update prices, this price data will be synchronously sent to two places, one as the primary pipeline for processing MEV, the MEV-Share protocol. The standard price oracle acts as a backup solution, ensuring that users can still receive the latest prices in case the SVR encounters issues.
Bidding process: In the SVR service, transaction searchers bid for the execution rights of liquidation transactions on the MEV-Share protocol, allowing searchers to pay for the opportunity to front-run, and this revenue can be used to benefit the supporting Aave community users and Chainlink operations.
Price on-chain: Regardless of whether the bidding is successful, the updated price data will be securely written to the blockchain. If SVR operates normally, data will be on-chain from SVR. If there are issues with SVR, meaning no one participates in the bidding, the system will automatically switch to the backup standard price oracle, ensuring uninterrupted data transmission and protecting users.
Illustration of the integration of Chainlink SVR and Aave. Pilot proposal on how Aave utilizes SVR.
The Aave proposal indicates that if the SVR system is successfully integrated, it is expected to recover liquidation-related profits of up to 40%. Of these profits, 65% will be returned to the Aave ecosystem, and 35% will be used for Chainlink's operations. Additionally, the proposal emphasizes that the integration of the SVR service will not significantly change Aave's existing liquidation mechanism or affect the user experience; it will only involve minor adjustments to risk parameters such as liquidation rewards.
In summary, the integration of Chainlink's SVR service by Aave is expected to enhance the recovery of profits that are otherwise lost to block validators and searchers, bringing them back into the protocol to create more revenue for users and improve the sustainability of the Aave economy. Additionally, SVR will only be used for backrunning to avoid harmful front-running and sandwich attack behaviors, protecting user interests.
(Ethereum Chain Science | What is the 'Miner Extractable Value' (MEV) crisis? How to improve miners' unconventional trading?)
This article on Aave's collaboration with Chainlink's new technology SVR, expecting to recover MEV profits of up to 40%, first appeared in Chain News ABMedia.
