On December 23, 2023, the decentralized finance (DeFi) protocol Aave released a proposal on its governance forum, planning to integrate the newly launched "Smart Value Recapture (SVR)" service by decentralized oracle service provider Chainlink. This service aims to return profits generated from backrunning transactions to users of the Aave ecosystem, reducing the current unfair distribution phenomenon caused by maximum extractable value (MEV).
MEV and Aave's challenges
In the DeFi ecosystem, maximum extractable value (MEV) refers to the additional profits that block builders obtain by reordering or inserting transactions before packaging blocks. This behavior is particularly common during liquidation events, typically yielding high profits, while users find it difficult to benefit from it.
Aave, as a leading decentralized lending protocol, allows users to borrow other cryptocurrencies by depositing cryptocurrency assets as collateral. If the value of the collateral drops significantly, the user's position will be liquidated. According to Aave's design, when third-party liquidators repay part of the user's debt on their behalf, they will receive corresponding collateral as well as additional liquidation rewards.
However, this reward mechanism provides clear MEV profit opportunities for block builders, while users who actually participate in the protocol can only gain minimal benefits. Aave pointed out in the proposal that this phenomenon leads to block builders obtaining most of the profits, while users only receive negligible returns.
It is important to emphasize that MEV is not a problem unique to Aave, but a challenge faced collectively by the entire Ethereum network. According to a report by Blocknative in August 2023, in order to avoid losses caused by MEV, an increasing number of users are choosing to transmit transactions through private transactions, a method known as "Dark Pool." By sending transactions directly to validators instead of publicly entering the transaction queue, users hope to reduce the risk of MEV attacks.
Chainlink SVR provides solutions
Chainlink's SVR oracle sells the usage rights of the "backrunning price oracle" to block builders through MEV-Share auctions, allowing builders to obtain important price-related information in advance, enabling them to reorder transactions and profit from them when packaging blocks, while the profits generated from the auction can flow back to Aave, effectively recovering part of the MEV profits. According to Aave's estimates, SVR is expected to capture about 40% of MEV profits and redistribute these profits back to Aave DAO, ultimately benefiting users of the entire Aave ecosystem.
Users will benefit from this
Aave's proposal shows that if Chainlink SVR is successfully integrated, it can not only optimize the liquidation mechanism and reduce the unfair phenomena brought about by MEV, but also directly return a significant proportion of MEV profits to Aave DAO, benefiting all participants. This will help enhance the economic sustainability of the Aave protocol and strengthen users' confidence in the DeFi ecosystem.
AAVE token reverses the downturn
Despite the recent significant pullback in the cryptocurrency market, AAVE token surged over 15% in the past 24 hours, returning to its cycle high. In response, Arthur, the founder of DeFiance Capital, who is long-term bullish on Aave, stated:
"It could be that some institutions are re-entering the market, so they can announce in their year-end reports that they own Aave; one of the best-performing DeFi assets and the future of finance."
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