Will AAVE's price reach new highs again? With Chainlink's help, it is expected to generate tens of millions of dollars in additional revenue each year.

Article reproduced from: Odaily Planet Daily

Author: Azuma, Odaily Planet Daily

The two leading DeFi projects Aave (AAVE) and Chainlink (LINK) both experienced significant increases today, but the reason is not due to the Trump concept WLFI increasing its holdings again (see 'What assets might the Trump family project WLFI buy next?'), but rather because the two projects have joined forces to promote a substantial cooperation that is expected to help both sides increase revenue by tens of millions of dollars each year.

According to OKX market data, as of around 11 AM Beijing time, AAVE was priced at 377.69 USDT, with a 24-hour increase of 16.66%; LINK was priced at 23.9 USDT, with a 24-hour increase of 5.8%.

Chainlink SVR

In the early morning of today Beijing time, Chainlink officially announced the launch of a new service called 'Smart Value Recapture (SVR)', which is a new oracle solution aimed at enabling DeFi applications to reclaim MEV value in a 'non-toxic' way through Chainlink's quotes.

The so-called MEV, or 'Maximal Extractable Value', refers to the value obtained by block proposers through including, excluding, or changing the order of transactions in a specific block. As a subset of MEV, OEV ('Oracle Extractable Value') refers to the MEV generated when oracle reports are transmitted on-chain and consumed by on-chain applications. The most common OEV opportunities occur in lending protocols, especially during liquidation processes.

Odaily note: The term OEV is actually an inertia misinterpretation, as it does not refer to oracles actively extracting value from users, but rather to MEV related to oracles.

In the current DeFi operational environment, the value of MEV (especially OEV) is captured by participants in the block building process, such as searchers, builders, and validators, without being returned to the DeFi protocols that originally generated the MEV, the end users, and the oracle. If there is a way to reclaim this MEV, it will help return the relevant value to its original creators.

This is the original intention of Chainlink in building SVR. From the application scenario perspective, Chainlink SVR cannot be used for controversial MEV predatory scenarios such as front-running or sandwich attacks, but is specifically built for value recovery scenarios related to liquidation, addressing the OEV issue that commonly plagues lending protocols.

Aave community proposal for integration

As one of the partners in the development of the initial version of SVR (specifically including BGD Labs, Flashbots, Aave DAO), Chainlink's announcement was immediately followed by BGD Labs initiating a preliminary proposal in the Aave community forum, proposing to integrate SVR as soon as possible.

BGD Labs pointed out that Aave's long-term stable operation has proven the effectiveness of its liquidation mechanism, but there are also obvious MEV arbitrage opportunities — in actual liquidation scenarios, builders often earn significant profits, while they do not do most of the work; at the same time, the share received by searchers, i.e. protocol users, is much smaller.

Chainlink's SVR is expected to properly address this issue and more precisely define who benefits the most from transaction ordering. For stability reasons, BGD Labs suggests deploying SVR for only 1-3 types of assets during the initial pilot phase to advance integration work in a controlled manner.

Potential value capture scale

According to data from Chainlink, after testing, Chainlink SVR is expected to achieve an actual value recovery rate of about 40% — for every $100 leaked from liquidating MEV, $40 can be reclaimed.

Chainlink added that although some alternative solutions claim to achieve higher liquidation recovery efficiency, the team has not seen conclusive actual data to prove this. For SVR, 40% is a conservative but realistic estimate, but actual performance is needed to collect real data.

BGD Labs added that the 40% recovery efficiency corresponds to the scale of past MEV leaks, with the potential to achieve value recovery in the tens of millions of dollars.

It is worth mentioning that BGD Labs added that for simplifying the system, the asset form receiving the reclaimed value will be ETH.

Revenue sharing plan

Chainlink stated in its announcement regarding SVR that the value reclaimed by SVR will be distributed according to a standard ratio between the integrated DeFi protocols and the Chainlink network, with 60% of the value flowing to DeFi protocols and 40% flowing to the Chainlink ecosystem — this ratio is not fixed and may be adjusted in the future.

For the first partner, in order to achieve a long-term cooperation with Aave, Chainlink proposed a revenue share of 65% for Aave and 35% for Chainlink in the first six months, but the relevant data must be approved by Aave's community governance.

As for the final flow of value after distribution, Chainlink did not explicitly mention it, only stating that 'the economic sustainability of Chainlink oracles can be supported through the payment of transaction gas costs and other ongoing infrastructure fees'; however, regarding Aave, BGD Labs has explicitly proposed to use reclaimed value to benefit users, such as providing incentives to stakers in the Umbrella module — this might also be one of the reasons for AAVE's price increase being more noticeable than LINK's at present.