The Ethereum lending protocol Aave has proposed the integration of Chainlink's Smart Value Recapture (SVR) technology, aimed at reclaiming the MEV during liquidation processes and redistributing it to protocol users and the ecosystem. It conservatively estimates that it can recover 40% of leaked MEV, amounting to tens of millions of dollars. This pilot program may redefine the distribution model of MEV and reduce the earnings of Ethereum validators. (Background: Aave and Lido's total TVL has surpassed $70 billion, dominating half of the DeFi world) (Additional background: The Trump family increases its DeFi holdings! Buying ONDO, AAVE, ENA tokens, with holdings exceeding $80 million) Recently, the Ethereum lending protocol Aave has conducted a community intention survey, planning to integrate a new feature from the oracle leader Chainlink—Smart Value Recapture (SVR). This feature aims to reclaim non-malicious Maximal Extractable Value (MEV), helping Aave recover MEV from liquidation processes and redistributing it to the Aave ecosystem for the benefit of users. The proposal has received widespread positive feedback from the community, which believes this collaboration will bring significant economic opportunities to both the Aave and Chainlink communities. Note: Maximal Extractable Value (MEV) refers to the maximum profit that block producers (such as miners or validators) can obtain by reordering, inserting, or deleting transactions within the blocks they produce. Therefore, MEV is one of the sources of income for block producers. MEV behavior may lead to increased transaction costs for users, transaction failures, or increased slippage, affecting user experience. Very bullish development for $LINK and $AAVE with the introduction of @Chainlink’s new non-toxic MEV recapture solution Chainlink SVR (Smart Value Recapture)—designed to recapture liquidation MEV in DeFi—will feature a revenue split between integrating DeFi protocols and the… pic.twitter.com/sSTabhrH8c — Zach Rynes | CLG (@ChainLinkGod) December 23, 2024 Reasons for integrating SVR According to the proposal, the reasons for Aave's integration of SVR include: Reducing MEV leakage: The MEV issue leads to an uneven distribution of Aave's liquidation rewards, with excessive profits flowing to block producers, while the searchers who actually execute the liquidations and protocol users receive less return. Enhancing protocol economic efficiency: Through SVR, Aave can reclaim these MEVs, enhancing the economic efficiency of the protocol and redistributing the reclaimed value to the Aave community and users. How SVR works SVR operates based on Flashbots' MEV-Share infrastructure, utilizing an auction mechanism to sell the rights to subsequent operations after price oracle updates to searchers. The winning searchers need to return part of the value to the protocol, thereby achieving MEV recovery. The following diagram outlines how SVR integrates within Aave V3 on Ethereum: The process in the diagram works as follows: The price reports generated by Chainlink Data DON are transmitted twice: once through the public memory pool to update standard price data (as in the existing process), and the second time through the RPC endpoint of Flashbots Protect to the SVR price data contract. Next, MEV-Share plays a crucial role. This protocol allows searchers to bid for subsequent trading opportunities generated by price oracle updates and bundles these trades together to pass to block producers. Block producers will choose the highest bidding searcher to include the relevant trades in the block. If no searchers bid, the price updates will be directly on-chain but will not include liquidation trades. Once the price updates and liquidation trades are successfully on-chain, the SVR data will update the price and use that price to complete the relevant liquidation operations. Most of the value generated from these operations will be reclaimed by Aave and Chainlink, thereby enhancing the protocol's revenue. If the MEV-Share system fails, Aave's data contract will activate a backup mechanism to obtain prices from standard Chainlink price data, ensuring the protocol's operation is not disrupted. Impact on Aave and Chainlink According to Aave's proposal, the reclaimed MEV value will be received in ETH, which is consistent with the situation where the liquidated collateral is typically priced in ETH. After the pilot program is completed, one of Aave's goals is to establish a more complex system that allows for the receipt of various forms of reclaimed assets. Regarding the estimated scale of reclaimed value, according to Chainlink's explanation, it is conservatively estimated that at least 40% of leaked MEV can be recovered, potentially amounting to tens of millions of dollars. However, the specific amount recovered depends on the range of assets to which the solution is applied, and these estimates are based on the hypothetical scenario of enabling SVR across all Aave assets, not the expected targets of the pilot phase. Regarding value distribution, Aave indicated that the specific distribution of reclaimed value will be discussed separately after the pilot phase ends. The core of this proposal is limited to system operations and technical details. Currently, preliminary discussions between Aave and Chainlink Labs suggest that within the first six months of the pilot program, the reclaimed value will be distributed 65% to Aave DAO and 35% to the Chainlink community ecosystem; after six months, the distribution ratio will be adjusted to 60% and 40%, with Chainlink's share primarily used to cover infrastructure-related costs. The final distribution ratio must be approved by Aave community governance. Additionally, Aave plans to use the reclaimed value to enhance user benefits, such as providing incentives for the upcoming Umbrella stakers. Impact on Ethereum validators For Ethereum validators, if Chainlink's SVR technology is widely applied across multiple DeFi protocols, it may reduce the MEV earnings of validators, leading to a decrease in staking returns. This could change the economic model for validators, forcing them to consider other strategies for supplementary income. At the same time, as DeFi protocols capture more MEV and redistribute it to ecosystem users, the governance tokens of these protocols may appreciate in value due to enhanced fundamentals, making governance tokens a potential 'hedge tool' for Ethereum validators facing declining future staking returns, used to balance the decline in staking income.