The Ethereum lending protocol Aave recently proposed a community intention survey to plan the integration of the leading oracle Chainlink's new feature—Smart Value Recapture (SVR). This feature aims to recover non-malicious maximal extractable value (MEV), helping Aave recover MEV from the liquidation process and redistribute it to the Aave ecosystem for user benefit.
This proposal has received generally positive feedback from the community, believing that this collaboration will bring enormous 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 in the blocks they produce. Therefore, MEV is one of the sources of income for block producers. MEV behavior may lead to increased user transaction costs, transaction failures, or greater slippage, affecting user experience.
Reasons for Integrating SVR
According to the proposal, the reasons for Aave integrating SVR include:
Reducing MEV Loss: The MEV issue has caused an uneven distribution of Aave's liquidation rewards, with profits flowing disproportionately to block producers, while the searchers (who actually execute the liquidations) and protocol users receive less reward.
Enhancing Protocol Economic Efficiency: Through SVR, Aave can recover these MEV, enhance the economic efficiency of the protocol, and redistribute the recovered value to the Aave community and users.
How SVR Works
SVR operates based on Flashbots' MEV-Share infrastructure, selling the rights to subsequent operations after price oracle updates to searchers through an auction mechanism. The winning searchers are required to return part of the value to the protocol, thereby achieving MEV recovery.
The following diagram outlines how SVR integrates and operates in Aave V3 on Ethereum:
The flow illustrated in the diagram works as follows:
The price reports generated by the Chainlink Data DON will be transmitted twice: once through the public mempool to update the standard price data (as per the existing process), and once via the RPC endpoint of Flashbots Protect to the SVR price data contract.
Subsequently, MEV-Share plays a key role. This protocol allows searchers to bid for subsequent trading opportunities after price oracle updates, bundling these trades together to pass them to block producers. Block producers will choose the highest-bidding searcher to include the relevant trades in the block. If no searcher bids, the price update will be directly added to the blockchain, but will not include liquidation trades.
When the price updates and liquidation trades are successfully added to the blockchain, the SVR data will update the price and use that price to complete the relevant liquidation operations. The value generated from these operations will mostly be recovered 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 that the protocol operates without disruption.
Impact on Aave and Chainlink
According to Aave's proposal, the recovered MEV value will be received in ETH, which aligns with the fact that the liquidated collateral assets are usually priced in ETH. One of Aave's goals after the pilot program is to establish a more complex system that allows for receiving multiple forms of recovered assets.
In terms of the estimated scale of recoverable value, according to Chainlink's description, a conservative estimate suggests that at least 40% of leaked MEV can be recovered, potentially amounting to tens of millions of dollars. However, the specific recovery amount depends on the range of assets to which the solution is applied, and these estimates are based only on the hypothetical scenario of enabling SVR across all Aave assets, not the expected goals during the pilot phase.
Regarding value distribution, Aave stated that after the pilot phase ends, the specific distribution plan for recovered value will be discussed separately. The core of this proposal is limited to system operation and technical details. Currently, preliminary discussions between Aave and Chainlink Labs suggest that in the first six months of the pilot program, the recovered value will be distributed 65% to Aave DAO and 35% to the Chainlink community ecosystem; after six months, the distribution ratio will adjust 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 expects to use the recovered 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 to multiple DeFi protocols, it may reduce the MEV earnings for validators, potentially leading to a decrease in staking rewards. This could alter the economic decisions of validators, forcing them to consider other strategies for supplemental income.
At the same time, as DeFi protocols capture more MEV and redistribute it to ecosystem users, the governance tokens of these protocols may increase in value due to enhanced fundamentals, making governance tokens a potential 'hedging tool' for Ethereum validators facing future declines in staking returns, used to offset the drop in staking rewards. Some Ethereum validators may therefore purchase governance tokens of leading DeFi protocols to seek stable returns in the long term.
However, whether this assumption can be realized depends on whether governance tokens can indeed gain value growth from MEV recovery and whether their returns are attractive enough to encourage Ethereum validators to participate.
Overall, the SVR technology redefines the distribution model of MEV, shifting some profits from Ethereum validators to DeFi protocols. This will have profound impacts on the economic returns of validators and the overall ecological landscape.
Future Voting Plans
Currently, this proposal is gathering community opinions and feedback on Aave's governance forum to assess the feasibility of launching the SVR pilot program on Aave V3. In the future, the proposal will undergo off-chain voting on Snapshot, awaiting the community's final decision.