On December 23, 2023, the decentralized finance (DeFi) protocol Aave announced a proposal on its governance forum to integrate the 'Smart Value Recapture (SVR)' service recently launched by the decentralized oracle service provider Chainlink. This service aims to return the profits generated from backrunning transactions to users in 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, often yielding high profits, while users find it difficult to benefit.
Aave, as a leading decentralized lending protocol, allows users to borrow other cryptocurrencies by depositing cryptocurrency assets as collateral. If the collateral's value drops significantly, users' positions will be liquidated. According to Aave's design, when third-party liquidators repay part of the user's debt, they will receive corresponding collateral and additional liquidation rewards.
However, this reward mechanism provides clear MEV profit opportunities for block builders, while users genuinely participating in the protocol can only gain minimal benefits. Aave pointed out in the proposal that this phenomenon leads to block builders receiving most of the profits, while users only receive negligible returns.
It should be emphasized that MEV is not a problem unique to Aave, but a challenge faced by the entire Ethereum network. According to a report by Blocknative in August 2023, 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 oracle' to block builders through MEV-Share auctions, which will allow builders to gain early access to important price-related information, thus reordering transactions and profiting from them when blocks are packaged. The profits generated from the auction can flow back to Aave, equivalent to a de facto recovery of part of the MEV profits. According to Aave's estimates, SVR is expected to capture about 40% of MEV profits and redistribute these profits to Aave DAO, ultimately benefiting users throughout the Aave ecosystem.
Users will benefit from it
Aave's proposal indicates that if the integration of Chainlink SVR is successful, it will not only optimize the liquidation mechanism and reduce the unfair phenomena brought about by MEV but also directly return a significant portion of the 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, the AAVE token surged over 15% in the past 24 hours, recovering to cycle highs. In this regard, 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, allowing them to 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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