Aave, a leading decentralized finance (DeFi) protocol, is considering integrating Chainlink’s new Smart Value Recapture (SVR) oracle to address a growing issue in the space—maximum extractable value (MEV). This move could redirect profits from transaction backrunning, often extracted by third parties, back into the hands of Aave’s users.
On December 23, Chainlink unveiled SVR, an oracle service designed to capture MEV profits, specifically focusing on liquidations within DeFi protocols. The same day, Aave’s governance forum presented a proposal to integrate SVR into the protocol, with the aim of recapturing MEV from Aave liquidations and returning it to the Aave ecosystem.
The MEV Problem in DeFi
MEV is the profit that miners, validators, or other entities can extract by reordering, including, or excluding transactions in the process of block production. While MEV has the potential to enhance network efficiency, it can also lead to significant costs for users, particularly in DeFi platforms like Aave.
Aave’s protocol allows users to borrow cryptocurrency by depositing collateral. If the collateral’s value drops too much, it triggers a liquidation process. When a position is liquidated, third-party liquidators repay part of the debt and receive collateral, plus a liquidation bonus. This bonus is where the MEV issue arises, as the liquidation process creates an opportunity for profit through transaction reordering, which benefits the liquidators more than the protocol’s users.
As Aave’s proposal points out, this “elegant solution” to liquidations has led to a situation where the entities benefiting from MEV do not contribute much to the overall process. Aave believes this discrepancy warrants an optimization to ensure users are not left with a disproportionate share of the costs.
Chainlink’s SVR: A Potential Solution
Chainlink’s Smart Value Recapture service aims to tackle this issue head-on. Through an MEV-Share auction, SVR allows protocols like Aave to sell the rights to “back-run” Chainlink’s price-feed oracle, capturing MEV profits that would otherwise go to third-party entities. Aave estimates that SVR could capture up to 40% of MEV profits, which could then be directed to Aave’s decentralized autonomous organization (DAO) to benefit users.
This integration could potentially shift the dynamics of DeFi liquidations by ensuring that the value generated from these processes is more equitably distributed. Instead of liquidators profiting disproportionately, users would benefit from the MEV captured and returned to the Aave ecosystem.
The Race to Protect Users from MEV
MEV has become a pressing concern for DeFi users and protocols across the Ethereum network. As users become more aware of the risks, there has been a surge in the use of private transactions, which are sent directly to a validator in what is known as a “dark pool.” This arrangement helps protect users from harmful MEV extraction by keeping transactions out of the public queue.
According to a report from Blocknative, private transactions have become increasingly common, with users opting for MEV protection through this method. The growing prevalence of private orders highlights the demand for solutions that can mitigate the impact of MEV on the broader Ethereum ecosystem.
Conclusion: Aave’s Bold Step Toward Fairer DeFi
Aave’s potential integration of Chainlink’s SVR oracle could represent a significant step forward in addressing the challenges posed by MEV in DeFi. By capturing a portion of MEV profits and redistributing them to users, Aave would not only optimize its liquidation process but also enhance the fairness of the DeFi ecosystem. If successful, this initiative could inspire other protocols to adopt similar solutions, helping to ensure that users benefit more directly from the value created within decentralized platforms.
As Aave’s governance forum moves forward with this proposal, it will be interesting to see how the integration of Chainlink’s SVR oracle plays out and whether it becomes a blueprint for other DeFi protocols to follow in addressing the MEV issue.
