Aave and Chainlink Collaborate on SVR, a New Technology Expected to Recycle MEV Profits by 40%
Aave, an Ethereum lending protocol, announced on 12/23 that it plans to integrate Chainlink’s new Smart Value Recapture (SVR) oracle service. The proposal aims to address the issue of unfair profit distribution caused by Maximum Extractable Value (MEV) and redistribute the profits from the liquidation process to Aave community users.
What is MEV?
Maximum Extractable Value (MEV) refers to the additional profit obtained by block validators and miners through adjusting transaction order, front-running, or canceling transactions. However, regular users suffer losses such as increased transaction costs and delays due to these unfair transactions by block producers, and they only receive minimal returns.
(A brief introduction to MEV on the Ethereum chain | What is the “Miner Extractable Value” (MEV) crisis? How to improve unconventional transactions by miners?)
Introduction to Aave’s current liquidation mechanism and MEV issue
Aave stated that its current protocol’s liquidation mechanism attracts third parties to execute liquidations through fixed proportion liquidation rewards. When the value of a user’s collateral drops significantly, third-party liquidators repay a portion of the user’s debt and receive equivalent collateral and additional rewards, ensuring the stability of the protocol.
With the development of blockchain technology, MEV has become a significant problem in the liquidation process. In simple terms, assuming the liquidation profit is set at 3%, and the liquidator only needs a 2% profit to offset the cost, the remaining 1% becomes the target of block validators and miners. They adjust the transaction order or front-run to redirect the profit to themselves, leaving regular users unable to benefit.
SVR bids to recapture MEV
Aave stated that Chainlink’s SVR service is built on the open-source Flashbots MEV-Share protocol and recaptures MEV profits from liquidations through a bidding process:
Price updates: When Chainlink’s oracle needs to update prices, these price data will be synchronized and sent to two places: the MEV-Share protocol as the main channel for processing MEV, and the standard price oracle as a backup solution. This ensures that users can still obtain the latest prices in case of any issues with SVR.
Bidding process: In the SVR service, transaction searchers bid for the execution rights of liquidation transactions on the MEV-Share protocol, allowing searchers to buy the opportunity to front-run. The income generated from these bids can be used to reward Aave’s community users and support Chainlink’s operations.
Price on-chain: Regardless of the success of the bidding process, the updated price data will be securely written to the blockchain. If SVR operates normally, the data will be uploaded from SVR. If SVR encounters any issues, meaning no one participates in the bidding, the system will automatically switch to the backup standard price oracle to ensure uninterrupted data transmission and protect user interests.
Chainlink SVR and Aave integration diagram.
Trial proposal: How Aave utilizes SVR
Aave’s proposal states that if the integration with the SVR system is successful, it is expected to recapture 40% of the profits related to liquidations. 65% of the profits will be returned to the Aave ecosystem, and 35% will be used for Chainlink operations. Additionally, the proposal emphasizes that the integration of SVR services will not significantly change Aave’s existing liquidation mechanism or affect user experience. It will only make minor adjustments to risk parameters such as liquidation rewards.
In summary, by integrating Chainlink’s SVR service, Aave aims to increase the profits that were previously lost to block validators and searchers and bring them back into the protocol, creating more revenue for users and enhancing the sustainability of the Aave economy. Furthermore, SVR is only used in backrunning to avoid harmful frontrunning and sandwich attacks, ensuring user interests are protected.
(A brief introduction to MEV on the Ethereum chain | What is the “Miner Extractable Value” (MEV) crisis? How to improve unconventional transactions by miners?)
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