Aave Considers Integrating Chainlink to Return MEV Fees Directly to Users

Decentralized finance (DeFi) protocol Aave is exploring the integration of a new Chainlink oracle designed to redirect profits from maximum extractable value (MEV) backrunning to users, as per a proposal in Aave’s governance forum.

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Chainlink Releases Smart Value Recapture Oracle

On December 23, decentralized oracle provider Chainlink released its Smart Value Recapture (SVR) oracle service. SVR specializes in capturing profits from MEV to benefit DeFi protocols. This innovative solution aims to address the issue of MEV exploitation by redirecting profits back to the protocol’s users.

Aave Proposes Integration with SVR

The same day, Aave proposed integrating SVR into its ecosystem "to recapture MEV from Aave liquidations and return it to the Aave ecosystem." This move is a significant step towards mitigating the issue of MEV exploitation in DeFi.

What is MEV?

Maximum extractable value (MEV) refers to the profits generated by reordering transactions before posting them to the public blockchain ledger. This often comes at the expense of users, who may end up paying a higher price for their transactions. MEV has become a significant concern in DeFi, as it can lead to substantial losses for users and protocols.

Aave’s Liquidation Process

Aave allows users to borrow cryptocurrency by depositing other crypto assets as collateral. When the collateral declines too much in value, it is forfeited or "liquidated." The liquidation process involves a third-party liquidator repaying some amount of debt and receiving the equivalent value in collateral, plus a percentage on top denominated liquidation bonus.

The Problem with MEV

Aave’s proposal highlights that the liquidation bonus creates a clear opportunity for MEV exploitation. This results in a significant profit for an entity that doesn’t perform the majority of the job, leaving users to bear the brunt of the losses. Aave estimates that Chainlink’s SVR can capture approximately 40% of MEV profits, which could be redirected to the Aave DAO to benefit users.

Protecting Against MEV

Users and protocols across the Ethereum network are taking measures to avoid the costs associated with harmful MEVs. Private transactions now dominate Ethereum’s order flow as users seek to protect their trades. This trend is expected to continue, as users prioritize MEV protection over public transactions.

Benefits of Integrating SVR

Integrating Chainlink’s Smart Value Recapture oracle into Aave’s ecosystem can have several benefits:

Reduced MEV Exploitation: By redirecting profits from MEV backrunning to users, Aave can mitigate the issue of MEV exploitation.
Increased User Benefits: Users stand to gain significantly from the integration, as they will receive a larger share of the liquidation profits.
Improved Protocol Efficiency: The integration can lead to improved protocol efficiency, as Aave can optimize its liquidation process to minimize MEV losses.

Conclusion

Aave’s proposal to integrate Chainlink’s Smart Value Recapture oracle is a significant step towards addressing the issue of MEV exploitation in DeFi. By redirecting profits from MEV backrunning to users, Aave can improve protocol efficiency and user benefits. As the adoption of private transactions continues to grow, it is essential for protocols like Aave to adapt and integrate innovative solutions like SVR to protect against MEV.

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