Aave collaborates with Chainlink's new technology SVR, expecting to recover MEV profits by 40%

Aave, the Ethereum lending protocol, officially announced on 12/23 its plan to integrate the new Smart Value Recapture (SVR) Oracle Machine service released by Chainlink, aiming to improve the unfair profit distribution caused by maximal extractable value (MEV), and to feedback the profits from the MEV liquidation process to the Aave community users.

What is MEV?

maximal extractable value (MEV) refers to the additional profit obtained by block validators and miners by adjusting the transaction order, jumping the queue, or canceling transactions. However, ordinary users suffer losses such as increased transaction costs and delays due to the unfair transactions of these block builders, and can only receive very little return.

(Ethereum Chain Popular Science | What is Miner Extractable Value (MEV) Crisis? How to Improve Unconventional Transactions for Miners?)

Introduction to Aave's existing liquidation mechanism and MEV issues

Aave indicates that the current liquidation mechanism of its own protocol attracts third parties to perform liquidation through a fixed ratio of liquidation rewards. When the value of the user's collateral drops significantly, third-party liquidators will repay part of the user's debt and receive equivalent collateral and additional rewards to ensure the stability of the protocol.

With the development of blockchain technology, MEV has become a major issue in the liquidation process. Simply put, 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 competition for block validators and miners. They will adjust the transaction order or cut in line to divert the profit to themselves, and ordinary users cannot benefit from it.

SVR auction recovers MEV

Aave states that Chainlink's SVR service is built on the open-source protocol of Flashbots MEV-Share, which recovers and liquidates MEV profits through bidding:

Price update: When Chainlink's Oracle Machine needs to update the price, these price data will be synchronously sent to two places, namely MEV-Share protocol as the main channel for processing MEV. The standard price Oracle Machine serves as a backup solution, so that users can still obtain the latest price in case SVR encounters any issues.

Bidding process: In the SVR service, transaction searchers will bid on the execution rights of liquidation transactions on the MEV-Share protocol, allowing searchers to buy the opportunity to cut in line, and these revenues can be used to feedback and support Aave's community users and Chainlink operations.

Price on-chain: Regardless of whether the bidding is successful or not, the updated price data will be securely written to the blockchain. Assuming that SVR is operating normally, the data will be uploaded from SVR. If there is a problem with SVR, that is, no one participates in the bidding, the system will automatically switch to the backup standard price Oracle Machine to ensure uninterrupted data transmission and unaffected users.

Chainlink SVR and Aave integration diagram. Experimental proposal, how Aave uses SVR.

The Aave proposal indicates that if the integration of the SVR system is successful, it is expected to recover 40% of the related liquidation profits. 65% of the profits will be reinvested in the Aave ecosystem, and 35% will be used for the operation of Chainlink. In addition, the proposal emphasizes that the integration of SVR services will not have a significant impact on Aave's existing liquidation mechanism, nor will it affect user operation experience, but will only make minor adjustments to risk parameters such as liquidation rewards.

In summary, the integration of Chainlink's SVR service by Aave is expected to increase the profit that was originally lost in the hands of block validators and searchers, bring it back to the protocol, create more returns for users, and improve the sustainability of the Aave economy. In addition, SVR is only used in backrunning to avoid harmful frontrunning and sandwich attack behaviors to protect user interests.

(Ethereum On-Chain Guide | What is the 'Maximal Extractable Value' (MEV) Crisis? How to Improve Miners' Unconventional Transactions?)

This article, Aave collaborates with Chainlink's new technology SVR, which is expected to recover up to 40% of MEV profits, first appeared in Chain News ABMedia.