Aave’s Pilot Project: Integrating Chainlink’s SVR To Tackle MEV Issue

• Aave is looking into adding Chainlink’s SVR oracles to its system.
• Chainlink introduced Smart Value Recapture (SVR) on December 23, 2024.
• SVR is being seen as the solution to Aave’s MEV problem.

Aave, a prominent DeFi protocol, is considering the integration of Chainlink’s new Smart Value Recapture (SVR) oracles on Aave V3. The primary goal behind this integration is to solve the pressing issue of Maximum Extractable Value (MEV) fees.

This oracle intends to redistribute transaction profits back to DeFi protocol users. The same was depicted in the proposal at Aave’s governance forum.

The proposal was released on Aave’s governance forum on December 23, 2024. It seeks community feedback before moving further with this pilot project. On that very day, Chainlink announced the launch of SVR with an X post.

The Need for Optimization in Aave’s Liquidation System

The DeFi protocol implements a simple yet incredibly sophisticated solution. This approach optimizes the protocol for liquidations.

Users can borrow cryptocurrency by pledging other cryptocurrency assets against it. The collateral that experiences a significant decline in value is forfeited or “liquidated”.

As the proposal states, ”whenever a position needs to be liquidated, the liquidator repays some amount of debt and receives the equivalent value in collateral, plus a percentage on top denominated liquidation bonus.”

The protocol offers a fixed liquidation bonus to incentivize any third party (liquidator) always to perform liquidations. This fixed bonus ensures that liquidity is maintained amid volatile market conditions.

The Aave and its liquidation bonus are a great deal overall. However, a “problem” that deserves some optimization is MEV (Maximal Extractable Value).

MEV is a byproduct of advanced transaction ordering. It occurs when blockchain ecosystem searchers and builders can reorganize transactions to extract value.

Aave’s liquidation technology allows liquidators to undertake profitable liquidations by capturing MEV. This results in a system in which seekers and builders benefit disproportionately.

The SVR Solution

To solve this issue, Aave is integrating Chainlink’s SVR solution to capture and redistribute MEV fees. Chainlink introduced this new oracle via an X post: “Introducing Chainlink Smart Value Recapture (SVR)—a novel non-toxic MEV recapture solution for users of Chainlink Price Feeds.”

SVR is built on top of the Flashbots MEV-Share infrastructure. Chainlink’s SVR utilizes the MEV-Share auction to sell searchers the right to back-run price feed updates and profit from liquidations.

As the outcome, the searcher who wins the auction will redirect most of their profit to the originator. That originator, in this case, would be the Aave protocol. This system aims to minimize MEV leakage risk and optimize liquidation.

Distribution of Recaptured Value

According to Aave, SVR can capture at least 40% of all MEV leaks. This depends on which assets the solution is applied to, with those numbers equivalent to active SVR in all Aave assets.

Regarding distribution, Aave is currently in talks with the Chainlink labs. A proposal was made to divide 35% of the Chainlink community ecosystem and 65% of Aave DAO for the first six months.

These six months would mark the beginning of the in-production integration phase. Following that, a 60% and 40% split will be used to pay for all kinds of infrastructure expenses.

Disclaimer

This article is for informational purposes only and provides no financial, investment, or other advice. The author or any people mentioned in this article are not responsible for any financial loss that may occur from investing in or trading. Please do your research before making any financial decisions.