Aave Mulls Chainlink Integration to Return MEV Fees to Users

The decentralized finance (DeFi) landscape is constantly evolving, and one of the hottest topics is Maximum Extractable Value (MEV). This refers to the profit that can be extracted by manipulating transaction order within a block on a blockchain. While it can benefit some, it often comes at the expense of regular users who experience higher transaction fees or frontrunning. Aave, a leading DeFi lending protocol, is taking a proactive step to address this issue by considering the integration of Chainlink's innovative Smart Value Recapture (SVR) oracle. This isn't just another integration; it's a potential game-changer that aims to recapture MEV profits and redistribute them back to Aave users. Imagine a future where the negative impacts of MEV are mitigated, and the benefits are shared across the community. This proposal has sparked significant discussion within the Aave governance forum and the broader DeFi community, with the potential to reshape liquidation dynamics and create a fairer ecosystem for all participants. The goal is ambitious: to capture approximately 40% of MEV profits generated, especially during Aave liquidations, and return them to the rightful beneficiaries – the users of the Aave protocol.

Aave is mulling integrating a new Chainlink oracle designed to redirect profits from transaction backrunning to the decentralized finance (DeFi) protocol s users, according to a proposal in

Understanding Maximum Extractable Value (MEV) and Its Impact

MEV, sometimes also referred to as Miner Extractable Value, represents the total value that can be extracted from a block beyond the standard block reward and transaction fees. This extraction is usually achieved by reordering, inserting, or censoring transactions within the block. It's a complex concept, but understanding it is crucial to grasping the significance of Aave's proposed integration.

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Think of it like this: Imagine a busy marketplace where merchants compete for customers. A savvy observer notices patterns in buying and selling and uses that information to their advantage. They might buy goods cheap just before a large purchase drives up prices, then quickly sell them for a profit. In the blockchain world, this ""savvy observer"" is often a bot or a validator with the resources to manipulate transaction order.

Santiment：当散户恐慌抛售时，鲸鱼和鲨鱼会逢低买入并引发市场反弹

• Frontrunning: Bots detect a large transaction and place their own transaction before it to profit from the anticipated price movement.
• Backrunning: Bots place their transaction immediately after a large transaction to capitalize on the price impact.
• Sandwich Attacks: A combination of frontrunning and backrunning, where bots insert their transactions both before and after a user's transaction to maximize profit.

These MEV strategies can significantly impact users. They might experience:

• Higher transaction fees: Bots compete with users by offering higher gas prices to ensure their transactions are included in the block first.
• Price slippage: The price they receive for a trade might be worse than expected due to the bot's actions.
• Failed transactions: Transactions might fail if the price changes too quickly due to MEV.

While MEV isn't inherently malicious, its extraction often comes at the expense of ordinary DeFi users, making the ecosystem less equitable. This is why Aave's initiative to address MEV is so crucial.

Chainlink's Smart Value Recapture (SVR): A Novel Solution

Chainlink's Smart Value Recapture (SVR) is a groundbreaking oracle service designed to capture MEV profits, specifically those generated from liquidations within DeFi protocols. It works by essentially auctioning off the rights to execute liquidations to searchers (bots and validators) who compete to offer the most value back to the protocol. Aave intends to leverage this to claw back revenue being siphoned off in the form of MEV.

Instead of MEV profits solely benefiting searchers, SVR redirects a portion of these profits back to the Aave protocol and its users. This is achieved through a MEV-Share auction, where searchers bid for the right to execute liquidations, and the winning bid is partially returned to the Aave ecosystem.

Here's how it works in simplified terms:

1. A liquidation event occurs on Aave.
2. Chainlink's SVR oracle triggers a MEV-Share auction.
3. Searchers (MEV bots) bid for the right to execute the liquidation.
4. The searcher with the highest bid wins the auction.
5. A portion of the winning bid is returned to the Aave protocol (e.g., distributed to Aave users or used to bolster the protocol's reserves).

The key is that Chainlink acts as a neutral intermediary, ensuring fair competition and transparency in the MEV extraction process. It essentially turns a negative externality (MEV) into a positive one by capturing a portion of the profits and redistributing them.

Aave's Proposal: Integrating Chainlink SVR for the Benefit of Users

Aave's proposal to integrate Chainlink's SVR is a significant step towards creating a more equitable and efficient DeFi ecosystem. The primary goal is to recapture approximately 40% of MEV profits generated from Aave liquidations and return them to the protocol's users. This is a bold move that could set a precedent for other DeFi protocols to follow.

The proposal outlines several potential benefits of integrating Chainlink SVR:

• Increased revenue for Aave users: By redistributing MEV profits, Aave can provide additional rewards to its users, increasing the attractiveness of the platform.
• Improved liquidation efficiency: The MEV-Share auction can lead to more efficient liquidations, reducing the risk of under-collateralization and improving the overall stability of the Aave protocol.
• Reduced negative impact of MEV: By capturing and redistributing MEV profits, Aave can mitigate the negative externalities associated with MEV, such as higher transaction fees and price slippage.
• Enhanced protocol security: A portion of the recaptured MEV profits could be used to bolster the Aave protocol's reserves, further enhancing its security and resilience.

This integration could also attract more users to Aave, as it demonstrates a commitment to fairness and user-centricity. In a competitive DeFi landscape, this can be a significant advantage. This is about reclaiming profits from frontrunning, something most users would prefer didn't exist in the first place.

Potential Implementation Challenges

While the potential benefits of integrating Chainlink SVR are significant, it's important to acknowledge the potential challenges:

• Complexity of integration: Integrating a new oracle service requires careful planning and execution to ensure it doesn't introduce any vulnerabilities or disrupt the existing functionality of the Aave protocol.
• Gas costs: The MEV-Share auction process might incur additional gas costs, which could potentially offset some of the benefits of recapturing MEV profits.
• Competition among searchers: If the competition among searchers is too fierce, it could drive up gas prices and reduce the amount of MEV profits that can be recaptured.
• Governance approval: The Aave community needs to thoroughly evaluate the proposal and vote in favor of integration for it to proceed.

The Aave team will need to carefully address these challenges to ensure the successful integration of Chainlink SVR. Thorough testing and monitoring will be crucial to identify and mitigate any potential issues.

Why is This Important for the DeFi Ecosystem?

Aave's move is significant for the entire DeFi ecosystem because it sets a precedent for how protocols can proactively address the challenges of MEV. It demonstrates that it's possible to mitigate the negative externalities of MEV and redistribute the benefits more equitably. If successful, it could inspire other DeFi protocols to explore similar solutions, leading to a more sustainable and user-friendly DeFi landscape.

This initiative also highlights the growing importance of oracles in DeFi. Oracles like Chainlink are playing an increasingly critical role in providing reliable and tamper-proof data to smart contracts, enabling them to execute complex operations with confidence. The integration of Chainlink SVR is a testament to the innovative solutions that oracles can provide to address pressing challenges in the DeFi space.

Furthermore, this integration underscores the importance of community governance in DeFi. The Aave community will play a crucial role in evaluating the proposal and deciding whether to proceed with the integration. This democratic process ensures that the integration aligns with the values and goals of the Aave community.

How Does Chainlink SVR Compare to Other MEV Mitigation Strategies?

Several strategies have been proposed and implemented to mitigate MEV, each with its own strengths and weaknesses. Chainlink SVR offers a unique approach by focusing on capturing MEV profits and redistributing them, rather than simply preventing MEV extraction.

Here's a brief comparison to other common MEV mitigation strategies:

• Transaction Ordering Services (Flashbots): These services aim to bundle transactions and submit them directly to miners, reducing the opportunity for frontrunning and sandwich attacks. While effective in some cases, they can also centralize MEV extraction and require users to trust the service provider.
• Fair Sequencing Services (FSS): These services aim to ensure a fair and predictable ordering of transactions, preventing MEV extraction by making it more difficult to manipulate transaction order. However, FSS can be complex to implement and might not be suitable for all DeFi protocols.
• MEV Auctions: These auctions allow searchers to bid for the right to include their transactions in a block, with the winning bid going to the block producer. While this can generate revenue for miners, it doesn't necessarily address the underlying issues of MEV or benefit users.

Chainlink SVR stands out by its focus on capturing and redistributing MEV profits, aligning the incentives of searchers, protocols, and users. It offers a more holistic approach to MEV mitigation that can benefit all stakeholders.

Practical Examples of How Aave Users Could Benefit

To illustrate the potential benefits of Aave's integration of Chainlink SVR, let's consider a few practical examples:

Example 1: Reduced Liquidation Penalties

Currently, when a user's position on Aave is liquidated, they incur a penalty. Part of the MEV extracted during the liquidation process could be used to offset this penalty, making liquidations less painful for users. Imagine a scenario where the standard liquidation penalty is 5%. Through SVR, Aave could potentially reduce this to 3% or even lower, easing the burden on users facing liquidation.

Example 2: Increased Lending Rates

The recaptured MEV profits could be used to boost lending rates on Aave. This would make Aave more attractive to lenders, attracting more capital to the platform and benefiting all users. Suppose Aave typically offers a 2% APY on USDC deposits. With SVR integration, they could potentially increase this to 2.5% or even 3%, making it a more appealing option for yield-seeking investors.

Example 3: Protocol Development and Security

A portion of the MEV profits could be allocated to fund the development of new features and enhancements for the Aave protocol. This would accelerate innovation and improve the user experience. Additionally, some profits could be used to bolster the protocol's security, making it more resistant to attacks and exploits.

Aave, Chainlink and the Future of DeFi

The proposed integration of Chainlink's Smart Value Recapture (SVR) by Aave signifies a turning point in how DeFi protocols are approaching MEV. It is a proactive measure to mitigate negative externalities and redistribute profits back to the users, promoting a more sustainable and equitable ecosystem. By leveraging the capabilities of Chainlink oracles, Aave aims to capture a significant portion of MEV generated during liquidations and channel it back to benefit its community.

If successful, this integration can pave the way for other protocols to adopt similar strategies, ultimately reshaping the DeFi landscape and creating a more user-centric environment. While challenges exist in integrating new services, the potential benefits of increased revenue for users, improved liquidation efficiency, and enhanced protocol security make it a compelling endeavor.

Conclusion: Key Takeaways and Call to Action

In conclusion, Aave's potential integration of Chainlink SVR represents a significant advancement in addressing the challenges of MEV in DeFi. It is a bold move to capture and redistribute MEV profits, creating a more equitable and sustainable ecosystem for all participants. The key takeaways from this proposal are:

• MEV is a complex issue that can negatively impact DeFi users through higher transaction fees and price slippage.
• Chainlink SVR is a novel oracle service that aims to capture MEV profits and redistribute them back to DeFi protocols and their users.
• Aave's proposal to integrate Chainlink SVR could lead to increased revenue for users, improved liquidation efficiency, and enhanced protocol security.
• This initiative sets a precedent for other DeFi protocols to proactively address the challenges of MEV.

As the Aave community deliberates and prepares to vote on this proposal, it's crucial for users to stay informed and participate in the governance process. Your voice matters in shaping the future of Aave and the broader DeFi ecosystem. Learn more about the proposal, discuss its merits and potential drawbacks, and cast your vote to help create a fairer and more user-friendly DeFi world.

Learn more about Aave's governance forum and the Chainlink SVR proposal to participate in the decision-making process. Your voice matters in shaping the future of DeFi.