Aave Considers Chainlink Integration to Address MEV Challenges

Decentralized finance (DeFi) protocol Aave is exploring the integration of Chainlink’s.

Chainlink’s newly launched Smart Value Recapture (SVR) oracle to address inefficiencies related to Maximum Extractable Value (MEV).

A proposal in Aave’s governance forum suggests that this move could redirect up to 40% of MEV profits back to the protocol’s users, potentially improving equity within its ecosystem.

The MEV Dilemma

MEV refers to profits made by blockbuilders who reorder transactions for financial gain before finalizing blockchain entries. This practice, while lucrative for builders, often occurs at the expense of DeFi users. Aave, which enables borrowing through collateralized crypto assets, faces significant MEV-related challenges during liquidation events.

Source: X

Liquidations occur when the value of collateral falls below a predefined threshold, allowing third-party liquidators to repay debt and claim collateral with an added liquidation bonus. While this mechanism has been effective, it has increasingly enabled blockbuilders to extract profits disproportionate to their contributions, according to Aave’s governance proposal.

“Lately, a problem has appeared that deserves optimization: MEV,” the proposal states.

Chainlink’s SVR Solution

Chainlink’s SVR oracle, launched on December 23, aims to address MEV inefficiencies by selling rights to back-run its price-feed oracle through an MEV-Share auction.

SVR diagram. Source: Avae

The captured profits are then redirected to participating DeFi protocols. If integrated, this service could allow Aave to reclaim MEV profits generated during liquidations and return them to its decentralized autonomous organization (DAO), benefiting its users.

The proposed implementation of Chainlink SVR with Aave v3 on Ethereum. Source: Chainlink

Aave estimates that the integration could capture approximately 40% of MEV profits, significantly enhancing the redistribution of value within its ecosystem.

A Growing Problem Across Ethereum

The issue of MEV extends beyond Aave, with protocols and users across the Ethereum network taking steps to mitigate its effects. One prominent solution involves private transactions, commonly referred to as “dark pools,” where orders are sent directly to validators instead of the public transaction queue.

An August report from Blocknative revealed that private transactions now dominate Ethereum’s order flow as users prioritize MEV protection.

Potential Impact

The proposed integration of Chainlink’s SVR with Aave’s V3 platform on Ethereum could set a precedent for addressing MEV inefficiencies in DeFi. It aligns with broader efforts within the crypto community to improve user benefits and reduce the exploitative potential of MEV practices.

The Aave governance forum is currently deliberating on the proposal. If approved, this integration could represent a pivotal step in reshaping how MEV profits are distributed within decentralized ecosystems.