Aave considers integrating Chainlink’s Smart Value Recapture to redirect MEV profits back to DeFi users

Reports from Aave’s governance forum indicate that Aave is considering incorporating a new Chainlink oracle that will redirect yields from transactions preemptive to the decentralized finance (DeFi) protocol’s users. The benefits would be captured by a new oracle, a Smart Value Recapture (SVR), which was released on December 23.

The SVR oracle will capture profits from maximum extractable value (MEV) to benefit DeFi protocols. At the same time, Aave suggested adding SVR “to recapture MEV from Aave liquidations and return it to the Aave ecosystem.” 

Blockbuilders have occasionally enjoyed profits from MEV by simply reordering transactions before releasing finished blocks to the public blockchain ledger.

Aave plans to redirect 40% of MEV profits to users 

With Aave, users can use other crypto assets as collateral while borrowing cryptocurrency. However, the user risks forfeiting the collateral if its value declines too much.

Part of the proposal reads:

Whenever a position needs to be liquidated, [a third-party] liquidator repays some debt and receives the equivalent value in collateral, plus a percentage on top denominated liquidation bonus.

The system has been classic, but recently, there has been a problem that calls for an update of the MEV system. The forfeiture or liquidation bonus is a clear and direct chance for MEV to create a good profit for the builder. Yet, in this case, the builder does the minimum. On the contrary, the protocol users receive very little in proportion. This needs rectification.

According to Aave, Chainlink’s SVR is a service that sells, via an MEV-Share auction, “the right to back-run” Chainlink’s price-feed oracle and profit from liquidations. To benefit users, the DeFi protocol intends to redirect nearly 40% of MEV profits to Aave DAO.

Ethereum users and protocols turn to private transactions for MEV protection

Users and protocols are currently protecting against MEV. Most protocols and users across the Ethereum network are deliberately trying to run away from the costs of harmful MEVs. There are a lot of private transactions in Ethereum’s order flow as users are out to protect trades.

Users prefer to go through the dark pool arrangement, sending transactions directly to validators instead of sending orders through the public queue. Private orders are sent to validators directly for protection against MEV.