Aave Integrates Chainlink SVR to Recapture Millions Lost to Oracle Extractable Value
Key Takeaways:
- Aave has integrated Chainlink’s Smart Value Recapture (SVR) on Ethereum to recapture MEV tied to liquidations.
- This integration represents a significant step toward a more sustainable DeFi economy by redirecting previously lost value back into protocols.
- This initiative highlights the potential of cooperation between leaders in DeFi such as Aave, Chainlink, and Flashbots.
Aave, a leading decentralized finance (DeFi) protocol, has officially integrated Chainlink’s Smart Value Recapture (SVR) on the Ethereum mainnet, marking another step in optimizing value recapture. Aave developers proposed this shift, which was approved by the community via an on-chain vote, introducing a new approach to handling oracle extractable value (OEV) in Aave liquidations.
Aave Recaptures MEV: Revolutionizing DeFi Economics with Chainlink
Historically, when undercollateralized loans were liquidated on DeFi lending platforms, a lot of value known as Maximal Extractable Value (MEV) was extracted. MEV, which includes profits that can be extracted from the liquidation process and other transaction ordering strategies, has traditionally been utilized by block builders, those responsible for ordering transactions within an on-chain environment. Previously, the value never returned to the protocols like Aave or the oracle infrastructure (based on Chainlink) that enabled the liquidation.
This process is similar to a traditional auction house where the auctioneer (Chainlink) sets the prices, and the house (Aave) provides the platform. When the loan was liquidated, a third party (block builder) historically captured a portion of the profit, leaving both Chainlink (the price setter) and Aave (the lending platform) without direct compensation. Chainlink SVR has been implemented to address this issue.
The Chainlink Smart Value Recapture (SVR) system, built in collaboration with BGD Labs, Flashbots, and other Aave DAO contributors, allows Aave to reclaim a portion of the MEV that was previously extracted by block builders. It does this through Chainlink’s oracle networks and Flashbots’ MEV-Share service. The system is strictly designed for backrunning liquidations and cannot be exploited for malicious practices such as frontrunning or sandwich attacks.
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How Chainlink SVR Works with Aave
The integration has already started recapturing liquidation MEV in markets such as Threshold Bitcoin (tBTC), LBTC, AAVE, and LINK. In the near future, Aave SVR is set to be expanded to additional assets to further assist with AAVE revenue optimization.
The MEV value recaptured through SVR will be divided among the Aave and Chainlink communities. The Aave DAO vote confirmed that the split will be 65% for the Aave ecosystem, 35% for the Chainlink ecosystem (over the first six months). Chainlink plans to pool its share of the SVR revenues, convert it to LINK tokens, then distribute the same among its network service providers. This creates a virtuous cycle, incentivizing the infrastructure that supports the DeFi ecosystem.
The partnership with Aave exemplifies how innovation in the cryptocurrency sector can lead to concrete and profitable tools for the entire ecosystem, said Johann Eid, Chief Business Officer at Chainlink Labs, adding that the integration makes way for a new standard in MEV recovery by enabling safe, scalable, and verifiable reintegration within DeFi applications and oracle infrastructure.
Payment Abstraction: Streamlining Fees with Chainlink
Chainlink SVR also marks the first application of Payment Abstraction, a cross-chain payment solution that streamlines fee payments within the Chainlink network. This system utilizes CCIP (Cross-Chain Interoperability Protocol), Chainlink Automation, and Price Feeds to automatically convert service fees into LINK tokens. Suppose a DeFi protocol that reads the value of an asset using Chainlink Price Feeds to set the collateralization ratio of a loan. This eliminates friction by automating payments in LINK when a given loan is liquidated through SVR’s system.
Experts Weigh In: A Game Changer for DeFi
It is no small feat to optimize liquidation algorithms while still preserving the security of the protocol, said Ernesto Boado, Co-Founder of BGD Labs. The partnership of Aave and Chainlink illustrates how to responsibly innovate within the technical limits of DeFi.
The integration “increases revenues for the DAO, strengthening the Aave ecosystem,” insisted Aave Labs founder Stani Kulechov. To him, the SVR’s contribution is not purely economic but also influences the security and technical integrity of the protocol.
Shea Ketsdever, Product Lead at Flashbots, said efficient MEV markets help build sustainable lending and DeFi infrastructure.
What’s next for Chainlink SVR and Aave?
Chainlink plans to further decentralize SVR across the network, improve gas efficiency and utilization, and expand its cross-chain oracle capabilities for various DeFi protocols. These future developments promise to extend the effectiveness of the mechanism even to more complex DeFi scenarios or interconnected across different blockchains. The goal is to enable protocols to recapture non-toxic MEV and further contribute to a sustainable DeFi economy.
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