Aave and Chainlink recently joined forces to promote cooperation in the DeFi field, which not only enhances the market performance of the two projects but also brings new solutions to the liquidation mechanism.
Leading DeFi projects Aave (AAVE) and Chainlink (LINK) both experienced significant increases today. However, the reason is not due to the Trump concept WLFI adding positions again, but rather the two projects working together to advance a real collaboration that is expected to increase their annual revenue by millions of dollars.
According to OKX, as of around 11 am Beijing time, AAVE was temporarily reported at 377.69 USDT, with a 24-hour increase of 16.66%; LINK was temporarily reported at 23.9 USDT, with a 24-hour increase of 5.8%.
Chainlink SVR
Early this morning Beijing time, Chainlink officially announced the launch of a new service called “Smart Value Recapture (SVR)”. This is a brand-new oracle solution designed to allow DeFi applications to recapture MEV (Miner Extractable Value) value in a “fair” manner through Chainlink’s price feeds.
MEV refers to the value that block proposers obtain by including, excluding, or changing the order of transactions in a specific block. As a subset of MEV, OEV (Oracle Extractable Value) refers to the MEV generated when oracle reports are transmitted on-chain and consumed by on-chain applications. The most common OEV opportunities occur in lending protocols, especially during the liquidation process.
Odaily note: The term OEV is actually a misinterpretation because it does not mean that oracles actively extract value from users, but rather refers to MEV related to oracles.
In the current DeFi execution environment, the value of MEV (especially OEV) is captured by participants in the block construction process, such as searchers, builders, and validators, without being returned to the original creators of the MEV, DeFi protocols, end users, and oracles. If there is a way to recapture this MEV, it will help return the relevant value to its original creators.
This is the original intention of Chainlink’s construction of SVR. From the perspective of application scenarios, Chainlink SVR cannot be used for controversial MEV looting scenes such as frontrunning or sandwich attacks. It is specifically designed to address the OEV problem plaguing the liquidation process in lending protocols.
Aave Community Proposal Integration
As one of the collaborators involved in the initial development of SVR (including BGD Labs, Flashbots, Aave DAO), Chainlink’s announcement prompted BGD Labs to immediately launch a preliminary proposal in the Aave community forum, suggesting that Aave integrate SVR as soon as possible.
BGD Labs pointed out that Aave’s long-standing stable execution has proven the effectiveness of its liquidation mechanism, but there are also obvious MEV arbitrage opportunities. In actual liquidation scenarios, builders often receive significant profits without doing the majority of the work, while searchers, that is, the users of the protocol, receive a much smaller proportion.
Chainlink’s SVR is expected to solve this problem properly and define more precisely which entity benefits the most from transaction ordering. For the sake of stability, BGD Labs suggests deploying SVR for only 1-3 assets in the initial pilot phase to advance integration in a controlled manner.
Potential Value Capture Scale
According to data from Chainlink, after testing, Chainlink SVR is expected to achieve an actual value recapture rate of about 40% (i.e., for every $100 leaked through liquidation MEV, $40 can be recaptured).
Chainlink also added that although some alternative solutions claim to achieve higher liquidation recovery efficiency, the team has not seen definitive empirical data to prove this. For SVR, 40% is a conservative but realistic estimate, which will need actual performance to collect real data.
BGD Labs also added that a 40% recovery efficiency corresponds to the scale of leaked MEV in the past and is expected to achieve value recapture worth millions of dollars.
It is worth mentioning that BGD Labs mentioned that, for the sake of simplifying the system, the form of assets receiving the recaptured value will be ETH.
Revenue Sharing Plan
In the announcement about SVR, Chainlink stated that the value recaptured by SVR will be distributed between the integrated DeFi protocols and the Chainlink network according to standard proportions. 60% of the value will flow to the DeFi protocols, and 40% will flow to the Chainlink ecosystem. The proportions are not fixed and may be adjusted in the future.
For the first partner, in order to achieve long-term cooperation with Aave, Chainlink proposes a 65% split to Aave and a 35% split to Chainlink for the first six months, but the relevant data must be approved through Aave’s community governance.
As for the final destination of the value after the split, Chainlink did not explicitly mention it, only stating that it will support the economic sustainability of Chainlink oracles through paying transaction gas costs and other ongoing infrastructure expenses. On the other hand, BGD Labs proposed using the recaptured value to benefit users, such as providing incentives to pledgers of the Umbrella module. This may also be one of the reasons why AAVE’s price increase is more noticeable than LINK’s at the moment.