Aave Looks To Tackle MEV By Integrating Chainlink SVR Oracle

Aave is considering integrating the new Smart Value Recapture (SVR) oracle to address maximum extractable value (MEV) in its ecosystem. MEV occurs when blockbuilders reorder transactions for profit before finalizing blockchain blocks, often benefiting them at the expense of users.

An Intriguing Proposal

On December 23rd, Chainlink launched the SVR oracle to capture MEV profits and return them to DeFi protocols. Aave proposed using SVR to capture MEV through liquidations and send it to the Aave DAO for redistribution. The proposal aims to capture profits via MEV-related backrunning and redirect them to protocol users, helping reduce the overall negative impact of MEV.

Aave allows users to borrow cryptocurrencies using collateral, which can be liquidated if its value drops too much. While the liquidation system works, it also creates an opportunity for MEV, allowing blockbuilders to extract profits with minimal contribution to the process.

Mitigating Risks

The SVR oracle could help by auctioning rights to back-run the price feed of Chainlink during liquidations, capturing about 40% of MEV profits and redistributing them within the ecosystem. As the Ethereum (ETH) network grapples with MEV, users are turning to private transactions, known as dark pools, to avoid MEV extraction.

In fact, a recent report by Blocknative showed that private transactions now dominate the order flow within Ethereum. Order flow refers to the routing of buy and sell orders to exchanges or liquidity providers for execution, determining the sequence and timing of transactions.

It can be beneficial by providing liquidity, ensuring smooth transactions, and supporting fair price discovery. However, it can also be problematic if manipulated, such as through frontrunning or MEV extraction, which can exploit users and drive up costs. To mitigate such risks, private order flow, like dark pools, is often used to protect against exploitation and ensure fairness.