Aave Considering Chainlink Integration for MEV Fee Returns

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Introduction

The DeFi ecosystem has witnessed significant growth, with platforms like Aave leading innovative solutions in borrowing and lending. As a key player in this space, Aave is exploring new avenues to enhance its operations, including the integration of a Chainlink oracle designed to recapture Maximum Extractable Value (MEV). This proposal aims to address challenges associated with MEV while benefiting both protocol users and developers.

What is MEV?

Definition and Benefits

Maximum Extractable Value (MEV) refers to the additional value derived from transactions by reordering them before they are finalized on a blockchain. This process, known as backrunning, allows participants to profit from the time it takes for transactions to be included in the main ledger.

Users of DeFi protocols often benefit indirectly through reduced gas fees or priority in transaction processing. However, the cost of MEV can sometimes offset these advantages, necessitating strategies to mitigate its impact.

How Does Aave’s Liquidation Process Work?

Current Mechanisms

Aave operates a unique borrowing model where users deposit collateral against which they can borrow cryptocurrency. In cases where the value of this collateral diminishes below a certain threshold, liquidation occurs.

A third-party liquidator repays some debt, receiving the equivalent value in collateral plus a predetermined liquidation bonus. This bonus creates an opportunity for profit extraction, often referred to as "MEV."

User Impact

While the process is elegant in theory, its execution can be costly and complex for users. The distribution of these bonuses among liquidators versus protocol users has become a focal point for scrutiny.

Why MEV is a Problem for Aave

Financial Implications

Aave’s MEV problem arises from the significant profits available to transaction builders (those who backrun) compared to users who bear the costs. This imbalance presents both challenges and opportunities.

• Profit Potential: Transaction builders can earn substantial returns, eroding protocol profitability.
• Cost Distribution: Users’ fees are split between collateral liquidators and protocol DAOs, leading to increased operational costs.

Recent Analysis

Aave’s analysis reveals that current MEV strategies result in a 5% fee for users, with an additional 0.8% allocated to its DAO. This structure creates a financial incentive that could negatively impact user trust and engagement.

Proposal Details: Introducing SVR

Enhanced MEV Management

The proposed SVR (MEV-Share Repayment) mechanism offers a novel approach to redistributing returns, ensuring both transaction builders and users benefit proportionally.

By introducing a share system, the protocol can maintain operational efficiency while fostering equitable value distribution. This approach balances the financial interests of all stakeholders.

Potential Outcomes

Financial Benefits

The SVR model could lead to:

• Improved User Experience: More predictable costs and enhanced security features.
• Protocol Growth: Increased user engagement driven by fair compensation for transaction builders.

Long-term Implications

Adopting this mechanism aligns Aave with broader industry trends, emphasizing transparency and equitable value distribution in the DeFi space.

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