As a seasoned analyst with years of experience in the cryptocurrency market, I find this development by Aave to be a strategic move that could potentially revolutionize the DeFi landscape. The integration of Chainlink’s Smart Value Recapture (SVR) service aims to address the issue of transaction frontrunning, which has long been a concern for users and protocols alike.
In simpler terms, there’s a proposal being considered in Aave’s community forums suggesting that they integrate a new Chainlink oracle. This oracle is intended to redirect the profits from transaction frontrunning (anticipating and executing trades before others) to the users of the Decentralized Finance (DeFi) platform, which is Aave.
On December 23rd, the decentralized oracle service provider, Chainlink, introduced Smart Value Recapture (SVR). This is a unique oracle service designed to reap profits from Maximum Extraction Value (MEV), ultimately benefiting Decentralized Finance (DeFi) protocols.
On the very same day, Aave suggested linking SVR for the purpose of reclaiming Miner Extractable Value (MEV) from Aave liquidations and redistributing it within the Aave community.
Blockbuilders can capitalize on Miner Extractable Value (MEV) by strategically arranging transactions within unconfirmed blocks before broadcasting them to the main blockchain. Occasionally, this practice may negatively impact users.
Aave’s MEV problem
As a financial analyst, I can express it this way: When utilizing Aave, I have the opportunity to obtain cryptocurrencies by pledging other digital assets as security. If the worth of these pledged assets experiences a significant drop, they may be subject to liquidation or forfeiture.
When it’s necessary to sell an asset, a designated liquidator will pay off some debt using the same value in securities held as collateral, along with an added bonus known as the liquidation premium,” as outlined in the plan.
This has been an “elegant solution,” but “ lately a ‘problem’ has appeared that deserves some type of optimization: MEV,” the proposal said.
The liquidation bonus creates “a very clear opportunity for MEV” and results in a “pretty significant profit for an entity that doesn’t do the majority of the job: the builder.”
Meanwhile, “the protocol users receive way less in proportion,” the proposal said.
As stated by Aave, Chainlink’s SVR (Serum Volatility Reward) functions as a service that allows bidders to participate in an MEV-Share auction and acquire the ability to re-execute (or “back-run”) Chainlink’s price feed oracle. By doing so, they can potentially benefit from liquidations.
According to Aave’s calculations, the Strategic Value Reward (SVR) mechanism may potentially seize around 40% of the total Miner Extractable Value (MEV) earnings. This portion could then be funneled back into the Aave Decentralized Autonomous Organization (DAO), ultimately benefiting its users.
Protecting against MEV
Users and protocols across the Ethereum network are scrambling to avoid the costs of harmful MEVs.
Currently, private transactions are taking over most of Ethereum’s transaction activity, as users aim to safeguard their trades, based on a report from Blocknative in August.
These private orders function by directly sending transactions to validators, a system known as a “dark pool,” rather than adding them to the public queue.
Generally speaking, users opt to send their transactions secretly to safeguard against Miner Extractable Value (MEV) risks, as suggested by Blocknative.
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2024-12-24 00:48