Revolutionary Upgrade! Chainlink's SVR Oracle Solution Can Bring New Opportunities to DeFi?

Question

We are excited to launch the Chainlink Smart Value Recovery (SVR), a new Oracle Machine solution designed to help Decentralized Finance applications recover untainted maximal extractable value (MEV) by using the Chainlink price Oracle Machine.

The initial version of Chainlink SVR was collaboratively developed by BGD Labs, Flashbots, and other contributors to Aave DAO, initially focusing on assisting Decentralized Finance lending protocols in recovering MEV related to Oracle Machine liquidations. SVR is built on top of the Chainlink infrastructure, systematically reducing unnecessary reliance on third parties, without the need to integrate intermediary smart contracts, thereby enabling existing Chainlink price Oracle Machine users to easily adopt SVR.

The price Oracle Machine version that supports SVR utilizes Flashbots MEV-Share and an innovative on-chain 'Dual Aggregator' contract architecture, providing higher efficiency and enhanced backup security. Chainlink SVR is currently running on the testnet and will soon be launched on the Ethereum mainnet. There are also plans to introduce a fully customized version in the future, with more improvements including higher decentralization, DON-based auction system, enhanced gas efficiency, and cross-chain functionality.

The Aave community is approving the integration of Chainlink SVR through the governance process, and related discussions can be found on the Aave forum. The value recovered from SVR not only provides a new source of revenue for Decentralized Finance protocols, but can also be used to promote the long-term economic sustainability of Chainlink Oracle Machine, ensuring that Decentralized Finance protocols continue to receive highly secure and reliable Oracle Machine services.

How does Oracle Machine in decentralized finance create MEV opportunities

Maximal extractable value (MEV) refers to the value obtained by proposers (nodes in the blockchain network) by determining the inclusion, exclusion, or modification of the order of transactions in a block. Today, the opportunity to order these transactions is usually discovered by 'searchers', who then compete in an auction for the right to order transactions in the block. This value is subsequently captured by the roles involved in the block construction process (such as searchers, builders, and validators).

As a subset of MEV, 'Oracle Extractable Value' (OEV) refers to the MEV generated in the process of Oracle Machine reporting to the chain and subsequently consumed by on-chain applications. The most common OEV opportunities occur in lending protocols, especially during the liquidation process. Searchers compete for the right to liquidate high-risk positions in this process and earn rewards through liquidation incentives. On Ethereum, the block space auction process is typically implemented through Flashbots' MEV-Boost, allowing searchers to bundle liquidation transactions with updates reported by the price Oracle Machine to achieve price tracking (backrunning).

Currently, the value generated by MEV related to Oracle Machine (such as liquidation) is captured by searchers, builders, and validators in the blockchain network, and this value is not returned to the Decentralized Finance protocols, end users, and Oracle Machine that initially generated the Oracle Machine-related MEV. Recovering this harmless MEV can ultimately return the value to its source.

Note: The term 'OEV' may be somewhat misleading, as it does not refer to Oracle Machine actively extracting value from users, but rather relates to the existence of MEV associated with Oracle Machine. We use the term 'OEV' here because it has been widely used to refer to this type of MEV.

Why choose Chainlink SVR?

Chainlink Labs and the wider Chainlink community have been actively researching solutions around MEV for years, such as Fair Sequencing Services (FSS) and Protected Order Flow (PROF). As a subset of MEV, we also focus on OEV research, exploring how Decentralized Finance protocols can capture this value and support the economic sustainability of Oracle Machines. We analyze various OEV designs to achieve solutions that maximize security, reliability, and long-term economic viability.

Through research, we have successfully developed an initial version of the Smart Value Recapture (SVR) solution called OEV. Chainlink SVR is designed for liquidation-related backrunning trades and is not applicable to frontrunning trades or sandwich attacks. These harmful MEV types can damage the user experience, and the Chainlink network and community have been actively researching solutions to mitigate the impact of these issues for many years.

Why choose Chainlink SVR?

We believe that Chainlink SVR is the best choice for implementing a native MEV recovery solution, as Chainlink's price Oracle Machine has already provided security for many of the largest Decentralized Finance protocols, with a verified track record in security and reliability. By integrating a Chainlink-based MEV recovery solution, Decentralized Finance protocols can not only retain the security and reliability provided by Chainlink, but also further enhance their own and the economic sustainability of the Chainlink infrastructure they rely on.

The main advantages of Chainlink SVR include:

Mature decentralized Oracle Machine network (DON) support

SVR is based on the decentralized Oracle Machine network (DON) infrastructure, which is the same as Chainlink's price Oracle Machine. This network has been verified and strengthened over the past 5 years and has successfully protected $75 billion in Decentralized Finance TVL at its peak, supporting $17 trillion in transaction value.

Reduce unnecessary third-party risks

For protocols that have already used Chainlink's Oracle Machine, SVR reduces unnecessary third-party supplier risks, lowers overall attack surface, and prevents unnecessary third-party diversion of economic value.

No need to integrate intermediary contracts

SVR does not require Decentralized Finance protocols to integrate intermediary contracts or 'package' Chainlink price Oracle Machine, thereby ensuring a more efficient smart contract workflow, avoiding substantial changes when using Oracle Machine data in Decentralized Finance protocols.

Economies of Scale

As the most widely used Oracle Machine solution in Decentralized Finance, Chainlink can drive economies of scale through SVR, enabling seekers and their subsequent Decentralized Finance protocols to benefit from the most promising opportunities and highest income.

Based on real-world test results, we believe that Chainlink SVR can achieve a realistic recovery rate of about 40% (i.e., $40 out of every $100 of liquidated MEV leakage value generated). While some other solutions claim to achieve greater efficiency in clearing MEV recovery, we have yet to see convincing actual data to prove this. Therefore, we believe that 40% is a conservative but realistic estimate that needs to be verified by collecting more data through actual operations.

How the initial version of Chainlink SVR works

Image source: ChainlinkChainlink Price Feeds provide the market-wide, volume-weighted average price of crypto assets by using decentralized oracle networks and multiple independent data sources.

The initial implementation of Chainlink SVR will include a set of parallel Chainlink price Oracle Machines, which are supported by the same mature DON (decentralized Oracle Machine network) architecture currently used to secure existing price Oracle Machine services.

The deployment of the Chainlink price Oracle Machine enabled by SVR will be used to recover the liquidation-related MEV in the lending protocol that integrates the solution, while retaining the standard Chainlink price Oracle Machine as a backup plan. The design of the 'dual aggregator' price Oracle Machine allows a single Chainlink data DON to generate Oracle Machine reports that are identical to the current ones, while transmitting Oracle Machine reports to the chain in different ways. The SVR Oracle Machine is based on existing Chainlink contracts and interfaces, greatly reducing the integration burden for existing Chainlink users, as minimal code changes are required (possibly only pointing to the new aggregator or SVR Oracle Machine).

Oracle Machine reports sent to SVR-enabled prices Oracle Machine will transmit updates on-chain via Flashbots MEV-Share, where the right to bundle liquidated transactions with Oracle Machine report updates is auctioned to searchers on a permissionless basis. At the same time, the same Oracle Machine reports are also transferred to the existing standard-priced Oracle Machine via a common memory pool, as a fallback to mitigate potential risk scenarios. Users of the standard price Oracle Machine will not be affected in any way related to SVR, as SVR is optional.

Source: ChainlinkThe smart contract infrastructure underpinning Chainlink Smart Application Recapture (SVR).

If the price Oracle Machine enabled by SVR encounters a transmission failure (i.e. MEV-Share failure), there will be a fault protection mechanism to ensure that the Oracle Machine can still report prices to the Decentralized Finance protocol. When the price Oracle Machine enabled by SVR is determined to be outdated (based on a configurable time period), it will return the latest price report from the standard price Oracle Machine before the deadline. This delay is necessary to prevent liquidators from bypassing the value recovery mechanism provided by Chainlink SVR and extracting value.

The diagram below provides an overview of how SVR plans to integrate with Aave V3 on Ethereum.

Source: Chainlink The proposed implementation of Chainlink SVR with Aave v3 on Ethereum.

The process in the figure is as follows:

Chainlink data DON generates price Oracle Machine reports in today's manner (i.e. through heartbeats or deviation thresholds). However, the price report is transmitted twice from different accounts.

A price report is transmitted to the standard price Oracle Machine (same as today) through the public memory pool.

Another price report is transmitted to the SVR Price Oracle Machine contract via the Flashbots Protect RPC endpoint.

MEV-Share is an open-source protocol that selectively shares data about transactions with searchers, such as price Oracle Machine updates. Searchers compete through bidding to include transactions in the transaction bundle shared with builders. The builder then selects the highest bidding searcher and includes the corresponding backrun and liquidation transactions in a block. If there is no bidding, the price Oracle Machine report will be directly published on the chain without any backrun or liquidation transactions.
When the price report and the call clearing transaction are published on the chain:

The price report has been updated for SVR price Oracle Machine.

Price chasing trading updates and settles relevant positions based on prices.

Most of the value is reclaimed by Aave and Chainlink.

In the described example, the SVR Oracle Machine returns an updated price. However, if there is no new price available (for example, if the MEV-Share fails), the Oracle Machine contract connected to Aave will have a fault-tolerant mechanism and return the standard Chainlink price after an adjustable delay.

Economic model

The MEV plans related to Oracle Machine recovered through Chainlink SVR are allocated between integrated Decentralized Finance protocols and the Chainlink network according to standard proportions, with 60% of the value allocated to Decentralized Finance protocols and 40% allocated to the Chainlink ecosystem. This allocation scheme provides additional income sources for Decentralized Finance protocols while supporting the economic sustainability of the Chainlink Oracle Machine by covering transaction gas fees and other ongoing infrastructure costs. Please note that these proportions may change in the future to achieve a sustainable economic model between Decentralized Finance protocols and the Oracle Machine that supports them.

Due to the long-standing and deep cooperation between the Chainlink and Aave communities, and Aave's role as the launching partner, the proposed revenue sharing plan for Aave in the short term after integration into the production environment is as follows: the Aave ecosystem will receive 65% of the revenue and the Chainlink ecosystem will receive 35% of the revenue - this plan requires approval from the Aave community governance.

We expect Chainlink SVR to be one of the first Chainlink services to connect to the Payment Abstraction system, depending on the results of security audits and the state of deployment. The payment abstraction is an on-chain smart contract system designed to significantly reduce billing and payment friction when users and developers interact with the Chainlink service. The system is designed to convert fee tokens into LINK through existing decentralized exchange (DEX) contracts.

Interested in recycling MEVs via Chainlink SVR?

If you are a Decentralized Finance protocol and interested in integrating Chainlink SVR to recover MEV, please contact us or follow us for more updates in the future.

Disclaimer: This article does not constitute investment advice. Users should consider whether any opinions, viewpoints, or conclusions in this article are applicable to their specific circumstances and comply with relevant laws and regulations in their country or region.

This article is reproduced with permission from: MarsBit

Original author: Chainlink

Revolutionary Upgrade! Chainlink Introduces SVR Oracle Machine Solution, Bringing New Opportunities to Decentralized Finance? This article was first published in 'Crypto City'.