Aave Integrates Chainlink SVR, Recaptures 40% of MEV Profits

Aave, a prominent decentralized finance (DeFi) lending protocol, has successfully integrated Chainlink's Smart Value Recapture (SVR) technology on the Ethereum Mainnet. This integration was approved through an on-chain vote by the aave community and marks a significant step towards reclaiming millions in oracle-related Maximal Extractable Value (MEV) that was previously lost to blockchain networks. The move introduces a sustainable revenue-sharing model between Aave and Chainlink, with a three-month exclusivity period where Aave will use Chainlink exclusively for SVR, and Chainlink will prioritize Aave’s ecosystem.

The integration of Chainlink SVR allows Aave to recapture oracle Extractable Value (OEV), which is a portion of MEV profits historically lost to block builders. This new income stream is estimated to be around 40% of MEV profits. Chainlink's decentralized infrastructure and Flashbots' MEV-Share service are utilized to redirect OEV back to Aave and Chainlink, ensuring that DeFi protocols and oracle providers are compensated for their contributions.

The SVR architecture addresses two main challenges: revenue leakage and protocol security. By recapturing OEV, Aave can unlock a new income stream, while Chainlink's battle-tested oracles mitigate risks such as frontrunning and data manipulation. The system uses a "Dual Aggregator" contract architecture to ensure fallback security, defaulting to standard Price Feeds if SVR data is delayed.

Ask Aime: What impact does Aave's integration of Chainlink's SVR technology have on the DeFi ecosystem and the relationship between Aave and Chainlink?

The deployment of SVR is a collaborative effort between Chainlink and Aave-focused developer groups BGD Labs and Aave Chan Initiative, with additional input from Flashbots, a research and development platform working on solutions to the negative effects of extractable value on Ethereum. Ernesto Boado, the co-founder of BGD Labs, highlighted the significance of this partnership, stating that it delivers innovation responsibly on the edge with SVR and its OEV recapturing model.

As a start, Aave will use SVR to reclaim liquidation MEV from Threshold Bitcoin (tBTC)—the Bitcoin-backed token that allows holders to mint and use BTC on Ethereum to access DeFi opportunities. Initial support will also include LBTC, AAVE, and LINK, with more markets to follow. Revenue from the recaptured value will be split 65% for Aave and 35% for Chainlink communities during the first six months. Chainlink plans to convert its portion of SVR fees into LINK, to be distributed to network service providers.

In the future, Chainlink plans to enhance SVR with increased decentralization, gas efficiency improvements, and cross-chain functionalities via the Cross-Chain Interoperability Protocol (CCIP). These upgrades could expand SVR’s applicability to diverse multi-chain DeFi environments, further amplifying revenue potential. However, there are concerns that need to be addressed, including dependency on Flashbots, gas costs, and governance dependence.

The integration of Chainlink SVR on the Ethereum Mainnet marks a pivotal step for Aave in establishing a new standard in cryptoeconomics. As the largest DeFi lending protocol, Aave is setting an example for other DeFi protocols by optimizing liquidation algorithms and recapturing MEV through innovative solutions. This move not only enhances Aave's revenue but also contributes to the stability and growth of the entire DeFi ecosystem.