Chainlink Smart Value Recovery (SVR): An On-Chain Solution Empowering DeFi to Capture Oracle-Related Maximal Extractable Value (MEV)

Chainlink Smart Value Recovery (SVR): An On-Chain Solution Empowering DeFi to Capture Oracle-Related Maximal Extractable Value (MEV)Chainlink is pleased to introduce Chainlink Smart Value Recovery (SVR), a revolutionary oracle solution designed to help Decentralized Finance (DeFi) applications capture harmless Maximal Extractable Value (MEV) utilizing Chainlink price oracles. Initially developed in collaboration with BGDLabs, Flashbots, and AaveDAO contributors, the initial version of SVR focuses on helping DeFi lending protocols recover oracle-related liquidation MEV

Chainlink Smart Value Recovery (SVR): An On-Chain Solution Empowering DeFi to Capture Oracle-Related Maximal Extractable Value (MEV)

Chainlink is pleased to introduce Chainlink Smart Value Recovery (SVR), a revolutionary oracle solution designed to help Decentralized Finance (DeFi) applications capture harmless Maximal Extractable Value (MEV) utilizing Chainlink price oracles. Initially developed in collaboration with BGDLabs, Flashbots, and AaveDAO contributors, the initial version of SVR focuses on helping DeFi lending protocols recover oracle-related liquidation MEV. Built upon Chainlink's established infrastructure, SVR systematically reduces reliance on unnecessary third parties, eliminating the need for integrating intermediary smart contracts, thus enabling easy adoption by existing Chainlink price oracle users.

SVR: A New Paradigm for Efficient and Secure MEV Capture

SVR-enabled price oracle versions leverage Flashbots MEV-Share and an innovative on-chain "dual aggregator" contract architecture, resulting in higher efficiency and enhanced security redundancy. Chainlink SVR is currently live on testnets and is soon to launch on the Ethereum mainnet. Future plans include a fully customizable version with further improvements, including increased decentralization, a decentralized oracle network (DON)-based auction system, enhanced gas efficiency, and cross-chain capabilities. The Aave community is currently reviewing the integration of Chainlink SVR through its governance process; discussions can be found on the Aave forum. The value recovered by SVR not only provides a new revenue stream for DeFi protocols but also contributes to the long-term economic sustainability of Chainlink oracles, ensuring DeFi protocols continue to have access to highly secure and reliable oracle services.

Oracles and MEV Opportunities in DeFi

Maximal Extractable Value (MEV) refers to the value extracted by block producers (nodes on a blockchain network) by deciding which transactions to include, exclude, or reorder within a block. Currently, these transaction ordering opportunities are often discovered by "searchers" who compete in auctions for the right to order transactions within a block. This value is then captured by actors involved in the block building process, such as searchers, builders, and validators.

A subset of MEV is "Oracle Extractable Value" (OEV), referring to MEV generated during the process of an oracle report being uploaded on-chain and subsequently consumed by on-chain applications. The most prevalent OEV opportunities arise in lending protocols, particularly during liquidations. Searchers compete for the right to liquidate high-risk positions, profiting from liquidation rewards. On Ethereum, this block space auction process is often facilitated through Flashbots MEV-Boost, allowing searchers to bundle liquidation transactions with price oracle report updates, enabling backrunning.

Currently, the value generated from oracle-related MEV (like liquidations) is captured by searchers, builders, and validators on the blockchain network, not returned to the DeFi protocols, end-users, and oracles that originally generated the oracle-related MEV. Recovering this harmless MEV ultimately returns value to its originating parties. It's important to note that the term "OEV" can be slightly misleading as it doesn't refer to the oracle actively extracting value from users, but rather the existence of oracle-related MEV. We use "OEV" here because it's become common parlance for this type of MEV.

Why Choose Chainlink SVR?

Chainlink Labs and the broader Chainlink community have been actively researching MEV-related solutions for years, including research into Fair Sequencing Services (FSS) and Protected Order Flow (PROF). As a subset of MEV, we have also focused on OEV research, exploring how DeFi protocols can recover this value and support oracle economic sustainability. We analyzed multiple OEV designs, aiming for a solution that maximizes security, reliability, and long-term economic viability. This research culminated in an initial version of an OEV solution called Smart Value Recovery (SVR). Chainlink SVR is specifically designed for liquidation-related backrunning and cannot be used for frontrunning or sandwich attacks. These harmful MEV types negatively impact user experience, and the Chainlink network and community have been actively researching solutions to mitigate their effects for years.

Chainlink SVR is the optimal choice as a native MEV recovery solution because Chainlink price oracles already secure many of the largest DeFi protocols and have a proven track record of security and reliability. By integrating a Chainlink-based MEV recovery solution, DeFi protocols not only retain the security and reliability provided by Chainlink but further enhance the economic sustainability of both themselves and the Chainlink infrastructure they rely on.

Key Advantages of Chainlink SVR:

1. Mature Decentralized Oracle Network (DON) Support: SVR leverages the same decentralized oracle network (DON) infrastructure as Chainlink price oracles, a network that has been proven and hardened over the past 5 years, having secured up to $75 billion in peak DeFi TVL and supporting over $17 trillion in transaction value.

2. Reduced Unnecessary Third-Party Risk: For protocols already using Chainlink price oracles, SVR reduces unnecessary third-party vendor risk, lowering the overall attack surface and preventing the unnecessary siphoning of economic value by third parties.

3. No Intermediate Contract Integration: SVR doesn't require DeFi protocols to integrate intermediary contracts or "wrap" the Chainlink price oracle, ensuring a more efficient smart contract workflow and avoiding substantial changes to how DeFi protocols use oracle data.

4. Economies of Scale: As the most widely used oracle solution in DeFi, Chainlink can drive economies of scale through SVR, allowing searchers and subsequently DeFi protocols to benefit from the most promising opportunities and highest revenue.

Based on real-world test results, we believe Chainlink SVR can achieve a realistic recovery rate of approximately 40% (i.e., $40 recovered for every $100 of liquidation MEV leakage). While some other solutions claim higher liquidation MEV recovery efficiencies, we have yet to see convincing real-world data to support this. Therefore, we consider 40% a conservative yet realistic estimate, with more data to be collected through live operation to validate this figure.

The initial version of SVR is just the beginning. Over time, Chainlink SVR is planned to evolve into a highly configurable, highly decentralized, general-purpose, and cross-chain OEV solution, built entirely on Chainlink's battle-tested infrastructure. We look forward to enabling protocols to maximize MEV revenue recovery on any supported chain while eliminating the unnecessary risks and latency introduced by other OEV solutions.

How Chainlink SVR's Initial Version Works

Chainlink price oracles provide market-range weighted average prices for crypto assets using a decentralized oracle network and multiple independent data sources. The initial implementation of Chainlink SVR will include a set of parallel Chainlink price oracles supported by the same mature DON architecture currently used to secure existing price oracle services. SVR-enabled Chainlink price oracles will be deployed to collect liquidation-related MEV for lending protocols integrating the solution, while retaining the standard Chainlink price oracle as a fallback. The "dual aggregator" price oracle design allows a single Chainlink data DON to produce the exact same oracle report as currently, but transmit the oracle report on-chain differently.

SVR oracles build upon existing Chainlink contracts and interfaces, significantly reducing the integration burden for existing Chainlink users as the required code changes are minimal (potentially only pointing to the new aggregator or SVR oracle). Oracle reports sent to SVR-enabled price oracles will have their updates transmitted on-chain via Flashbots MEV-Share, where the right to bundle liquidation transactions with oracle report updates is auctioned to searchers in a permissionless manner. Simultaneously, the same oracle report is also transmitted through the public mempool to the existing standard price oracle, acting as a fallback mechanism to mitigate potential risk scenarios. Users of the standard price oracles will not experience any SVR-related impact as SVR is optional.

If the SVR-enabled price oracle experiences a transmission failure (i.e., MEV-Share failure), a fail-safe mechanism ensures the oracle can still report prices to the DeFi protocol. When the SVR-enabled price oracle is deemed stale (based on a configurable time period), it will return the latest price report from the standard price oracle prior to the cutoff point. This delay is necessary to prevent liquidators from circumventing the value recovery mechanism provided by Chainlink SVR and extracting value.

The following diagram provides an overview of how SVR is planned to integrate into Aave V3 on Ethereum. (Diagram would be inserted here; since image insertion is not possible, a textual description follows)

Aave V3 and SVR Integration Flow:

1. Chainlink data DON generates price oracle reports as it does today (i.e., via heartbeat or deviation...)