Key Takeaways
- Reclaiming Lost Value: Oval, the Oracle Value Aggregation Layer, is a mechanism introduced by UMA to address the issue of Oracle Extractable Value (OEV) within the DeFi ecosystem. OEV is a form of Miner Extractable Value (MEV) that is generated when DeFi protocols consume price updates from decentralized oracles like Chainlink. Oval’s primary objective is to recapture this value, which is often lost to the MEV supply chain, and redirect it back to the protocols that create it.
- Targeting High OEV Protocols: UMA’s Oval focuses on DeFi lending protocols like Aave and Compound, which can generate significant OEV when liquidating overleveraged positions. By capturing up to 90% of this value, Oval aims to create a more equitable distribution of revenue, ensuring that the protocols themselves benefit from the value they generate.
- Collaboration with Flashbots: Oval operates in close collaboration with Flashbots, a leader in MEV research and management. Flashbots’ MEV-Share protocol facilitates an order flow auction, allowing Oval to extract OEV and return it to the respective DeFi protocols. This collaboration aims to disrupt the existing MEV supply chain and redirect OEV back to where it belongs.
- Security and Integration: UMA has taken steps to ensure the security of Oval, subjecting it to an audit by Open Zeppelin. The integration of Oval into established DeFi protocols is straightforward, requiring a simple governance vote without the need for code changes. Oval’s potential lies in making DeFi protocols and oracle infrastructure more sustainable while fostering new revenue streams and innovative mechanisms for the DeFi ecosystem.
UMA, a leading player in the decentralized finance (DeFi) space, has launched Oval – the Oracle Value Aggregation Layer – on the Ethereum mainnet, aiming to tackle the issue of Oracle Extractable Value (OEV). It promises to recapture significant amounts of value lost within the DeFi ecosystem, redirecting it to the very protocols that generate it.
Oracle Extractable Value (OEV) Explained
OEV is a form of Miner Extractable Value (MEV) that arises when a DeFi protocol receives a price update from a decentralized oracle. For instance, consider Aave, a prominent lending protocol. It can create OEV when consuming a price update from a Chainlink Data Feed that reveals an overleveraged position, making it susceptible to liquidation. This presents an opportunity for “searchers” to profit by rapidly executing liquidations.
To ensure quick asset sales, lending protocols often offer substantial liquidation bonuses, ranging from 5% to 10%. These bonuses are the maximum theoretical OEV, and Oval aims to capture up to 90% of this value.
Oval: The Solution to OEV Leakage
Oval isn’t an oracle but a mechanism that integrates with lending protocols to reclaim the value generated when they utilize Chainlink price updates. Oval wraps existing Chainlink Data Feeds and employs an order flow auction, run in collaboration with Flashbots’ MEV-Share, to extract OEV. The proceeds from this auction are directed back to the protocol, potentially redirecting as much as 90% of the OEV back to where it belongs.
Robert Leshner, CEO of Superstate, emphasized the significance of MEV capture, stating, “MEV protection, particularly MEV capture, is the frontier of Ethereum research.” He expressed excitement about Oval’s potential to reclaim the hundreds of millions of dollars that lending protocols typically lose to MEV extraction.
How Oval Works?
Oval’s operation involves wrapping Chainlink price updates and guiding searchers into an auction conducted via MEV-share, which is an order flow auction protocol managed by Flashbots. To safeguard against any delays, Oval automatically releases the Chainlink price to ensure swift liquidations.
The Frontier of MEV Research
Oval’s development stems from close collaboration with Flashbots, a platform at the forefront of MEV research. Flashbots estimates that over 415,000 ETH in value has been extracted since Ethereum’s Merge in September 2022. The majority of this value ends up with Ethereum block builders and validators, perpetuating the existing status quo.
Oval disrupts this MEV supply chain by funneling a substantial portion of OEV back to lending protocols as revenue, potentially creating new revenue streams and novel DeFi mechanisms.
Security First
UMA has taken extensive measures to ensure Oval introduces no additional risks to the underlying Chainlink Data Feeds infrastructure. The mechanism has been audited by Open Zeppelin and remains open to UMA’s bounty program.
Integration Made Simple
For established protocols, integrating Oval is straightforward, requiring only a governance vote with no need for code changes.
The Potential of Oval
Oval represents a promising step towards making DeFi protocols and oracle infrastructure more sustainable, offering the potential for a more equitable distribution of value within the ecosystem. With Oval in play, DeFi protocols can tap into previously lost revenue streams, potentially unlocking new avenues for innovation and growth.
UMA, the team behind Oval, has a strong track record of innovation in the Ethereum and DeFi space, with projects like the Optimistic Oracle and the cross-chain intents protocol, Across Protocol, showcasing their commitment to driving progress within the industry.
In the ever-evolving world of DeFi, Oval’s launch marks a significant development, addressing an issue that has long plagued the ecosystem and opening the door to a more equitable future for all participants.
Read Also: Chainlink Functions: A new platform to bridge Web3 and Web2 for advanced dApp development