Rising more than 2.5 times in 5 days, UMA Lianchuang explains in detail the OEV tool Oval

Author: Hart Lambur, UMA Lianchuang; Translation: Golden Finance xiaozou

Press: Recently, UMA announced on January 17 that it will launch an oracle value extraction tool After Oval’s announcement, its price increased more than 2.5 times in just 5 days. UMA was officially launched on the Ethereum mainnet on Oval on 23 on January 1, and UMA ChuangHart Lambur published a detailed explanation ofOval.

Key points:

· When a loan agreement Oracle Extractable Value (OEV), a type of MEV, is generated when a price update triggers liquidation.

· Lending protocols lost hundreds of millions of dollars on OEV.

· Oval runs on the Ethereum mainnet, supporting protocols to use this OEV as a form of revenue and contributing to the sustainable development of DeFi.

· Oval does this by wrapping Chainlink price updates and auctioning OEV using Flashbots’ MEV-Share.

· Oval leverages proven Chainlink and Flashbots infrastructure to minimize integration costs and trust assumptions.

· Oval requires no code for integration and can capture 90% of Oracle MEV.

On January 23, 2024, UMA released Oval, the Oracle value aggregation layer, on the Ethereum main network. Oval obtains the income from the lending agreement by obtaining a type of MEV called OEV (Oracle Extractable Value: Oracle Extractable Value).

Ethereum’s leading DeFi protocol generates hundreds of millions of dollars in OEV every year. Aave and Compound have each generated well over $100 million in OEV since launch. This value is lost to the MEV supply chain and brings no benefit to the agreement.

Oval is not an oracle. Oval is a mechanism that integrates with lending protocols and recaptures the value generated when Chainlink prices are updated.

Oval wraps existing Chainlink Data Feeds. In order to extract OEV, searchers must conduct an order flow auction in Flashbots’ MEV-Share, and the auction proceeds will flow into the protocol.

Oval redirects up to 90% of OEV back into its creation protocol. The profits captured again by Oval can make DeFi protocols and oracle infrastructure more sustainable.

1. What is Oracle Extractable Value (OEV)?

An Oracle Extractable Value (OEV) is a MEV that is created when the protocol receives updates from a price oracle.

Take a lending protocol like Aave as an example: the Aave market can create OEV through price updates from the Chainlink Data Feed, thus exposing over-leveraged positions to liquidation. In order to ensure the smooth operation of Aave, liquidators can obtain risk-free profits by quickly closing positions.

The lending protocol provides a large liquidation bonus to ensure that collateral can be sold quickly, allowing anyone (called a "searcher" in MEV) to repay the debt and Claim collateral at discounted prices. For example, liquidations on Aave offer 5-10% liquidation discounts. These discounts must be large to ensure that assets can be sold quickly even in times of extremely high volatility.

This liquidation discount is the theoretical maximum OEV, and Oval is able to capture 90% of it.

Superstate CEO Robert Leshner said: "MEV protection, especially MEV acquisition, is at the forefront of Ethereum research. Personally, I'm delighted I'm also excited to see UMA partner with Chainlink and Flashbots as they seek to capture the hundreds of millions of dollars in MEV flowing out of lending protocols, and I'm also excited about Oval's potential to bring a broader range of new revenue streams to DeFi protocols."

To receive clearing fees, MEV seekers compete with each other, providing block builders with hefty "tips" in order to have their transactions included in the block. The block builder then pays the block proposer a significant portion of the value in order to add the transaction to the blockchain. All parties make substantial profits from OEV, but actually contribute nothing to the value-creating agreement.

2, Oval operating mechanism

Oval enables OEV capture by wrapping Chainlink price updates and gathering seekers to participate in auctions. The auction uses MEV-share, an order flow auction protocol operated by Flashbots.

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Oval attaches repayment instructions to the seeker's packet, requiring that any excess value be repaid to the protocol. Without Oval, this excess value would be lost. We estimate that Oval can recover hundreds of millions of dollars in value.

As a safety precaution, Chainlink prices will be released automatically if there are any delays related to Oval or MEV-share. This ensures that quick liquidation is always possible.

3, MEVResearch Frontier

Oval was built by its team in close collaboration with the Flashbots team, using MEV-share’s existing order flow auction infrastructure.

Flashbots estimates that more than 415,000 ETH of value has been withdrawn since Ethereum’s major merger in September 2022. In the MEV supply chain, this value is extracted from the protocol and unsuspecting users, with much of that value flowing into the pockets of Ethereum block builders and validators. This is what we strive to change.

Oval serves as an MEV capture tool that disrupts the MEV supply chain and transfers up to 90% of the OEV extracted from lending protocols back as proceeds. protocol.

By doing so, Oval allows the protocol to create new revenue streams and potentially bring new mechanism designs and business models to DeFi.

"At Flashbots, we have always believed that dapps can significantly limit the amount of MEV they are exposed to," said Hasu, Flashbots' head of strategy. “The key insight is that protocols should not blindly broadcast transactions to a public mempool, but rather auction the right to execute transactions to a competitive market of seekers. It is on this insight that Oval ultimately returns OEV to Defi protocols and its users. We look forward to helping them in this process."

4, Safety first

< p style="text-align: left;">Oval's design does not introduce any additional risk to Chainlink Data Feeds' underlying infrastructure. To ensure this, Oval has been audited by Open Zeppelin.

Because Oval uses Chainlink Data Feeds, blue-chip protocols integrating the solution can continue to obtain prices from the most used oracle providers in DeFi.

Oval also has the same bounty program, which covers all UMA audited contracts, such as those behind UMA Optimistic Oracle, oSnap and Across Bridge.

Gauntlet CEO Tarun Chitra said: "Oval has a very attractive value proposition for major protocols such as Aave - updating contract addresses starts to earn a lot of money. MEV revenue of less than 1%. Gauntlet is excited to partner with leading DeFi protocols such as Aave and Compound, and we look forward to seeing how Oval can create additional revenue streams for their products."

5. How to integrate?

At the contract level, Oval operates in the same way as the Chainlink Data Feed, providing Chainlink prices to the protocol without any impact on the end user experience.

Existing protocols can easily integrate Oval through a simple governance vote. No code changes are required.