Introducing the OEV Watchtower Tool
Discover How Much Value Lending Protocols Can Recapture with OEV Network
Lending protocols are currently leaking millions of dollars every year due to maximal extractable value (MEV). API3 will be launching OEV Network as a solution to recapture that value and return it to the protocol where it originated. This strategic recovery not only improves protocol performance but also opens the door to innovative business models for onchain lending.
API3 developed the OEV Watchtower tool as an easy way for lending protocols to estimate their potential value they can reclaim by integrating with the OEV Network.
What value is being leaked?
Lending protocols pay out a liquidation bonus to searchers in order to manage the risk of their loans and reduce bad debt. That liquidation bonus is a fixed percentage of a user’s collateral and a needed incentive for maintaining the health of the protocol.
The problem is that the liquidation bonus is often higher than it needs to be, meaning protocols are overpaying for maintaining the health of their protocol and leaking value down chain to searchers and block builders.
The liquidation market is highly competitive because it is a simple strategy to perform. Currently, this competition occurs at the blockspace level, with block builders capturing the lion’s share of the liquidation bonus. OFAs have demonstrated best execution for users because in competitive auctions rational bidders will end up bidding close to the total MEV of a transaction. For liquidations, this means that searchers are paying up to 99.9% of their revenue to block builders in these auctions.
The math is simple:
Liquidation bonus (Revenue) — searcher revenue (Profit) = total revenue leaked to block builder (Cost)
That block builder revenue is the amount lending protocols are overpaying searchers to perform liquidations. A mechanism designed to promote a healthy protocol ends up leading to higher fees for users and worse protocol performance.
OEV Network fixes this.
Capturing a Million Opportunity
With OEV Network, API3 is moving the competition for liquidations from the blockspace level to the oracle level. OEV Network creates an efficient market for oracle updates, allowing searchers to compete at the oracle level for oracle updates that enable liquidations, giving the winning bidder exclusive rights to the liquidation bonus.
The auction model of the OEV Network allows dApps to retain the value that they are currently leaking to block builders through the liquidation bonus. The competition at the blockspace level has demonstrated searchers are willing to accept significantly less than they are getting paid for the liquidation bonus, as they are passing up to 99% to the block builders. With the OEV Network, searchers will have a competitive market for liquidations at the oracle level, with the majority of the auction proceeds going back to the dApp where the value originated.
The OEV Network introduces a simple change in market dynamics that will revolutionize liquidations for lending protocols, improving the health of lending dApps and opening the door to innovative business models.
Use the Watchtower Tool to Assess Your Opportunity
Lending protocols can use the Watchtower Tool to calculate the potential value that can be recaptured based on the current liquidation incentive rate and the TVL (total value locked) of the project.
- Visit OEV Watchtower Tool
- Enter your protocol’s liquidation incentive rate and TVL.
3. Compare your protocol’s performance to other lending protocols like Aave, Compound, and others.
4. Assess the total opportunity available for your protocol.
Where Should that Value Go?
The OEV Network introduces a novel mechanism for lending protocols to explore new business models. By being vertically integrated with the API3 Oracle Stack, any lending protocol that uses API3’s decentralized data feeds benefits from having a built-in solution to recapture protocol MEV. This value can be redirected back to users by reducing fees or increasing yields, or be channeled back to the protocol treasury to fuel new innovation.
With OEV Network, the question is no longer about how to capture the value protocols are losing to MEV, but how that value can be effectively utilized to improve onchain lending.
As more and more users are coming onchain to explore the freedoms of onchain finance, OEV Network makes it possible for lending protocols to become more resilient, profitable, and user-friendly.
OEV Network is not just the next evolution of oracle technology. It’s the start of a revolution for lending protocols.
