Announcing Oval: Earn Protocol Revenue by Capturing Oracle MEV

Tldr; Developed by UMA in collaboration with Flashbots, Oval is an MEV capture mechanism that enables protocols to monetize the value they produce when consuming Chainlink oracle data. Oval creates new revenue streams for lending protocols, contributing to DeFi sustainability.

Key Takeaways:

• When lending protocols consume price updates that trigger liquidations, they leak Oracle Extractable Value (OEV), a type of MEV.
• Lending protocols lose hundreds of millions of dollars in OEV.
• Oval is live on Ethereum mainnet, empowering lending protocols to capture this OEV as a form of revenue and contribute to DeFi’s sustainability.
• Oval does this by wrapping Chainlink price updates and by using Flashbots’ MEV-Share to auction off Oracle Extractable Value.
• Oval leverages battle-tested Chainlink and Flashbots infrastructure to minimize integration costs and trust assumptions.
• Oval does not require code to integrate and can capture 90% of oracle MEV.

UMA is launching Oval — the Oracle Value Aggregation Layer — today on Ethereum mainnet. Oval earns revenue for lending protocols by capturing a type of MEV called Oracle Extractable Value (OEV).

Ethereum’s leading DeFi protocols create hundreds of millions of dollars in OEV annually. Aave and Compound have each created well over $100M of OEV since their launch. This value is lost to the MEV supply chain without any benefit to the protocols.

Oval is not an oracle. Oval is a mechanism that integrates with lending protocols and recaptures the value that is created when they consume Chainlink price updates.

Oval wraps existing Chainlink Data Feeds. To extract OEV, searchers must compete in an order flow auction run in Flashbots’ MEV-Share, with proceeds of the auction going to the protocol.

Oval redirects as much as 90% of OEV back to the protocol that created it. Revenue recaptured by Oval can make DeFi protocols and oracle infrastructure more sustainable.

What is Oracle Extractable Value (OEV)?

Oracle Extractable Value is a type of MEV that is created when a protocol receives an update from a price oracle.

Consider a lending protocol like Aave: An Aave market may create OEV by consuming a price update from a Chainlink Data Feed that exposes an overleveraged position to liquidation. To secure Aave, liquidators can make a risk-free profit by swiftly liquidating the position.

Lending protocols offer a large liquidation bonus in order to guarantee the quick sale of collateral, allowing anyone (called a “searcher” in MEV speak) to repay the debt and claim the collateral for a discount. For example, liquidations on Aave offer a 5–10% liquidation discount. These discounts must be large to guarantee a quick sale of the assets even in periods of extremely high volatility.

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

“MEV protection, particularly MEV capture, is the frontier of Ethereum research,” says Robert Leshner, CEO of Superstate. “Personally I am very excited to see UMA working with Chainlink and Flashbots to attempt to capture the $100s of millions of MEV that lending protocols leak, and I’m excited about the possibility of Oval bringing new revenue streams to DeFi protocols more generally.”

To claim liquidation fees, MEV searchers compete with each other by offering high “tips” to block builders in exchange for including their transactions in blocks. Block builders then pay a large portion of this value on to block proposers to add the transaction to the blockchain. These parties make substantial profit from OEV without actually contributing to the protocol that created the value.

How Oval works

Oval enables OEV capture by wrapping Chainlink price updates and then funneling searchers into an auction. This auction is run with MEV-share, which is an order flow auction protocol operated by Flashbots.

Oval attaches repayment instructions to the searcher’s bundles that will require any excess value to be repaid back to the protocol. Without Oval, this excess value is lost. We estimate hundreds of millions can be reclaimed by Oval.

As a failsafe, if there is ever any delay associated with Oval or MEV-share, the Chainlink price is automatically released. This ensures that liquidations will always occur quickly.

See the docs for a deeper dive into Oval’s mechanics.

The frontier of MEV research

Oval is built in close collaboration with the team at Flashbots and uses the existing order flow auction infrastructure provided by MEV-share.

Flashbots estimates that over 415,000 ETH in value has been extracted since Ethereum shipped the Merge in September 2022. In the MEV supply chain, this value is extracted from protocols and unsuspecting users and most of it accrues to Ethereum block builders and validators. This is the current status quo that we seek to change.

Oval, as an MEV capture tool, disrupts the MEV supply chain and diverts as much as 90% of OEV extracted from lending protocols back to them as revenue.

By doing so Oval allows protocols to create new revenue streams, and has the potential to enable new mechanism designs and business models for DeFi.

“At Flashbots, we’ve long held the view that dapps can drastically limit the amount of MEV they expose,” says Hasu, Strategy Lead for Flashbots. “The key insight is that, instead of blindly broadcasting a transaction to the public mempool, protocols should auction off the right to execute this transaction to a competitive market of searchers. Oval is building on that insight to finally return Oracle-Extractable Value (OEV) back to Defi protocols and their users. We look forward to supporting them on that journey.”

Security comes first

Oval has been designed to introduce no additional risks to the underlying infrastructure of Chainlink Data Feeds. To ensure, this Oval has been audited by Open Zeppelin.

Since Oval uses Chainlink Data Feeds, blue chip protocols that integrate the solution can continue sourcing prices from DeFi’s most widely used oracle provider.

Oval is also open to the same bounty program that covers all of UMA’s audited contracts — such as those behind UMA’s Optimistic Oracle, oSnap and the Across Bridge.

“Oval has an impressive value proposition for major protocols like Aave — update a contract address and start earning significant MEV revenue that is otherwise lost,” says Tarun Chitra, CEO of Gauntlet. “Gauntlet is excited to work with leading DeFi protocols like Aave and Compound to see how Oval can be used to build additional revenue streams into their products.”

How to integrate

On the contract level, Oval operates in the same manner as a Chainlink Data Feed and delivers Chainlink prices to protocols, with no impact on end-user experience.

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

Oval is built by UMA, a team that has been at the forefront of innovation in the Ethereum and DeFi space since 2018. Oval is now live on Ethereum Mainnet. If you are a user interested in Oval, visit our landing page or dive deep into our mechanisms on our docs site. If you are a protocol interested in integrating Oval, please reach out.

About UMA

UMA was founded in 2018 to solve hard problems facing the development of Ethereum. UMA created the Optimistic Oracle for trustlessly recording any kind of data on the blockchain and has more recently pushed the DAO ecosystem forward with oSnap. UMA also powers Across Protocol, the fastest and cheapest EVM bridge.

About Flashbots

Flashbots is a pioneer in MEV research, known for its groundbreaking work in reducing the impact of MEV on Ethereum. Flashbot’s MEV-Share infrastructure has changed the MEV landscape by helping users reclaim a share of the revenue their transactions generate.

Thanks to Tarun Chitra, Robert Leshner, Stani Kulechov, and Hasu for reviewing this post and contributing their thoughts to Oval.