UMA Launches Oval to Recover Millions in Oracle Extractable Value (OEV) for DeFi Protocols

Key Takeaways

• Regain lost value: Oval, the Oracle Value Aggregation Layer, is a mechanism introduced by UMA to solve the OEV (Oracle Extractable Value) problem in the DeFi ecosystem. OEV is a form of Miner Extractable Value (MEV) created when a DeFi protocol uses price updates from a decentralized oracle like Chainlink. Oval’s primary goal is to recapture this value that is often lost in the MEV supply chain and redirect it back to the protocols that generate it.
• High OEV Protocol Targeting: UMA’s Oval focuses on DeFi lending protocols like Aave and Compound, which can generate significant OEV when liquidating overly leveraged positions. Oval aims to capture up to 90% of this value, creating a more equitable revenue distribution, allowing the protocol itself to benefit from the value generated.
• Collaboration with Flashbot: Oval operates in close collaboration with Flashbots, a leader in MEV research and management. Flashbots’ MEV-Share protocol facilitates order flow auctions, allowing Oval to extract OEV and return it to the corresponding DeFi protocol. The goal of this collaboration is to disrupt the existing MEV supply chain and get OEVs back on track.
• Security and Integration: UMA has taken steps to ensure security at the Oval and has been audited by Open Zeppelin. Integrating Oval into existing DeFi protocols is simple and requires simple governance voting with no 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 leader in decentralized finance (DeFi), has been launched. oval – Oracle Value Aggregation Layer – aims to solve the Oracle Extractable Value (OEV) problem on the Ethereum mainnet. It promises to reclaim significant amounts of value lost within the DeFi ecosystem and redirect it to the very protocols that created it.

OEV is a form of Miner Extractable Value (MEV) that occurs when a DeFi protocol receives price updates from a decentralized oracle. For example, consider the popular lending protocol Aave. You can generate OEVs that are prone to liquidation by consuming price updates from Chainlink data feeds that reveal overly leveraged positions. This provides an opportunity for “searchers” to quickly execute a liquidation and profit.

To ensure quick asset sales, lending protocols often offer significant liquidation bonuses ranging from 5% to 10%. These bonuses are the theoretical maximum OEV and Oval aims to capture up to 90% of this value.

Oval: The Solution to OEV Leakage

Oval is not an oracle, but is a mechanism that integrates with the lending protocol to reclaim the value created when leveraging Chainlink price updates. Oval wraps existing Chainlink data feeds and extracts OEV using order flow auctions run in partnership with Flashbots’ MEV-Share. Proceeds from this auction will be passed back to the protocol, potentially redirecting up to 90% of OEVs back to where they belong.

Robert Leshner, CEO of Superstate emphasized the importance of MEV capture, saying, “MEV protection, especially MEV capture, is at the forefront of Ethereum research.” He expressed excitement about Oval’s potential to help the lending protocol recoup hundreds of millions of dollars typically lost to MEV extraction.

How does an elliptical work?

Oval’s operations include wrapping Chainlink price updates and directing searchers to auctions conducted via MEV-share, an order flow auction protocol managed by Flashbots. To avoid delays, Oval automatically releases Chainlink prices to ensure rapid liquidation.

Frontiers in MEV research

The development of Oval resulted from close collaboration with Flashbots, a platform at the forefront of MEV research. Flashbots estimates that more than 415,000 ETH worth has been extracted since the Ethereum merger in September 2022. Most of this value accrues to Ethereum block builders and validators, perpetuating the existing status quo.

Oval disrupts the MEV supply chain by funneling a significant portion of OEV back into the lending protocol as revenue, potentially creating new revenue streams and new DeFi mechanisms.

Security first

UMA has taken extensive steps to ensure that Oval does not pose additional risk to the underlying Chainlink data feed infrastructure. This mechanism has been audited by Open Zeppelin and remains open to UMA’s bounty program.

Integration made easy

For established protocols, Oval integration is simple and requires only a governance vote with no code changes.

Oval Potential

Oval represents a promising step toward making DeFi protocols and oracle infrastructure more sustainable and providing the potential for a more equitable distribution of value within the ecosystem. Oval allows DeFi protocols to leverage previously lost revenue streams, potentially opening new avenues for innovation and growth.

UMA, the team leading Oval, has a strong track record of innovation in the Ethereum and DeFi space through projects such as Optimistic Oracle and the cross-chain intent protocol Across Protocol, demonstrating a commitment to driving advancements within the industry.

In the ever-evolving world of DeFi, the launch of Oval marks an important step forward, solving problems that have long plagued the ecosystem and opening the door to a more equitable future for all participants.

Read: Chainlink Features: A New Platform Bridging Web3 and Web2 for Advanced dApp Development