Thank you @Kyle for kicking off this discussion. We’d like to provide some additional context on Chainlink SVR, Compound’s historical usage of Chainlink oracles, and how Compound can capture liquidation MEV (OEV) in a risk-adjusted manner.
First, it’s important to note that this discussion isn’t just about which OEV recapture solution the Compound protocol should integrate, but also which price oracle provider Compound deployments will use, as the two are intrinsically tied together (i.e., using API3 for OEV also means using API3 for price oracle reporting). Modifying the core price oracle system used by Compound markets has serious security implications that could increase the risk of bad debt and insolvent markets, resulting in a loss of user funds if not considered carefully.
While recapturing OEV presents a real and tangible revenue opportunity for the Compound community, it is important to analyze this situation from a holistic perspective, which informs our recommendation of Compound to adopt Chainlink SVR for OEV recapture.
Background
Compound upgraded to Chainlink Price Feeds in June 2021 for the Compound V2 market on Ethereum, and integrated Chainlink at launch for the Compound V3 market on Ethereum in August 2022. Chainlink Price Feeds were adopted after $89M in user positions were incorrectly liquidated when the Coinbase Oracle (Compound’s former oracle provider) misreported the price of DAI, leading to value being siphoned from users. Chainlink Price Feeds have since become the default price oracle solution for Compound market deployments across chains, and continues to secure the primary and largest Ethereum V2 and V3 markets. Since integrating Chainlink nearly four years ago, there have been zero oracle-related exploits across Compound markets using Chainlink feeds, with Chainlink securing $12B in Compound TVL at its peak.
Through our long-standing collaboration with the Compound community, we have always taken a security-first approach, ensuring Compound markets have reliable access to accurate market data via Chainlink’s Decentralized Oracle Networks (DONs). Chainlink DONs leverage multiple layers of decentralization data aggregation, including the use the use of multiple independent oracle node operators, such as global telecommunication firms, who fetch and aggregate data from multiple professional data aggregation firms via paid data API subscriptions, to create tamper-proof oracle reports that are reliably published onchain even during the most extreme market volatility and blockchain network congestion conditions. This track record of securing billions of dollars in TVL for Compound over a period of nearly four years without any loss of user funds speaks to the integral nature of Chainlink’s usage by Compound.
It’s important to emphasize that the integration of any particular OEV recapture solution is inextricably linked to also integrating that OEV solution’s price oracle provider for market data. Therefore, it’s critical for protocols to not compromise on security by integrating an OEV solution linked to an unproven price oracle that can increase risks for the sake of rushing to capture a bit of extra revenue, as the risks to the protocol greatly outweigh the potential of small revenue recapture.
Expanding to using other, less proven price oracles in an attempt to recapture OEV would significantly alter the risk profile of the Compound protocol, potentially increasing risk for the end-users and billions of dollars in TVL.
Chainlink SVR
As the largest oracle in the industry by a wide margin, as measured by Total Value Secured (TVS) and number of integrations, we cannot afford to put DeFi at risk by taking shortcuts when creating and improving Chainlink services. There is no margin for error. When developing Chainlink Smart Value Recapture (SVR)—the OEV recapture solution native to Chainlink Price Feeds running on the same exact proven DON infrastructure—we took a systematic approach to ensuring security and reliability. Chainlink Labs and the broader Chainlink community have been actively researching MEV mitigation solutions for a number of years, including Fair Sequencing Services (FSS) and Protected Order Flow (PROF). As a subset of MEV, we’ve also engaged in research around OEV and how DeFi protocols can recapture this value and to help support the economic sustainability of oracles.
Rather than rush a product to market, we engaged in multiple cycles of R&D to arrive at an initial design that maximizes security, reliability, and long-term economic viability. Chainlink SVR was built in collaboration with industry-leading organisations such as Flashbots and other contributors to the Aave DAO, in order to meet the specific security and reliability requirements of the largest DeFi lending markets. SVR is undergoing testing on mainnet and is currently being integrated into the Aave V3 deployment on Ethereum pending Aave’s governance processes.
SVR also includes critical security functionality, such as in the case of transmission failure during an SVR auction, there is a fail-safe mechanism to ensure that the feed can still report an accurate price to DeFi protocols. This failsafe mechanism can be set at any threshold to manage risk according to an integrating protocol’s needs, highlighted in our recently published research report on SVR. Furthermore, SVR is not dependent on any third party bridges or external blockchain networks to process OEV auctions, reducing both reliance on third party dependencies and minimizing downtime risks. Chainlink SVR feeds are deployed natively on each supported blockchain and operate offchain OEV auctions using widely adopted MEV infrastructure. This maximizes searcher diversity and creates more competitive OEV auctions, leading to higher recapture rates for the protocol. More information about SVR can be read in the original SVR announcement and the follow up SVR research analysis.
Chainlink SVR is currently live on Ethereum and we are actively working on making SVR available across additional blockchains. Base and other OP Stack chains are expected to be supported by SVR in the near term, while chains such as Arbitrum, Scroll, Sonic, and other chains are being evaluated to be rapidly supported next. We are happy to collaborate with the Compound community to align our chain expansion plans for SVR. Additionally, future iterations of SVR are planned to introduce further improvements, including increased decentralization, enhanced gas efficiency, continuous price updates, and chain-agnostic functionality.
Recommendation
Based on the above considerations, we strongly recommend that the Compound community does not introduce unnecessary risk and continues to benefit from the proven security track record of using Chainlink Price Feeds. To build on this secure foundation, we recommend that Compound integrate Chainlink SVR as the OEV recapture solution of choice starting with Ethereum mainnet before expanding to other chains as SVR continues to become available across additional blockchain networks.
Beginning with an integration of Chainlink SVR for Compound markets on Ethereum mainnet would not only maximize the OEV recapture revenue opportunity compared to longer tail chains, but would also maintain the usage of Chainlink’s proven decentralized Price Feed oracle networks for core pricing data, protecting the protocol and its users.