Compound x Chainlink SVR Integration Proposal
Hi everyone, Ash here. The following post is our proposal for Compound Finance to integrate Smart Value Recapture (SVR) to recapture oracle-related liquidation MEV for the Compound protocol. We’ll start by providing context on Compound’s historical usage of Data Feeds and the implications involved in choosing an OEV solution, before diving into the full proposal.
It’s important to note that this RFP process isn’t just about which OEV recapture solution the Compound protocol should integrate, but also which price oracle provider Compound deployments should use, as the two are intrinsically tied together (i.e., using an oracle provider for OEV recapture also means using the same oracle provider for market pricing data).
While recapturing OEV presents a real and tangible revenue opportunity for the Compound community, 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. This could result in a loss of user funds (which currently sits $3B+ in user deposits) if not considered carefully. Thus, it’s important to analyze this situation from a holistic perspective, given the combined security implications of choosing both a price oracle provider and an OEV recapture provider.
Background
Compound originally upgraded its price oracle mechanism to Chainlink Data Feeds back in June 2021, starting with the Compound V2 market on Ethereum before extending it to Compound V3 as part of its Ethereum launch in August 2022. The Compound community adopted Data Feeds after $89M in user positions were incorrectly liquidated due to the Coinbase Oracle (Compound’s former oracle provider) misreporting the price of DAI, leading to value being siphoned from users.
Chainlink Data Feeds have since become the default price oracle solution for Compound market deployments across chains, and continues to secure the primary and largest V2 and V3 markets on Ethereum, accounting for the vast majority of the protocol’s TVL. Since this upgrade four years ago, there have been zero oracle-related exploits or loss of user funds across Compound markets, with Data Feeds securing $12B in Compound TVL at its peak.
Throughout our long-standing collaboration, we’ve always taken a security-first approach to ensure Compound markets have accurate market data via Chainlink’s Decentralized Oracle Networks (DONs). DONs leverage multiple layers of decentralized data aggregation, including the use of multiple independent oracle node operators, who fetch and aggregate data from multiple professional data aggregation firms via premium data API subscriptions to create accurate, tamper-proof oracle reports that are reliably published onchain, even during the most extreme market volatility and blockchain network congestion conditions (e.g., FTX collapse, major airdrops & NFT mint events).
It’s important to re-emphasize that integrating a particular OEV recapture solution is inextricably linked to the oracle solution it uses for market data. It’s critical for protocols to not compromise on security by integrating an OEV solution linked to an unproven price oracle, as the risks to the protocol greatly outweigh the potential of additional revenue recapture.
As the most widely adopted oracle in DeFi, with 67%+ market share as measured by Total Value Secured (TVS), we cannot afford to put DeFi at risk by taking shortcuts when creating and improving critical services. When developing Chainlink SVR—the OEV recapture solution native to Data Feeds, which runs on the same proven DON infrastructure—we took a systematic approach to ensuring security and reliability after researching MEV mitigation solutions for a number of years, including Fair Sequencing Services (FSS) and Protected Order Flow (PROF).
Rather than rush a product to market, we engaged in multiple cycles of R&D and collaborated with industry-leading organisations such as BGD Labs and other key participants of the Aave DAO to arrive at an initial design that maximizes security, reliability, and long-term economic viability using Flashbots infrastructure. SVR is now the largest OEV recapture solution on the market and used in production on the Aave V3 Ethereum deployment, securing $9B+ of TVL on Ethereum without meaningfully changing the protocol’s risk profile.
Since SVR launched in production earlier this year, the average OEV recapture rate has increased 2x (~25% to ~50%) while the total value secured grew 20x (~$400M to ~$9B+). SVR markets have processed over 200 liquidations in 2 months that paid out ±$310K in liquidation bonuses. In parallel, the number of independent searchers on SVR has continued to increase, helping increase SVR’s decentralization and supporting a healthy, competitive searcher market. In working closely with the Chainlink user base, we have gained valuable experience and in-production data that we used to inform our proposal to the Compound community.
The implementation of SVR on Compound can progress swiftly according to the following estimated timeline:
- RFP finalization - Mid to end of June: Finalization of the RFP, including DAO feedback. Final vote and decision by the DAO to move to implementation phase
- Preparation & Setup - End of June to beginning July: Discussions with Compound DAO members and key stakeholders. Deployment and testing of SVR-specific contracts with WOOF software; Security review with Gauntlet, Openzeppelin, and Platonia.
- Governance Approval & Integration - Mid to end of July: Compound DAO governance proposal and vote to update price feed addresses to SVR feed addresses; Comprehensive testing and monitoring of SVR feeds.
- Go-Live & Monitoring - End of July: Continuous monitoring of performance; Weekly reports published on Compound forum.
- Further product expansion - Post end of July: Expansion of SVR across more chains as aligned with the DAO
Below, we describe SVR in more detail using the requested RFP structure.
General Overview
Company/Protocol Name and Brief Background:
- Chainlink is the most widely adopted oracle platform across both DeFi and TradFi, providing protocols and organizations secure access to on-chain data delivery, cross-chain interoperability, offchain computation, and legacy system connectivity. Major financial market infrastructure and institutions such as Swift, DTCC, J.P. Morgan, UBS, SBI, Fidelity International, and ANZ Bank, as well as top DeFi protocols including Aave, Compound, Kamino, Jupiter, Morpho, Fluid, and hundreds more work with and use this standard to power advanced blockchain applications and transactions. Chainlink has enabled $21T in transaction value, secured over $75B in DeFi TVL at its peak, and has captured 67%+ market share in DeFi for oracle infrastructure, while operating the largest OEV recapture solution in production by value secured.
List Existing Associations with Compound Protocol/DAO:
- The Compound protocol uses Chainlink Data Feeds to access financial market data, which is used to help ensure protocol solvency. This includes for its largest market deployments of Compound V2 and V3 on Ethereum, which secure billions in user deposits, as well as markets on Base, Arbitrum, Optimism, Polygon, Ronin, Scroll, and Linea. We have supported the Compound community over the years through custom oracle solutions and improvements, including the UAV and UAV V2.
Explicitly list ALL of the chains that you are intending on applying for integration on (options include Ethereum mainnet, Base, Arbitrum, Unichain, Optimism, Polygon, Mantle, Scroll, Ronin, and Linea):
- We will integrate SVR on Compound on every chain except Unichain. In order to ensure a well coordinated and safe implementation, we will roll this out gradually.
Section 1: Technical Questions
1a) Technical Overview:
Smart Value Recapture (SVR) is an extension of Chainlink Data Feeds that enables DeFi protocols to recapture non-toxic, oracle-related MEV (e.g., liquidation MEV). The initial version of SVR was built in collaboration with BGD Labs, Flashbots, and other contributors to the Aave DAO. SVR is modular and future-proof in its ability to leverage multiple Order Flow Auction (OFA) providers, starting with support for Flashbot’s MEV-Share, but can expand to additional established providers over time.
By using established OFA providers, SVR is able to support an open, decentralized searcher ecosystem. This helps ensure competitive bidding and market-driven recapture rates as opposed to closed or single-searcher models, which can artificially inflate recapture rates and introduce single points of failure. Notably, SVR’s open approach is aligned with Compound’s existing ethos of having a permissionless, decentralized liquidation process, where any account address can liquidate eligible positions. The same searchers who facilitate liquidations on the Compound protocol today can permissionlessly integrate with SVR to continue supporting the protocol’s solvency.
Price Update & Liquidation Process:
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SVR feeds produce price oracle reports in exactly the same way that reports are generated today for standard Data Feeds. This means a decentralized committee of independent oracle node operators fetch and aggregate data from multiple premium data providers to produce a cryptographically signed aggregated oracle report that is verified onchain. The difference with SVR is how onchain data transmission takes place.
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An oracle report update for SVR feeds is transmitted onchain via an OFA (e.g., Flashbots MEV-Share), where the right to bundle a liquidation transaction with the oracle report update is auctioned to searchers in a permissionless manner. In parallel, the same oracle report for standard Data Feeds is transmitted onchain via the public mempool, which serves as a fallback to mitigate potential risk scenarios via the DualAggregator contract. Users of the standard Data Feed are completely unaffected by anything SVR-related, as it is opt-in to allow for phased SVR adoption.
The flow in the figure below is as follows:
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The Chainlink Data DON produces a price oracle report exactly as today (i.e., by a heartbeat and/or deviation threshold). However, the price report is transmitted twice, from different accounts.
1.1 One price report is transmitted to the standard Data Feed via the public mempool (the same as today).
1.2 Another price report is transmitted to an SVR Price Feed contract through a Flashbots Protect RPC endpoint. -
MEV-Share is an open-source protocol that selectively shares data about transactions (e.g., price oracle updates) with searchers, who then bid to include the transactions in bundles. The bundles are shared with builders, who then select the highest searcher bid and include the relevant backrun and liquidation transactions in a block. If no bid is placed, then the price oracle report is published onchain without any backrunning liquidation transaction.
2.1 When the price report and the backrunning liquidation transactions are published onchain, then:
2.1.1 The price report updates the SVR Price Feed.
2.1.2. The backrunning transaction uses the price update to liquidate the relevant positions.
2.1.3 Value is recaptured by Compound and Chainlink. -
In the described example, the SVR feed returns an updated price. However, if no fresh price is available (e.g., if MEV-Share fails), the feed contract connected to Compound has a fail-safe mechanism that returns a price from the standard Data Feed at an adjustable delay.
Onchain Components:
- DualAggregator: An onchain aggregator contract that stores both SVR Price Feed updates and standard feed updates. This contract provides users the right price depending on if they come through the normal FeedProxy or the OEVFeedProxy.
- OEVFeedProxy: A proxy contract that points to the SVR DualAggregator, which has the same interface that Compound already uses.
Offchain Components:
- Decentralized oracle network (DON): A distributed collection of independent Chainlink oracle node operators responsible for fetching and aggregating data, coming to consensus, producing cryptographically signed oracle reports, and delivering oracle reports to an intended destination (onchain or offchain).
- Flashbot MEV-Share: MEV-Share is an open-source protocol for users, wallets, and applications to internalize the MEV that their transactions create (i.e., orderflow auction). It allows users to selectively share data about their transactions with searchers, who then bid to include the transactions in bundles. Users can choose how the searcher’s bid is redistributed—between themselves, validators, or other parties.
Value Accrual:
- Recaptured OEV is distributed between Compound and Chainlink based upon a pre-agreed upon fee split. Compound’s portion of recaptured OEV fees will be automatically sent to the Compound DAO treasury address. Distribution will occur in the asset received from the auction (typically the native gas token). Distributions can be made on a frequent basis. Since distributions take the form of onchain transactions, payments can be programmability tracked.
1b) Integration & Compatibility:
Integrating Smart Value Recapture (SVR) into Compound V3 is straightforward, leveraging Compound’s existing infrastructure and longtime compatibility with Chainlink Data Feeds. The upgrade is as simple as updating the current Data Feed address to point to a new SVR-enabled Price Feed address for each desired market. This process utilizes Compound’s established governance, requiring no changes to Compound’s core smart contract code or the deployment of new Comet instances for your existing markets.
Chainlink Labs will deploy the necessary SVR-specific contracts (like the DualAggregator and OEVFeedProxy) on each requested chain. Compound’s main action is the governance-approved configuration update to switch to these new SVR feed addresses. This maintains the DAO’s preference for minimal integration complexity and no disruptive contract upgrades, offering a seamless path to recapturing OEV by effectively just redirecting to an enhanced version of the Chainlink feeds already trusted and used for years.
1c) Fallback and Resilience:
In the case of a transmission failure by the SVR-enabled Price Feed (i.e., MEV-Share failure), there is a fail-safe mechanism to ensure that the feed can still report a price to the DeFi protocol. When the SVR-enabled Price Feed is determined to be stale by a defined time period (e.g., 6 blocks on Ethereum), it will return the latest price report from the standard Data Feed before the cutoff point. This delay is necessary to avoid liquidators extracting value by bypassing the value recapture mechanism provided by SVR.
1d) Existing Price Feed Compatibility:
SVR serves as an official extension of Chainlink Data Feeds and does not require “wrapping” or replacing existing infrastructure; instead, only pointing to a SVR-activated feed address. SVR uses the same oracle reports produced by DONs for standard Chainlink Data Feeds in the DualAggregator, but uses a different onchain transmission path (e.g., Flashbot MEV-Share). The fallback to standard Chainlink Data Feeds is handled within the DualAggregator contract.
1e) Auction Details:
Our approach prioritizes decentralization, security, and efficiency by integrating with existing, well-established Order Flow Auction (OFA) providers. Initially, this includes support for Flashbots’ MEV-Share, which has a proven track record having processed more than 26 million of MEV transactions, demonstrating its robustness and wide adoption.
How the Auction is Run:
- Submission: Chainlink DON submits the SVR-dedicated price report to OFA providers, such as Flashbots’ MEV-Share. (A standard, non-SVR price report is also sent to the public mempool for the fallback mechanism).
- Report Disclosure: The OFA providers stream the SVR report data to its network of searchers. For example, see Flashbots’ Event Stream. Importantly, the report shared with searchers does not include its signature, preventing searchers from taking the report and using it outside the OFA.
- Bidding & Bundling: If an opportunity exists, searchers submit “bundles” back to the OFA. These bundles consist of the SVR price report, along with their own backrun tx designed to capture this value and place a “bid”.
- Forwarding: The OFA forwards these competing bundles to its network of subscribed builders. These bundles come with the condition that a designated portion of the captured value is refunded to a pre-designated address (benefiting Compound and Chainlink).
- Builder Auction: Builders then determine the most profitable valid bundle and include it in the next block they propose.
*The Auction process may differ on other chains, which will be adapted accordingly.
Searcher Bidding Dynamics:
- Permissionless Access: OFAs like Flashbots offer permissionless access to searchers. This fosters a large, diverse, and highly competitive market, significantly reducing risks of collusion or monopoly.
- Private System: With OFAs directly integrated with builders, searchers’ bundles are protected from the risk of “front-running” or “sandwiching attacks”. This is particularly important because most liquidation transactions include a number of swaps in order to be able to liquidate the under-collaterized loan or repay the flash loan.
- Programmable Privacy & Composability: MEV-Share allows for controlled information sharing, which can enable sophisticated strategies where searchers choose to share some information with other searchers to allow them to backrun their bundle. This leads to more efficient MEV capture and higher overall refunds.
- Builder Auction Dynamics: Since builders receive many competing bundles for the same opportunity and profit only when landing the most profitable valid bid onchain, each builder has a strong economic incentive to include the highest-paying valid bundle before any other builder. This makes it difficult for even a set of builders to censor high bids or manipulate the outcome.
Mitigating Risks:
- “Builders” as the Auctioneer: By having builders be the auctioneer on the searchers’ bundles, SVR requires no onchain auction execution. This increases revenue for all participants by decreasing gas and operational costs.
- Coordinator Bias: We deliberately avoid any centralized Chainlink coordinator. The DON submits the SVR price report directly to Flashbots. While trust is a factor with Flashbots (as with any relay), their reputation of operating as a research organization focused on neutrality minimizes a single point of bias. Furthermore, Flashbots’ wide integration (over 20 builders covering 90%+ of blocks) and the fact that builders run the auction on the received bundles ensures decentralization of the auction process.
- Network Latency: By integrating Flashbots, we leverage their existing, low-latency network for connecting searchers and builders.
1f) Auction Timing & Block Coordination:
New price oracle reports are generated based on both a deviation threshold (percentage difference of the offchain price since last onchain update; e.g., 0.5%) and a heartbeat value (time elapsed since last onchain update; e.g., 10 minutes). When a new price report is generated, the SVR copy is sent to MEV-Share. MEV-Share holds an offchain auction every block, where searchers determine if there is a profit opportunity associated with the update. MEV-Share infrastructure allows SVR to specify that only backruns are allowed, and then bundles the transactions for inclusion by a builder. MEV-Share does not allow front-running transactions.
1g) Timeliness of Liquidations:
Auctions on MEV-Share occur every block, after which the bundle is immediately sent to builders. We measure inclusion delay as the difference in blocks between the SVR and non-SVR price report landing on the chain. Our in-production implementation on Ethereum shows that there is no block inclusion delay, or even a 1 block speed up on SVR compared to normal price report inclusion (in 7.5% of cases the price report is delayed by 2 or more blocks). Since the integration of SVR, there has been no bad debt accrual to the protocol.
The delay allows for the offchain process to accrue and collect bids from searchers before bundles of oracle updates and liquidations are published onchain. Further analysis has been published by the Chainlink Labs economics team here. The results suggest that, with no or minor calibration from integrating protocols, lending protocols can benefit from integrating SVR while still preserving their current risk profile.
Source: LlamaRisk SVR Dashboard
1h) Latency Optimization Techniques
As explored in previous questions, latency optimization is achieved through leveraging performant, low-latency OFAs (e.g., MEV-Share) and optimized Chainlink DON reporting. As soon as a Chainlink DON generates a new oracle report, it is sent to the OFA (e.g., Flashbots MEV-Share). Highly performant searchers can generally provide bids on the order of 200ms to a few seconds. The MEV-Share auction closes 3 seconds before a new block is generated, after which the winning bid is bundled and forwarded to builders. On faster chains (Arbitrum, Base), the auction will run for a few seconds to maximize searcher participation before closing the auction.
1i) Auction Participation & Incentive Design:
Chainlink SVR is able to facilitate wide participation by searchers by leveraging open OFAs with existing searcher bases (e.g., MEV-Share). The open, competitive nature of established OFAs naturally mitigate concentration risks through a permissionless bidding process. The primary incentive for searchers is the OEV opportunity itself and guaranteed bundled execution. No additional Chainlink-provided rebates are currently being provided. In the pilot period, we’ve seen 8 unique searchers win bids, and confirmed with 6 more that they are onboarded and actively searching for opportunities.
1j) Cross-Chain Operations:
Each chain has a unique OEV landscape due to factors such as DEX liquidity, active searchers on the chain, and mechanics around providing ordering guarantees. SVR maximizes ordering guarantees and recapture rates on each chain by operating natively and keeping the auction mechanics modular. SVR can operate natively on each chain that Chainlink Data Feeds operate on. Currently, SVR is live in production on Ethereum mainnet, providing OEV recapture for the Aave protocol. Support for Base is planned within the next few weeks, while Polygon, and Arbitrum are also high priority for integration and expected within the next few months. Optimism, Mantle, Scroll and Linea are expected to follow shortly after.
1k) Market Support & Asset Readiness:
Chainlink provides Data Feeds for all assets on all chains we are proposing SVR to be integrated. Once SVR is deployed on a chain, the process to deploy an SVR feed takes the same amount of time as a normal Chainlink Data Feed.
1l) Emergency Controls:
SVR has a built in fallback mechanism that brings the SVR feed in line with the normal feed fed through the public mempool after a predefined amount of seconds. This helps ensure that even in the worst case scenario the SVR feed will trail the normal one by a set amount of seconds.
Separately, Chainlink Labs can collaborate with the Compound DAO to create a guardian contract that can swap from the SVR proxy to the normal proxy instantly based on e.g. a multisig transaction by the governance guardian.
to be continued in next post…