Summary
UMA presents Oval as a tool for recapturing Oracle Extractable Value (OEV), a subset of Miner Extractable Value (MEV), for Compound DAO’s consideration and discussion. Implementing Oval could help Compound recover significant OEV currently lost during liquidations. We estimate Oval could have generated $6.3M in returns year-to-date on Ethereum mainnet Comets. Oval is compatible with major Layer 1 price feeds like Chainlink and RedStone, and does not require any changes to Compound’s existing smart contract code.
The OEV Opportunity
Compound incentivizes liquidations by offering liquidators a 5-20% liquidation incentive. This high incentive ensures quick liquidations, though it leads to inefficiencies. When oracle price updates trigger new liquidation opportunities, liquidators compete by bidding to secure these opportunities, resulting in substantial value lost to OEV.
Our research indicates that typical liquidations pay up to 99% of the liquidation incentive as OEV. To date, approximately $100M in Compound liquidation incentives on Ethereum mainnet have been lost to OEV, benefiting neither Compound nor its users. This presents an opportunity for Compound to enhance efficiency by capturing this value.
Oval’s Solution
Oval can recapture up to 90% of the OEV lost in Ethereum mainnet liquidations. This would have amounted to approximately $6.3M year-to-date. For context, if Compound chose to use these funds to increase Ethereum mainnet COMP rewards, this could double the current rate for a whole year.
Oval achieves this by auctioning new price data on oracle price feeds (e.g., Chainlink or Redstone). Liquidators bid for the first access to these new prices and the associated liquidation opportunities, allowing Compound to reclaim the liquidation incentives. If no bids are made, the price is released post-auction.
Oval’s order flow auction is built on top of Flashbot’s MEV-Share which is industry leading MEV infrastructure that is already used to produce around 90% of Ethereum mainnet blocks. Liquidators (or MEV “searchers”) submit their liquidation transactions along with their bids to the Oval Node which appends a permissioned price unlocking transaction and passes the bundle on to MEV-Share. The winning bundle is included in the next block and the new price is unlocked, the winning liquidator executes the liquidation, and the bid amount is paid to Compound.
Importantly, Oval’s integration does not negatively impact borrowers, who continue to pay the same liquidation penalties. The OEV recaptured by Oval is excess value that would otherwise go to block proposers.
Security
Oval uses off-chain components, but the on-chain smart contracts limit any risk. They ensure that prices can only be delayed by a pre-configured auction period (1 or 2 blocks), after which liquidations proceed as usual. If the offchain infrastructure is down or no liquidators bid through Oval, the new price is still released and liquidations continue as per normal after the auction period. Oval’s contracts have no ability to alter oracle price data. Oval smart contracts are audited by Open Zeppelin, and Oval has a $1M bug bounty.
Liquidator Integration
Liquidations on Oval are completely permissionless and were designed in consultation with liquidators to be easy to implement into existing liquidation bots. Liquidators only need to add the Oval Node RPC to their list of block builders. For detailed guidance, see our liquidator documentation.
Compound Integration
Integrating Oval is straightforward, requiring only a governance vote to update the price feed address in Compound’s smart contracts. No code changes are necessary.
Oval’s Performance
Oval has been implemented on 3 Morpho markets to date with a combined TVL of $8M. There have been a total of 24 liquidations during the lifetime of the Oval markets with some being funded by the UMA team to onboard and incentivize initial liquidator adoption. Some of the initial liquidations were not captured within Oval’s auction window as the markets were small and liquidators began onboarding.
Over the last two months, 14 of 17 liquidations have been executed within the Oval auction window and returned OEV to Morpho users. All of the 14 captured liquidations occurred within the same block as the price update introducing no delay. Critically the 3 liquidations that did not occur within the auction window were still executed afterwards and had no detrimental effect on the market. On captured liquidations, Oval has returned 37% of the liquidation bonuses paid to liquidators.
Oval’s performance to date proves it can safely and effectively recapture OEV on liquidations. The UMA team is continually monitoring Oval’s performance and working with liquidators to improve it. We expect both the rate of liquidations captured by Oval and the percentage of liquidation penalties captured to be over 90% as liquidator adoption continues to grow and an increased volume of liquidations creates higher liquidator competition driving up the bids required to win liquidations.
Conclusion
Thank you for considering Oval as a solution for Compound’s OEV opportunities. Oval:
- allows Compound to capture OEV with any price feed provider
- has a track record of fast and efficient liquidations
- is easy for existing liquidators to adopt
- utilizes Flashbot’s reliable MEV-Share infrastructure
- ensures high security through on-chain fallbacks, audits, and a bug bounty program
By integrating Oval, Compound can reclaim substantial OEV and enhance its position as a leading DeFi lender. We welcome questions and feedback and plan to incorporate feedback into a future proposal.
Resources
Oval Docs
Oval Performance Dune Dashboard
UMA Medium post: What is OEV?