Hey folks, I’ve written a couple of articles in the past couple of weeks about a potential partnership with UMA and Chainlink, speculating what they could be cooking together in order to revolutionize the DeFi space. Earlier today, they finally announced some details of what that partnership will entail— a project called “Oval” — which is expected to officially launch next week:
In a nutshell, what’s been revealed so far is that Oval will help recoup lost funds that are lost through MEV-related liquidations. I’ve written in the past about MEV in regards to sandwich attacks, but MEV also plays a significant role in liquidations, and the profits can potentially generate millions.
Here’s a simple example:
1/ Paul supplies 10 $ETH on AAVE
2/ Because he’s a degen, Paul decides to borrow about 5 $ETH’s worth in $USDC. Initially he has a decent “health factor” of 2.0, which indicates he is overcollateralized on his position.
3/ The market takes a significant downturn and now Paul’s health factor falls to 0.99 — a very unhealthy position:
4/ Brittany, an excellent MEV liquidation searcher, sees that Paul’s health factor has fallen below 1.0, and because she’s quick on the trigger, she executes a smart contract to liquidate Paul.
5/ Lending protocols like Aave provide a bonus ( which on Aave it’s a fixed 5%) to the liquidator when they repay up to 50% of the loan’s borrowed amount. In Brittany’s case, she would get a bonus of 0.125 worth of $ETH for repaying half of Paul’s borrowed 2.5 $ETH.
At today’s prices, 0.125 worth of $ETH is roughly worth $300 dollars, and for the liquidator, this amount was made relatively risk free. This might not seem like a whole lot, however if we scale this up a bit searchers could potentially make millions of dollars if not more, just like they did just this past week over the course of only 14 different transactions:
Where Oval comes in…
Although the full details haven’t been released yet, what Oval is projected to do is to be able to recapture up to potentially 90% of the profits made from searchers like Brittney as they execute these liquidations.
In a partnership with Chainlink, as an updated price gets released on-chain that would cause a liquidation, MEV searchers will pay bribes to Oval to essentially get liquidation-access-rights for an unhealthy position — bribes that can go back either to the protocol and/or Oval. In other words, depending on how the bidding goes, the revenue generated from MEV liquidations now have the potential to be shared between the liquidation and the protocol, not just the liquidator.
Conclusion & Next steps
From what I’ve gathered, not only can Oval potentially generate a lot of revenue from MEV bots, but the idea of MEV-revenue sharing might be a piece of new tech that could revolutionize borrow-lending models across all of DeFi.
Although it’s unclear of what exactly the terms of this revenue-sharing model will look like, what is clear is that the UMA team already has some significant integrations lined up, and that they’ll be “big ones”:
If you’re keen to find what’s next, I highly recommend that you hop over to UMA’s discord to join in on the discussion, and to follow them on their socials, because really…these eggs are about to crack wide open.
As always, thanks for taking the time to read this and be sure to follow me on twitter (https://twitter.com/CryptosWith) to get all my latest updates. Also, looking for a gift for your Crypto-loving/hating friend? Give them a REKT journal to cheer them up!
Disclaimer: And as a final reminder, this is not financial advice and this is for educational and entertainment purposes only. Please as always, do your own research and find what investments are best for you. Cheers everyone!