Oval, OEV Tool by UMA Co-Founder, Rises Over 2.5x in 5 Days
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Oval, OEV Tool by UMA Co-Founder, Rises Over 2.5x in 5 Days
Oval operates on the Ethereum mainnet, enabling protocols to capture OEV (Oracle Extractable Value) as a revenue stream and contributing to the sustainable development of DeFi.
Navigating Web3 tides with focused insightsAuthor: Hart Lambur, Co-founder of UMA
Translation: Jinse Finance xiaozou
Note: Recently, after UMA announced on January 17 the upcoming launch of Oval, a tool to extract value from oracles, its price surged over 2.5x within just five days. On January 23, UMA officially launched Oval on the Ethereum mainnet. Hart Lambur, co-founder of UMA, published an in-depth article explaining Oval.
Key points:
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Oracle Extractable Value (OEV), a form of MEV, is created when price updates from lending protocols trigger liquidations.
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Lending protocols have lost hundreds of millions of dollars in OEV.
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Oval runs on the Ethereum mainnet and enables protocols to capture this OEV as a source of yield, contributing to the sustainability of DeFi.
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Oval achieves this by wrapping Chainlink price updates and auctioning OEV via Flashbots’ MEV-Share.
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Oval leverages the proven infrastructure of Chainlink and Flashbots to minimize integration costs and trust assumptions.
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Oval requires no code changes for integration and can capture up to 90% of oracle MEV.
On January 23, 2024, UMA launched Oval—its Oracle Value Aggregation Layer—on the Ethereum mainnet. Oval generates yield for lending protocols by capturing a type of MEV known as OEV (Oracle Extractable Value).
Leading DeFi protocols on Ethereum generate hundreds of millions of dollars in OEV annually. Aave and Compound have each generated well over $100 million in OEV since their inception. This value has been lost to the MEV supply chain, providing no benefit to the protocols themselves.
Oval is not an oracle. Oval is a mechanism that integrates with lending protocols to recapture value generated during Chainlink price updates.
Oval wraps existing Chainlink Data Feeds. To extract OEV, searchers must participate in order flow auctions on Flashbots' MEV-Share, with auction proceeds flowing back to the protocol.
Oval redirects up to 90% of OEV back to the originating protocols. By recapturing this yield, Oval can make DeFi protocols and oracle infrastructure more sustainable.
1. What is Oracle Extractable Value (OEV)?
Oracle Extractable Value (OEV) is a form of MEV created when a protocol receives updated prices from an oracle.
Take a lending protocol like Aave: Aave markets can generate OEV through price updates from Chainlink Data Feeds, which expose over-leveraged positions to liquidation. To ensure smooth operation, liquidators can earn risk-free profits by quickly closing these positions.
Lending protocols offer substantial liquidation bonuses to ensure collateral is sold quickly, allowing anyone (known as a "searcher" in MEV terminology) to repay debt and claim collateral at a discount. For example, Aave offers liquidation discounts of 5–10%. These discounts must be large enough to guarantee rapid asset sales even under extreme volatility.
This liquidation discount represents the theoretical maximum OEV, and Oval is capable of capturing 90% of it.
Robert Leshner, CEO of Superstate, said: "MEV protection, especially MEV capture, is at the frontier of Ethereum research. Personally, I'm excited to see UMA collaborating with Chainlink and Flashbots to capture the hundreds of millions in MEV flowing out of lending protocols. I'm also thrilled that Oval promises to open up new revenue streams for DeFi protocols."
To earn liquidation fees, MEV searchers compete by offering high "bribes" to block builders to include their transactions in blocks. Block builders then pay a significant portion of this value to block proposers to get transactions onto the blockchain. All parties profit handsomely from OEV, yet contribute nothing back to the protocols that created the value.
2. How Oval Works
Oval captures OEV by wrapping Chainlink price updates and aggregating searcher participation through auctions. These auctions use MEV-Share, an order flow auction protocol operated by Flashbots.
Oval attaches repayment instructions to searchers' data bundles, requiring any excess value to be returned to the protocol. Without Oval, this excess value would be lost. We estimate Oval can reclaim hundreds of millions in value.
As a safety measure, if there are any delays related to Oval or MEV-Share, Chainlink prices will automatically publish directly. This ensures fast liquidations continue uninterrupted.
3. At the Frontier of MEV Research
Oval was built through close collaboration between the UMA team and the Flashbots team, leveraging MEV-Share’s existing order flow auction infrastructure.
Flashbots estimates that since Ethereum's major merge in September 2022, over 415,000 ETH in value has been extracted. Within the MEV supply chain, this value is taken from protocols and unsuspecting users, with most flowing into the pockets of Ethereum block builders and validators. This is exactly the status quo we aim to change.
As an MEV capture tool, Oval disrupts the MEV supply chain and returns up to 90% of the OEV extracted from lending protocols back to them as revenue.
By doing so, Oval enables protocols to create new revenue streams and opens possibilities for novel mechanism designs and business models in DeFi.
"At Flashbots, we've long believed that dapps can greatly limit the amount of MEV they're exposed to," said Hasu, Strategy Lead at Flashbots. "The key insight is that protocols shouldn't blindly broadcast transactions to the public mempool, but instead should auction the right to execute those transactions to a competitive market of searchers. Oval embodies this insight, ultimately returning OEV to DeFi protocols and their users. We look forward to supporting them in this journey."
4. Safety First
Oval is designed to introduce no additional risk to the underlying infrastructure of Chainlink Data Feeds. To ensure this, Oval has been audited by OpenZeppelin.
Since Oval uses Chainlink Data Feeds, blue-chip protocols integrating this solution can continue to receive prices from the most widely used oracle provider in DeFi.
Oval also benefits from the same bounty program that covers all audited UMA contracts, including those behind the UMA Optimistic Oracle, oSnap, and Across Bridge.
Tarun Chitra, CEO of Gauntlet, said: "Oval presents a highly compelling value proposition for major protocols like Aave—simply updating a contract address allows them to start earning significant MEV revenue they otherwise wouldn’t capture. Gauntlet is proud to work with leading DeFi protocols such as Aave and Compound, and we’re eager to see how Oval creates additional revenue streams for their products."
5. How to Integrate
At the contract level, Oval operates identically to Chainlink Data Feeds, delivering Chainlink prices to protocols with zero impact on end-user experience.
Existing protocols can easily integrate Oval through a simple governance vote. No code changes are required.
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