Podcast Summary
Reducing value transferred to MEV bots in DeFi: New mechanisms like Oval from Ooma aim to keep MEV within DeFi ecosystem, potentially improving user products and economic viability of DeFi app layer on Ethereum.
The DeFi market is continuously evolving towards greater capital efficiency and better price discovery, with new mechanisms like Oval from Ooma aiming to reduce the value transferred to MEV bots and keep it within the DeFi ecosystem. This could lead to improved products for users and increased economic viability of the DeFi app layer on Ethereum. The conversation also touched upon the role of MEV share from Flashbots in this context and the eventual retention of MEV value by the source of its creation. Sponsors like Kraken and crypto tax calculator were mentioned to support the show and simplify crypto trading and taxation respectively.
Uniswap mobile wallet: Trade, store, and explore DeFi on the go: Uniswap mobile wallet allows users to trade tokens, buy crypto, store NFTs, and engage with DeFi applications, while oracle updates, like Chainlink, can create Maximally Extractable Value (MEV) for Ethereum validators
The Uniswap mobile wallet offers a convenient and secure way to trade tokens, buy crypto, store NFTs, and explore DeFi on the go. Additionally, the discussion highlighted the significance of oracle updates, specifically Chainlink updates, and their potential to create Maximally Extractable Value (MEV) in DeFi applications. This MEV can be captured by Ethereum validators, leading to potential large profits. It's important to note that this process is similar to how Uniswap transactions with slippage create MEV. Overall, the Uniswap mobile wallet expansion and the exploration of MEV through oracles are key developments in the DeFi space.
MEV from DeFi liquidations: $150M+ from oracle updates: During market volatility, MEV from DeFi liquidations, mainly from oracle updates, can reach $150M+, potentially leading to substantial losses if not addressed.
During times of market volatility and potential liquidations in DeFi, a significant amount of MEV (Maker's Economic Value) is captured, primarily due to price oracle updates, mostly from Chainlink. This MEV is estimated to be around $150 million based on historical data from Avian Compound. The reason why collateral is sold at a discount during liquidations is to ensure the protocol's health and prevent bad debt. If left unchecked, this version of MEV, known as Oracle Attractable Value, could result in substantial losses for the protocol and its users. The discounted sale of collateral is a design choice by the protocol to minimize the risk of internalizing bad debt and to protect the capital managed for various depositors. Failure to address this issue could potentially lead to socialization of losses among token holders and depositors. With the ambition of Ethereum, DeFi, and any chain becoming the world's global financial system, it is crucial to understand and mitigate the potential risks associated with MEV.
Debates on fair and efficient liquidations in DeFi: Compound vs Maker: Compound prioritizes quick liquidations at potentially high costs, while Maker offers slower liquidations with longer warnings and lower collateral requirements but higher volatility asset support. These choices impact collateral requirements and potential centralization in the validator layer.
In the world of decentralized finance (DeFi), there are ongoing debates about how to handle liquidations in a fair and efficient manner. Two popular protocols, Compound and Maker, have different approaches: Compound aims for quick liquidations at potentially high costs, while Maker offers slower liquidations with longer warnings and lower collateral requirements but higher volatility asset support. These differences reflect each protocol's focus on lenders or borrowers. However, these choices come with trade-offs, such as higher collateral requirements for slower liquidations. MEV (Minimum Extractable Value) is another important topic in DeFi, as it refers to the potential profits that privileged parties can extract from other participants due to asymmetries in power or information. In the context of Oracle updates, when liquidations become unlocked, validators can potentially extract different amounts of value from their blocks, leading to possible centralization. While centralization might be acceptable in some systems, it goes against the decentralized ethos of crypto and Ethereum's goal to become the root of trust in the global financial system. Therefore, maintaining a decentralized validator layer is crucial.
Centralization trends in the block building layer: Decentralization challenges in blockchains can lead to infra-level taxation, but higher-level solutions and capturing MEV within apps can help reduce centralization risks and create a more stable infra-level.
The decentralization of blockchains can face challenges at different layers, and current centralization trends in the block building layer are a concern. While techniques like MEV boost have helped keep validator layers decentralized, the block building layer is seeing more centralization. This centralization can lead to infra-level taxation of applications, resulting in a loss of value for users. Higher-level solutions, like those being developed at OVIL, aim to address this issue by allowing applications to retain more value and reducing infra-level volatility. Additionally, capturing MEV within applications can provide a revenue stream and decrease centralization risks. Ultimately, the goal is to create a more stable and dependable infra-level, benefiting both users and developers.
Understanding the Oval Mechanism for Ethereum's Decentralized Finance Ecosystem: The Oval mechanism is a new innovation in Ethereum's DeFi space that aims to capture Oracle-generated MEV and distribute it back to the parties who create it using auctions for fair determination of validator selection.
The Ethereum ecosystem is constantly evolving, with new technologies and business models emerging to increase efficiency and reduce leakage. One such innovation is the Oval mechanism, which aims to capture Oracle-generated MEV (Order Execution Value) and return it to the parties who create it. This mechanism uses auctions to determine which validator gets the first right to use a Chainlink price update for a specific protocol, allowing for a better understanding of the OEV created for that protocol. The ultimate goal is to distribute value back to users and create sustainable business models in the decentralized finance (DeFi) space. It's important to note that the decentralization of Ethereum is crucial for the success of these experiments, and initiatives like Flashbots are working to bring transparency, democratize access, and distribute value back to users in the MEV ecosystem.
New mechanism OVIL helps DeFi protocols get best price during liquidations: OVIL is an opt-in mechanism for lending apps that uses an auction process to determine fair price for collateral during liquidations, ensuring best execution for DeFi protocols
OVIL (Optimistic Value Interpolation Layer) is a new mechanism designed to help DeFi protocols like Aave, Compound, and MakerDAO, ensure they receive the best possible price when selling collateral during liquidations. This is done through an auction process where participants bid for the right to perform the liquidation, with the winning bid becoming the market-clearing price. This system is an opt-in mechanism for lending applications and can be thought of as a bolt-on for Chainlink. It acts as a gate that enforces the auction process for a short period of time before defaulting back to Chainlink. The analogy of Robinhood was used to explain this concept, where instead of just allowing the first high-frequency trader to execute an order, an auction determines a fair price before the trade takes place. This mechanism solves the problem of lending protocols not knowing the fair price of their collateral and helps prevent suboptimal execution. By using market forces and competition to precisely set the liquidation bonus to the market-clearing price, OVIL functions as a best execution module for lending protocols.
Determining Fees and Slippage Tolerances in DeFi Systems: Order flow auctions and off-chain actors help set correct fees and slippage tolerances in DeFi systems, improving efficiency in lending markets and enabling new features for users.
In decentralized finance (DeFi) systems, setting transaction fees and slippage tolerances in the context of order contests can be challenging and interconnected issues. Regular transactions can be parameterized based on historical fees, but in contested situations, the correct fee and slippage tolerance become difficult to determine. Order flow auctions (OFAs) come into play as they provide real-time oracle information on the correct fee to set, considering both transaction fees and slippage tolerances. Additionally, off-chain actors, such as liquidators, can leverage market forces to determine the best price for users, allowing DeFi applications to access valuable market information. This results in more efficient use of collateral in lending markets like Aave, enabling the onboarding of new collateral and adding new features, leading to increased revenue and a better product for users.
Mantle's New Offerings: Mantle Network and Grants for Aave and TOKU: Mantle introduces Mantle Network, an Ethereum layer 2, and grants for Aave and TOKU to support collateral types and simplify token management while Celo explores Ethereum as a layer 2 solution and MEV share offers customizable order flow auctions.
Mantle, a DAO-led web 3 ecosystem, is expanding its offerings with the Mantle network, a new Ethereum layer 2 built using OP stack and Eigenlayer's data availability solution. Mantle aims to support more collateral types and make Aave more efficient by offering grants to promising projects. TOKU, on the other hand, simplifies token grant management for teams dealing with legal and tax obligations. Celo, a mobile-first EVM compatible blockchain, is exploring Ethereum as a layer 2 solution to bring advantages like low gas fees and decentralized sequencer. MEV share, used by some systems in the background, is an order flow auction protocol that allows customization in terms of privacy and information revelation to avoid front-running.
MEV: From Problem to Tool in Decentralized Finance: MEV nodes collect and match orders, leading to efficient markets and quick price discovery, while the distribution of surplus value is decentralized and not controlled by a single entity.
MEV (Minimum Extractable Value) is a mechanism in decentralized finance (DeFi) that was initially perceived as a problem leading to suboptimal prices and centralization. However, it has evolved into a tool for creating market clearing forces. MEV nodes collect and match orders from multiple searchers, who submit their entire order books, resulting in efficient markets and quick price discovery. The distribution of surplus value created from these transactions is also a choice that can be made between the MEV node, lending market, Block Builder, or any other specified party. This system, while involving nodes collecting market information, is decentralized as the choice of distribution and the matching of orders is not controlled by a single entity. Instead, it leads to a more efficient and decentralized market.
Decentralizing Order Flow Auctions with Swerve: Swerve is a decentralized platform enabling private computation and decentralized privacy, enabling decentralized execution of code for order flow auctions and eliminating the need to trust centralized parties, paving the way for decentralized block building and order flow auctions.
Swerve is a decentralized platform that aims to unlock new capabilities in crypto and MEV by introducing a new virtual machine for private computation and decentralized privacy. Swerve enables the decentralized execution of code, previously only possible on centralized servers, and enables private smart contracts. For instance, it can be applied to order flow auctions, which require privacy and off-chain computation. MEV share node, a centralized actor in the system, can benefit from Swerve by running the same code on the decentralized network instead of a centralized server, eliminating the need to trust a centralized party to run the code and keep information private. Swerve's architecture minimizes trust assumptions, as the code behind smart contracts is publicly available and executable on the Ethereum network. The potential benefits of Swerve extend beyond MEV share nodes, as it paves the way for decentralized block building and order flow auctions. The trust assumptions introduced by Swave are minimal, as the worst-case scenario for lending protocols is simply not receiving the MEV that they weren't otherwise getting. The Swave design addresses centralization concerns by ensuring that the Ethereum contract on-chain takes precedence over the centralized infrastructure. Overall, Swerve represents a significant step towards decentralizing order flow auctions and unlocking new capabilities in the crypto space.
OVAL: Capturing MEV with Optimistic Virtual Automated Liquidations: OVAL is an optimistic solution for capturing MEV in DeFi, ensuring transactions can proceed even with offline nodes. It functions as a short auction and is a low-risk way for protocols to experiment with MEV capture.
OVAL (Optimistic Virtual Automated Liquidations) is an elegant solution for capturing MEV (Maker Extractable Value) in decentralized finance (DeFi) protocols. It functions as a fail-safe mechanism, ensuring transactions can still go on-chain even if one of the nodes is offline. The system works by inserting a short auction into the protocol, which can be set to any length of time, with 90% of the blocks being mined by builders connected to Mevshare. OVAL doesn't increase the latency of transactions and is a low-risk way for protocols to experiment with MEV capture. Aave is one of the protocols that has made a proposal to adopt OVAL in a limited way, potentially doubling their revenue. Another parallel mechanism is Sorella Labs' Uniswap V4 hook, which aims to address impermanent loss for Uniswap LPs by capturing MEV in a similar way.
Addressing fee and slippage challenges in DEXs with auction mechanisms: Auction mechanisms like Oval and Sorella Labs help mitigate risks and inefficiencies in DEXs by ensuring fair pricing and distributing MEV fairly among stakeholders.
The problem of setting fees and slippage in decentralized exchanges (DEXs) like Uniswap v4 is similar to the Oracle problem, where both users and automated market makers (AMMs) face the challenge of quoting outdated prices due to the nature of AMMs. This issue can lead to arbitrage opportunities, which is a much larger problem than the Oracle problem. To address this, solutions like Oval and Sorella Labs use auction mechanisms to discover the price at which traders should quote to the market, ensuring fairness and efficiency. These solutions also capture the MEV generated and return it to the protocol, ensuring that the value created is distributed fairly among the stakeholders. In essence, these mechanisms aim to mitigate the risks and inefficiencies in decentralized finance (DeFi) markets and promote a more equitable distribution of value.
Addressing Unsustainable Transaction Costs in DeFi: Platforms like Oval pay gas fees to reduce costs for users and retain a share for infrastructure costs, but there are other infrastructure costs beyond Oval that need to be addressed for the sustainability of DeFi.
The DeFi space faces significant transaction costs and the extraction of MEV, which can be unsustainable for some infrastructure providers like Chainlink. To address this issue, a potential business model is for platforms like Oval to pay gas fees and retain a share for infrastructure costs. However, there are other infrastructure costs beyond Oval, including FlashBots, Netshare, Swab, and Oracle providers. For Chainlink, the sustainability of their core product, which supports most of DeFi with freely accessible price feeds, is a concern. In the future, topics for further exploration include how this model applies to layer 2 solutions, the efficiency of MEV on decentralized exchanges, and the potential for auction structures to price trades. In a year, it would be interesting to assess the amount of MEV still being leaked at the application layer and the adoption of auction-like structures in the decentralized finance and layer 2 spaces.
Exploring the Future of DeFi with Ooma: Ooma discusses the potential for interoperability and innovation in DeFi, highlighting the possibilities for new applications and uses. Remember, crypto and DeFi are risky but rewarding.
Learning from this conversation with Hart Lambur and Hazu Nawaz of Ooma is the potential for continued innovation and growth in the DeFi (Decentralized Finance) space. They discussed the possibilities of interoperability between different DeFi platforms and the potential for new applications and uses. Hart mentioned that it will be interesting to see how these platforms evolve and differ from each other. For those interested in learning more about Oval, an Ooma product, they can visit ooma.xyz and follow Ooma Protocol on Twitter. It's important to remember that crypto and DeFi are still risky ventures, but the potential rewards are significant. As we continue on this "Bankless Journey," it's important to stay informed and be prepared for the challenges and opportunities that come with this new frontier. As always, Bankless Nation, be wise and be cautious.
