Title: Oval Pilot Program on YFI-crvUSD Silo
Authors: Lee @ UMA with review by aiham.eth
Simple Summary
This proposal seeks to implement Oval into the YFI-crvUSD Silo market as a pilot program. Oval will enable SiloDAO to recapture liquidation MEV that is currently lost to block builders and proposers. After evaluating Oval’s effectiveness, Silo can consider whether to enable Oval on other markets.
Abstract:
This proposal seeks to implement Oval into the YFI-crvUSD Silo market as a pilot program.
Oval is a liquidation MEV recapture tool composed of 2 parts:
- A simple, audited smart contract that wraps the Chainlink price feed Silo currently uses. This contract wrapper can not change or delay the price feed data. It only allows for new prices that create liquidation opportunities to be auctioned off to liquidators.
- Offchain infrastructure that executes the auction. This is built on top of Flashbot’s MEV-Share which is a trusted MEV infrastructure leader.
Integrating Oval will allow Silo to recapture a portion of the MEV that is currently being lost on liquidations. SiloDAO can decide what to do with their portion of the recaptured MEV (ie. return to liquidated parties, DAO revenue).
The YFI-crvUSD market has been chosen as it uses a Chainlink price feed. Oval already has pre-written and audited Chainlink adaptors, so there will be no code changes required to Silo smart contracts. The integration process is simple and will require minimal developer time from the Silo team. This pilot program will allow Silo to evaluate the effectiveness and potential scalability of Oval for broader application within its markets.
Motivation:
When a liquidation occurs on Silo (and most other lending protocols), the liquidated user is charged a liquidation fee. These fees go to the 3rd party liquidator and ensure that it is profitable for liquidations to occur in market conditions that are unfavorable to liquidators. However, this often overpays for the liquidation. In these scenarios, liquidators participate in MEV by competitively bidding in an auction for first access to the profitable liquidation. The ultimate beneficiary of this is block proposers who can take up to 90% of the Liquidation Fee.
By integrating Oval, Silo can run a similar competitive auction where they are the main beneficiaries, thereby recapturing the value that would have gone to the block proposer through MEV. SiloDAO is then free to decide what to do with their portion of the recaptured MEV (ie. return to liquidated parties, DAO revenue).
Specification & Rationale:
What is Oval?
Oval enables liquidation MEV capture by wrapping Chainlink price updates as they are pushed onchain so that MEV cannot be extracted without the consent of the protocol.
With Oval, when searchers perform a liquidation on Silo an order flow auction is triggered using Flashbots’ MEV Share—a trusted tool that allows MEV searchers to compete for MEV extraction offchain.
To extract the liquidation MEV created by an update, searchers must submit a winning bid, most of which is paid to the protocol as revenue. The winner of the auction gets the right to backrun the oracle update transaction—performing the liquidation by adding their transaction to the block immediately after the price update.
If no bid is received by the end of the auction window, the Chainlink price is automatically released and Silo liquidations function as normal. This approach utilizes the solid foundation of Chainlink price feeds and MEV-Share to extract MEV from liquidations. Oval is applicable to all markets within Silo that employ Chainlink price feeds.
The diagram below showcases, at a high level, a comparison between current liquidations and liquidations with Oval.
Chainlink & Oval
Oval is not an oracle, and it does not replace Chainlink.
- Using Oval means still using Chainlink price feeds. Oval wraps incoming prices from Chainlink, shielding them from MEV searchers.
- The Oval contract will use the Chainlink price feed and initiate an auction for the MEV searchers to bid for access to liquidations.
- No additional pricing logic is inserted.
- If no one participates in the auction, the price update will be released after 12 seconds (1 block).
Implementation
Deploying Oval requires two simple steps:
- Deploy Silo’s own instance of the Oval smart contracts for the YFI-crvUSD market (UMA is happy to assist with this).
- Update the YFI-crvUSD market’s oracle address from the Chainlink price feed to the Oval smart contract that points to the same Chainlink price feed.
We recommend that Silo receives their Oval revenue to the SiloDAO treasury or a DAO controlled multi-sig for the pilot program. After the pilot program, the DAO can decide how these funds should be handled and develop a smart contract solution for distributing the funds if desired.
These steps are further detailed in our docs. UMA is committed to providing ongoing support to ensure a successful implementation of Oval.
How Oval Works
Integrating Oval requires no code revisions to Silo smart contracts. Currently, Silo smart contracts receive price data directly from Chainlink price feeds. To integrate Oval, Silo would instead receive Chainlink price data through Oval smart contracts. It’s crucial to note that Oval cannot modify Chainlink price data in any way. The only function of Oval smart contracts is to temporarily lock the latest Chainlink price from Silo so it can be auctioned off to MEV searchers. The steps below outline the basic Oval flow and how it integrates with Chainlink and MEV-share. Please see the docs page here for more info on this flow:
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Chainlink price update is released to the public Ethereum mempool.
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Searchers see this update and submit liquidation bundles to the Oval Node to backrun the update and perform a liquidation.
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The Oval Node creates a transaction that unlocks the newest price (unlockLatestValue). This unlock transaction is added to the searcher bundle along with refund instructions and forwarded to MEV-share. This is done for each searcher bundle sent to the Oval node.
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MEV-share forwards all bundles to all connected builders; this includes all the main block builders. The builders run a standard Flashbots auction, selecting the winning bundle based on the builder payment. Because of the refund instructions, the builder is required to refund most of this payment to the protocol (Silo).
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The refund will be directed to a multi-sig controlled by SiloDAO stakeholders & UMA.
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The winning bundle is selected by the builder and is sent within the proposed block to the proposer.
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The proposer appends the block to the Ethereum chain. The relevant parts of this block execute the following actions, in this order:
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Oval unlock transaction
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Winning searcher bundle (may include Chainlink price update)
Note: Step 4 is dependent on the Chainlink price update being included in a block that is built using mev-boost (90% of proposers use mev-boost). If not, the unlockLatestValue transaction will not be included in the same block and the new price will be available for anyone to use without going through the Oval auction and the MEV recapture will be missed. Alternatively the auction length can be increased to multiple blocks. This decreases the chance that OVal MEV recapture is missed due to a proposer not using mev-boost, but extends the maximum possible price delay if there is no auction winner.
Security
- To ensure the security of this system, Oval has completed an audit by Open Zeppelin and has an additional security bounty of up to $1M for any vulnerabilities that are identified.
- UMA has worked closely with Flashbots to develop Oval. Flashbots has updated the MEV-Share design to add support for Oval.
Benefits (Pros):
Oval allows Silo to capture the majority of this MEV as revenue and requires no smart contract code changes to integrate. The revenue earned from Oval can be used by SiloDAO in various ways.
Downside (Cons):
Integrating Oval will cause a minor increase in gas costs for transactions that read the oracle price (borrow and liquidation).This is estimated to be an increase of less than 4%. For more info please refer to our docs.
Voting:
Yes: Integrate Oval into the YFI-crvUSD Silo Market
No: Do not Integrate Oval into the YFI-crvUSD Silo Market