UMA's Value Capture
MEV Money! UMA has gone meteoric over the past 5 days, gaining 190% off its Oval announcement last Thursday. Why has the UMA token rapidly repriced?
When discussing MEV, we are typically talking about toxic MEV – like the money generated from a sandwich attack – and how to return this value back to the users performing onchain actions.
While it is possible to prevent this type of user-generated MEV by using a protected RPC endpoint, no method has cracked the task of capturing MEV created by protocols. Each year, lending protocols lose tens of millions of dollars to MEV; Aave alone has bled over $62M to MEV during its lifetime!
Imagine what that could build. 🥚 pic.twitter.com/NRmD9xApQU
— UMA 🥚 (@UMAprotocol) January 19, 2024
Oval promises to become the first MEV capture tool for protocols that taps a unique form of extractable value called Oracle Extractable Value (OEV) and acts as a layer between Chainlink, a predominant provider of oracle price data, and the lending protocols that use this data to inform their liquidations.
Chainlink’s price feed data gets wrapped by Oval in an OEV auction that requires searchers, the actors that bundle up batches of MEV-containing transactions – like liquidations from a lending protocol – and send them to block builders, to pay for the ability to update a lending market’s price to conduct a liquidation.
In the event that liquidations are not processed, likely due to factors like high gas prices, Oval will be disabled and will simply redirect the Chainlink price data to allow liquidations to proceed as normal in order to prevent under-collateralization.
Protocols that implement Oval will be eligible to earn up to 90% of the fee paid by searches to update the Chainlink price data, with the remainder split between Chainlink and UMA to serve as a fee for providing the oracle infrastructure and accessing the MEV capture infrastructure.
Oval is an attractive offering for lending protocols looking to recapture the untapped liquidation MEV they create and could receive widespread use; UMA’s lucrative new revenue stream will proportionally scale with this adoption!