DeFi by Design EP#125: Onchain MEV in DeFi Lending Markets Explained

Transcript

welcome back to the rollup High Roller Community as always nothing on the rollup is to be construed as Financial advice we are just an Educators in the defi space toss us a quick like give us a share a repost send it to a friend who may want to watch this and finally give us a sub or a follow it means the world to help support credibly neutral educational content in def5 we're here to educate Empower and enrich you and let's jump in welcome to D5 by Design we talk all things blockchain and cryptocurrency while striving to educate Empower and enrich what's going on guys welcome back to the def5 BL design podcast in the world of modular me and great Vibes we

have our lovely peeps from Uma Rob and I been long-term supporters remember messing around on defi summer and Uma was there so that was that was a sign of the ogus of of Hart and Chris and a really cool product launch recently so without much further Ado um would love to just get a quick uh kind of intro from Chris I know you're a bit uh kind of new to the to the rollup and then let's just Dive Right In sure yeah hey guys thanks for having us on so I'm Chris I work at Uma have been here for about four years just over four years now uh was on the engineering team for most of that time ran part of the team for just over a year and in the last six

months I've been in like a research capacity where I'm specific looking at the intersect between me intents and oracles and how this plays out into the future and have been involved in designing the oal system which we've watched Pretty recently fantastic so what are we like a week post launch now um yeah something like those you see out dude I I actually forgot for a second that it was four full years I've been working with Chris holy [ __ ] that's a long time and um yeah um oh man uh I'm feeling great um guys this has been it's been a cool launch and it's like we um we caught a narrative that I think is

pretty uh well it was by Design we think this Meb capture narrative is real um but we should of course give your your viewers an overview what oal is but I'm I'm really pumped about it and pumped about where this this could go uh yeah and I guess just for background right I'm hard I I cop onoma and across um I've talked with you guys for a while I've been a big big longtime supporter of the rollup um and what you guys have been doing uh young hungry let's figure out this crypto thing do it together do some fun podcasts um let's have some fun um so yeah I guess I'll give a like two second overview of what oval is yeah at a real high level and then like leave it

to you guys to poke and prod um and steer a conversation um uh but oal uh it stands for Oracle value aggregation layer that's how we came with the name uh we have these fun egg emojis floating around uh as our our icon which I thought was idiotic and people seem to like so hey let's go for it uh I'm I'm not good at marketing uh the idea for oal is that Oracle price updates uh from products like chain link leak me we can talk about why that is and how that happens they me on the order of 100 million bucks a year something like that can also talk about how we estimate that

number and that 100 million bucks a year is going to ethereum validators who don't really need it uh so oal is a a Meb capture tool specifically an oracle meev capture Tool uh that can be used by anyone using chain link price feeds today and can actually capture that 100 million bucks order of magnitude of Mev and redirect it back to the protocol um and to chain link itself too um I will point out that oal is not an oracle we don't provide price feeds at all it's purely Meb capture and it's built on top of chain link using chain link price feeds let you guys take it from there so let's just put this in Practical terms

I'm a DJ on a I've got my my whale siiz position of $10,000 of e and I've borrowed 9,000 or sorry I brought about 7,300 pushing the LTV at like 8 % really close there so my health factors at about 1.1 um or maybe a little less all of a sudden e takes a nose dive boom a liquidates me I believe they take 5% on each positions um and in this current state there's some sort of uh price update from chain link which uh typically comes from an aggregation of centralized exchanges that tells OB that the price of eth is you know now down 10% so this user is basically underwater um some bot or some sort of liquidation

engine kind of comes in and repays my my debt and captures that 5% um but what where where oval comes in is in that process of the of the price feed in that liquidation so kind of walk us through the like the uh the the technicality of kind of that of where I I kind of misstepped there and you know where oval comes into that equation yeah and that's a that's like a perfect t here for the to talk about the Ned supply chain and kind of how oal fits within the supply chain so in the example you were giving now you have this chain link price that hits the public ethereum mle uh everyone can see that it's there right it's kind of pending until it's included in a

block which optimistically will take you know sub 12 seconds from when it gets the mle to look included but it could be a bit longer um and at that point the way that the supply chain is structured today is that you have Searchers seeing that this update is going to catalyze at liquidation right like everyone can agree that uh the price of e going from whatever 2,400 to 2,200 creates enough of a Delta that that position is underwater and that's going to create this like sort of risk-free opportunity on the table that anyone can take so what happens today is that you have Searchers bidding to back run that update so back run in this context means that they want their transaction to be placed immediately

behind the update so you what what the searcher is chain link update lands on chain and behind that update is their transaction so they can be the first to use this new price so the venue in which these bits happen today is within like the meev uh infrastructure along the me supply chain so Searchers are submitting bids to builders and these Builders then run an option where they basically choose the bid that pays them the most uh to actually back run this Oracle update so you'll have yeah a bundle constructed by a Searcher that in the first slot in the bundle is the chain link update followed by their liquidation and the the Builder is going to choose the bid that that pays them the most um the builder then pays that

Revenue to the validator right that effectively all of the value flows to the validator in this aution uh and how like builders make money is kind of unrelated here but for the the context of information that's like universally known by all Builders uh it's pretty fair to assume that all that value flows to the ballot so the Searcher is effectively the validator for the right to background this chain link update um and when we talk about like how much money you can make and how much is lost here the way we we think about this is basically what that liquidation bonus is right the thing that you mentioned at that's like 5% threshold so the way to think about that is like a is effectively selling the dured debt to the Liquidator at a discount right so

they're they're letting the Liquidator repay this ad debt and giving them the collateral at a 5 % like better price than what they could on Unis swap so the Liquidator is going to liquidate that position just walk away with 5% so the way oval works and the way we fit along the supply chain is we effectively insert an auction that Searchers need to now bid on to actually uh have the right to backround that Oracle update and instead of all of the value flowing to the Builder and then sort of indirectly to the validator this special option captures that value and then kicks it back to the protocol that created the value in the first place and the way we've done this is by leveraging me share so me share is a tool built by

flash Bots and me protect is built on me share which is like uh FL or yeah me protect which is Flash bot's uh like me recapture tool that users can can use so the way that this works is like you would connect your wallet to it and when you submit a swap on on Unis swap or whatever you would actually get refunds for me associated with back Rons right so like the uni swap swap you would get a kickback so what we've done with oval is basically built a version of that product but for the protocal by leveraging this existing tool l so we run this the special auction that lets you bid to background and we capture like up to 90% of that Meed that would have gone to the validator now goes to the protocol um we can go a lot deeper

but I think I'll I'll stop there and we can kind of see the supply chain before and after effectively has this like extra block being inserted which we create the special auction to to capture that excess value and then redirect it to the protocol rather than to the validator got it I guess so um yeah if I were just summarize in one second guys Andy you you had this 5 per number and one really kind of conceptually simple way to think about it is all a cares about is selling bad debt they just need to sell it they just need to make that happen so they pick a really large discount to sell it at and they hardcoded to 5% to the chain link update and what ob's basically doing is it's

running an auction to actually price what that discount should be at the market clearing price so this is kind of like the finance guy explanation from it so we're saying hey we're selling debt now and conceptually what's happening is what is it going to cost to sell this debt at a discount and it's not 5% it's always less than 5% ob's never had a failed liquidation its history so it might be like 1% or 0.5% or it might be nothing right and oval runs an auction captures that money puts a market price on where we should sell this collateral and that that money gets redirected back to the protocol right and you're saying there's

enough liquidable value for this to equate to hundreds of millions or you know a lot of money at stake here yeah like very simply if so it depends on how many liquidations there are right so the more liquidations the more money is getting lost this way so basically every time there's a liquidation a and compound are selling collateral too cheap um and so if we look at their liquidations if there's a billion dollars of liquidations which there approximately is right you know well I think on OB the 500 million a year something like that it depends on the Year we're looking at um for 500 million of uh of liquidations a 10% liquidation bonus that's 50

million bucks of excess value that's being paid away and that just goes to additional ethereum validators who get that's like that's like when you like for example when you go on staking rewards and choose your validator stake your eth you can basically choose me I want me or I don't want me blocks effectively um and so this is this is kind of part of of the extra yield that you know those stakers would would receive as part of being validator which does participate in collecting me and you're saying well why why should they get that why why shouldn't there be a a more equitable distribution of this or at the very least a more profitable distribution of this to um you know those who can create

a better solution yeah and there is an important point there right it's not like this money is just made up out of th air it like does exist it's going to the ethereum sers today however there's generally Broad consensus that like those guys don't need the money they're already getting paid their ethereum stake rewards and we don't need that excess money to secure ethereum it's basically like they're getting paid extra for staking ethereum that isn't needed and isn't actually factored into like the economics of the ethereum protocol so uh viewers on your on the podcast are going to listen and be like well I'm a sneaker so I get less money and the answer is like yeah you would I mean in the scheme of all your rewards

it's very small um but uh it's a much more efficient use of that money for it to go back to the protocol and for it to go to like chain link chain link should get paid for their Oracle price Source here too um and yeah OB want to take what that'll be we'll figure out but it's more efficient for it to go back to the protocol go back to chain link um and make the protocol more uh sustainable and actually guys maybe later on we can talk about how Med capture and maybe cap kind of opens up a new type of like business model for some of these protocols too does indeed and and I I saw you guys get some Flack for trying to make money in crypto would you look

at that trying to create a project which actually makes money and you are just just banned from the timeline but on a more um important I guess philosophical and um like programmable level um the and heart we spoke about this quite a while ago which was um something that you know that you guys were pondering which was um in the oval infrastructure when these uh price feeds come in um you know there there's a bit of concern from some um meev players whether because they are directly affected by this in their business model or because they're actually ideologically concerned about the centralization risks of sort of this um oev capture tool um now honestly like

I'm not gigabrain enough to really like understand it all but I I I I understand that there's there's some potential centralization risks to oval how do you kind of like go about this what is the points in which you can kind of refute these risks and perhaps even like start by explaining why these concerns have been brought up and you know um how how you guys are thinking about it so I'll go quick and then Chris can go deeper more technically here um the thing that I want like the way Chris described this is we're auctioning off the right teams to ch Ching price update um the way this happens is we run an auction and right now there is no uh

decentralized way to run that auction and sign a message doesn't exist yet those Technologies are coming and they're kind of cool and quite interesting but there is no decentralized way to do that today um so we are using a pseudo centralized Technology based off of flash Bots Med share which is trusted and does the same thing so we essentially have the same security assumptions as Flash B N share and the same the same centralization risks as the rest of the me supply chain and we're running this centralized auction um pseudo centralized auction and we will own that like there is this point of centralization the point to make very clear is the worst thing that happens here is your price is delayed by

a short parameter and we're talking like three blocks 36 seconds um that's I'll be actually super technically true that's one worse it's not a short I mean it's short but it's I'm not trying to pick it prod two hard but it's it's it can be a yeah well okay so first of all that third that sock thing that is in the 0.01% case so it's extremely rare right we're saying that 90% of the time there's no delay 99% of the time there's like a 12 block delay um it it so this is we're talking about uh low numbers here educ cases here and you have to put this one of the things that I I'm

slightly frustrated by um with this line of critique is um if you understand how these defi lending protocols work this is not a problem right like Jing prices come in every hour right there's just not big moves here so these delays I think uh it's it's one of it's kind of like a little bit of a nerd snipy comment if I'm gonna be a bit spicy uh little bit of a nerd snipy comment where you're like okay wait there's thing it's like well look we thought about this pretty deeply um and trust me this is uh not a concern moreover there's actually some really cool oval is a really cool tool to help

decrease the insolvency risk of these protocols so Andy back to your example we're saying right now there's a 5% discount um that uh your liquidation example uh when there's liquidation out of eth collateral we sell it at 5% discount well let's take a a riskier token um that you want to use that maybe has really big price moves like you might be like okay to keep this protocol safe we actually there could be a worst case where we need a 40% discount or something like that and what oal would let you do is actually you could program it where it'd be like in the worst case it is a 40% discount but because we run this auction we actually efficiently price that discount to whatever the

market C rate is all the time so you could actually increase your liquidation discounts so your worst case scenario you're more protected without actually your average with your average case getting better that did I lose you on not or that kind of make sense nope I it has been a dire problem of lending markets especially across some of the more um aggressive chains of bad debt um and to be able to to create a a permissionless market for this um to to ensure the lack of this problem in the future and be able to to uh offer uh several protocols um compensation as as as per result yeah on the same page so one

thing we could double click on when we talk about centralization here I think is like just comparing what oval's centralization risk looks like versus like the current status quo so when we were talking earlier about like what the current supply chain looks like we spoke about there being an auction where such as Kaki bidding to background updates right like this is still happening so that's happening within like Builders who are doing who are facilitating this option and that centralization risk uh and the way to think about like the sort of security model of that looks basically the same as what it looks like with oval right like the oval auction is actually technically running within the same Builder right we're we're running we're not using a different venue for

the auction right like the me share and like the oval contracts and all of this like what this does is like protects the update and kind of governs who can do the back run but the the Vue for the auction is the same so when we talk about like censorship around blocks within the Builder like all of this stuff remains basically a problem right like a malicious Builder today could choose to do nasty things to someone uh that is trying to do a liquidation now where where it does differ though is that there's always a situation in the standard Mud Supply Chain where like you can submit a vanilla block and and the the proposer might be able to choose like a block that wasn't constructed by by a builder directly right so you you

can always like sort of bypass the Builder if the validator chooses to build a the block and in the case of oval like in this uh construction like or this construction like you're going to have that like three block delay which you wouldn't have today so that's like kind of where it gets kind of nuanced but uh from our perspective like this three block delay is really not like super massively meaningful thing to most money markets um and another thing I'll say that's important to note here is like this value is configurable right like the idea behind this is to say like consider like how long it's going to take probabilistically for you to be able to include a block that was built by a builder that the Searcher was connected to so something like 90% of

ethereum blocks are built by builders that are connected to me sh sh right so me uh boost is connected to 90% of validators and me share the thing we're built on is connected to me boost so about 90% of the validators in the in the ethereum Set uh we have access to submitting these bundles to so the the question really is like how long does it take if you have access to 90% of of blocks to have like a high inclusion delay or sorry let me rephrase that to have a low chance of a long inclusion DeLay So we want to minimize the chance of delays and over a three block period that goes down to like 0.1% chance that you're going to submit to a builder that's not connected so that's kind of like where the logic behind this number

came from is like what seems reasonable here um yeah and in terms of the the markets like the impact this could have on a for example um when you think about like the impact of the price delay it's really like uh you know chain Ling updates every hour or if the price diverges by more than half a percent on E and I think it's like 1% on other feat so there are situations where that's delayed anyways and in sort of this 0.1% of the time you have a three block delay uh it doesn't seem to be like super massively impactful thing for the money market now obviously there's like deeper analysis that needs to be performed exactly on like the Financial Risk that this poses on a money market but I think in conjunction with things like Arc was

proposing like larger liquidation bonuses which kind of increases the the safety tolerance of the protocol around like impact of delays um they constructions that are like equivalently safe if not safer when you introduce like this extra Market mechanism into the into the liation plug personally not a huge fan of uh increased liquidation bonuses I like my uh 5% for DJing hard yeah but Andy what if your 5% was actually the worst case and it never hit there and instead it was like 2% or 1% right and uh your lending markets actually offered other long tail assets that I'm sure Andy you never touch the

really D Genny longtail assets I'm sure that's not something to do but there is a market out there for people that want to get leverage on their D Genny longtail assets and lending markets can't safely include those in many of their designs because they would need to put like an insane liquidation bonus on it and then take that every time which would then be a really shitty experience so we're just saying it's a new tool like um there very clearly like when I zoom out on the thing that I think it's really hard for people I I think even people that um I don't think there's anyone that disagrees with the idea of running an auction for the market clearing price for liquidation makes sense right and that's what we're

doing so just one uh closing thought on just to close that loop as I think Rob's gonna probably take us um another direction is that um if I'm if I'm using a a a pulled lending market like on a or an isolated Market I'm not sure if it's going to change the Dynamics here um and let's say the the current liquidation bonus is 5% on this eth example but I get liquidated and and actually uh in in in this instance um oval's been implemented and are are are you saying that uh like as a user's been liquidated I will have less of a penalty if Loval if oval has been implemented on the on the asset which I'm borrowing or which

I'm lending and then borrowing against or um that the compensation doesn't come back to the user goes back to the protocol so maybe we can get into that conversation about like how how you guys aim to kind of use the use the auction or use the results but just first from use perspective does anything change in an oval implemented Market that's that you you nailed it though it's goes back to the protocol and the protocol can choose what they do with it right so the protocol could say hey let's make liquidation is less painful for users so let's like anything we got from their liquidation will pay back to them um uh or the protocol can say actually let's make like I'm making stuff up here right

but the protocol can say let's make gas fees free for users and all their transactions so that protocols like free to use because it's paid for by liquidations right well they added to insurance so the safety module or whatever it is right right or they they buy and burn their token like return to to token holders right or and they do a combination of all these things um you know in our example where you increase the liquidation bonus to have incre to to to decrease the risk of protocol in the worst case scenario um maybe what you do that is you say hey we pay back most of the liquidation bonus back to got liquidated um but we keep I don't know a third of it and buy and burn tokens so uh the a token for example um

right so the point is it's like another degree of freedom for how people can actually um what the protocol can do and where they want to send this money um but it's money the protocol did not have before so from my perspective um it's it's kind of a no-brainer right people can take this money the protocol can take this money and use it to increase their own revenue or redirect that Revenue back to um the things that they think are important to that community this is a new paradigm because so few crypto applications are generating Revenue these are uh ideas that only a few projects have uh have

considered um and yeah I'd like to keep going in this direction like the the rollup Centric road map that vitalic put out there has like an entire section on mvv it's called The Scourge it's between things between like The Verge and the Splurge or something like that but um one of the things on there Chris you mentioned very briefly which was inclus inclusion lists and that's something that like seems to have a role in the me supply chain the the word inclusion list all like that term also seems like just intuitively a bit

centralized so I'm curious if you could like shed some light on like role that plays in the me supply chain and how oval may impact uh the future of the scourge okay so to be clear I was talking about inclusion rates not inclusion lists uh inclusion lists are a different concept um something that's not really live on Main net today and also not something that we like strictly have designed around or really thought about uh inclusion lists are about being able to avoid censorship of transactions from like validators that uh collude to exclude transaction sets so yeah not not really something we've designed about today it what I meant by inclusion rates here is thinking about like uh given

like how many Builders there are and like what validators are connected to those Builders how long does it take for you to submit a transaction and from it being submitted for it to actually included in a block gotcha and yeah right and and it's those small processes just so our community can kind of really get their head around it's these small little time gaps and processes that occur within the chain almost that like you you would have no idea from from the user perspective but this is where like the majority of this me is or meev is kind of captured from um and and people call it toxic um me and like are are you guys approaching this from like okay we're

trying to solve like this like toxic problem or is it like we're trying to just give like like I I was curious from the first princi was like why you guys decided that this was something that you wanted to approach like was it like is it is it crypto economic is it I'd like what is the like what is the first principles maybe we should have talked about this in the very beginning but like you know what why well okay let's let's just go into this word toxic and where this comes from here yeah um and I don't think there's actually a definition for what is toxic me or what isn't but like from a user perspective no one wants to get their face ripped off like that sucks right I want to do things and I want an expected

behavior um and so where a lot of this toxic meev comes from it's like oh I'm using Unis Swap and I set a 5% slippage went limit um and I do this trade and I lose 5% or I pay my worst possible price but like I look at binance I look at like the US it barely it didn't change like how did I just get my face ripped off there that's toxic that sucks right the sandwiches and that's sandwiches mainly and by the way small segue um what a and like other lending markets are doing it's conceptually equivalent to sending a Unis swap trade with a five to 10% slippage window and they're getting

their faces ripped off by this supply chain so I would argue that it's like kind of toxic um toxic for them uh but Andy now it goes to like okay well we'll all agree that nobody wants that to happen you want users to have expected Behavior right then there becomes a lot of like philosophies here of like should you try to eliminate me and how should you try to eliminate Meb um uh should you capture Meb and how should you try to capture Meb things like this um and I think I wrote on a tweet um I I grew up with like in the reduce reuse recycle concept I don't know if you guys grew up

with this either right um so it's like reduce your waste consumption reuse the things you can and recycle whatever whats over right and um uh so we I don't know that reuse replies here but I think the right philosophical angle I take is sure let's design things to reduce Meb we will not eliminate it there will be Meb right um so we can reduce smart things and we increasingly have better protocol designs better mechanisms that reduce less me but it doesn't get eliminated whatever is left over let's recycle or in this case recapture it and use it to

do useful things um and that's my my take and I think it's cool right like it works so let's do it I think one one thing that like flows nicely from that is around like um and also to in regards to your question like the inspiration or like the context of why we built this is you can build systems that internalize me on their own right like you don't need overall in all situations to capture Meed right you could build other there again from the ground up and you could run an auction in protocol or you could use other system and like a lot of other like Perpetual protocols and money markets like have done this right

they've like Design Systems where they'd either minimized or internalized me like within the protocol so the take that we were saying though is like there's all this money that's like clearly on the table uh with these projects that already have traction and it's like it's a lot more difficult to convince someone like AB to rebuild their protocol from the ground up and then migrate all their users if there's this sort of like modular component that we can slap on the SL on the side uh that kind of doesn't add meaningful risk but just creates new cash flows so like V1 like where we wanted to start with this really was like how do we take existing protocols that are orded that are on mainnet that are live today and how do we give them the tools to internalize this Meb without needing to be rebuilt

right so like one of the big like guiding principles of how we designed it is that we wanted it to be like a drop in replacement for projects that use existing article types so like the oval contracts like look like chain link smell like chain link behave like chain link but they pay you right so like use chain link chis they they ra chain link so it's it's a it's a pay a version of Chain Lake that pays you from that perspective um and I think that that was like a really important component of how we designed it in the beginning just because it's like it it's it's very uh difficult to to find other ways of like modifying these systems without them needing to be reordered and redeployed and this kind of thing so that that was

like part part of why we approached it like that um you know there's a lot of longtail stuff that we could get into around like what does this look like in the future but at least for the beginning like that was kind of this immediate like Gap that we saw around like how do we provide services to these projects that that haven't been able to internalize it maybe because they were built before this was a thing or before like these mechanisms were more like well understood and this kind of thing yeah no yeah good one of the things that occurred to me I thought I was kind of like digging a little bit into this was that um this is almost an argument like against app chains in a certain sense like dydx you know they

may have they may have deployed their own app chain for a bunch of different reasons one of which might have been to internalize that me now these these apps that have traction you know maybe a was considering an app chain and one of the reasons why was to internalize Mev but now they don't need to uh dis align from ethereum because they can stay on ethereum and also internalize the me yeah I but I think I do I see what you're saying like having a module modu like something you can plug in that lets you capture me maybe that is one uh reason why you were considering

an AB chain and you're not anymore like he wanted to internalize that but I don't think that's the only reason why people want to build app chains and I also don't think overall like today today it's on L1 but our L2 designs mean we'd plug into any app chain or any evm compatible too so I still think even if you were to build your own app chain there's still use for having this me module you can plug into um uh particularly if it's giving you like high quality price data like CH data yeah so what does Oval look like in the the multi-chain world like beyond ethereum what does where do oval fit

in I think like Chris can make me touch on it but I like we're not our designs here aren't fleshed out enough to have us be like super crisp um for you and your viewership on what that might look like um I think the concepts are the same though you auction off the right to use like a price update or a chainlink price update um and yeah like Chris I want you to hop in but thing I'd add is like what the me supply chain looks like on l2s is both quite different and quite undeveloped so the concepts are going to remain the same but how you do it um is is different yeah I guess all I'll really add is like we we have spent

obviously a lot of time thinking about this but I don't think we have anything that's like super ready for production or not ready for production ready for for to talk about to publicly but yeah just echoing what F said like creating a venue Within These domains that do not have like robust Supply chains and and also like importantly robust venues for like running auctions right like on Main net there's like this there's an auctioner you can send things to and say like this is how much I want to pay for this block space right like Builders are literally selling block space um on arbitrum for example that doesn't exist in any meaningful way and on optimism it also doesn't exist but it also looks completely different right so how you

build systems that are like universally uh reachable is like a whole worldo design space the one thing I will say though um and we're like obviously keenly aware of this is systems like Suave which is a whole kind of worms that we could get into but don't really need to but swab which is kind of like the next iteration of what flash Bots are building as this kind of um TurnKey solution for running like permissionless mechanisms and like what they want to be like this venue for me systems systems like sve I think can power uh more robust multi-chain versions of O right I I'll leave it at that for now in terms of what the multi- chain version looks like but yeah we definitely are considering this very seriously um but

it's it's also like I also think it's like kind of less of an issue in the multi chain space right like one of the the interesting things about me on Main net is like by virtue of like the long block time like and and by virtue of the fact that there is such like a large amount of TBL already in these like kind inefficiently designed mechanisms right there's like a lot of me to be extracted but on a lot of the layer twos like by virtue of f block times and like different Oracle designs and also like more robust like mechanisms Within These like liquidation systems like there's like a lot less M to be captured at least right now right again that's not to say that that's going to be the case forever and it's not to say there is no Ned but at least to begin with like the

the the big highe is is still made that one out yeah and there's a lot less at stake um a lot less liquidity um and honestly just less whales and so like where there are big users is where there are you know more me and kind of brings me to the economic point you guys got some flak about your economic choices with regards to deciding to be a crypto protocol to make money which is kind of meing around um but I'd like to explore why you guys have well let's just start with the what like when you guys were we Design This you guys basically realize like okay we could unlock this amount of capital now what kind of has gone

through your um kind of uh thought processes to establish how you would like to distribute this in you know in Equitable manner or in a manner which you think is is is is worthy of your efforts and time and developer resources and things just kind of take us to like like the Bare Bones of of this and then we can kind of talk about what is right and what is fair and that and that I I mean proba about what is right it's going to be harder any but um uh moral philosophical I don't know but no the the thought process here is pretty simple um there's real money being left on the table it's on the order of like 100 million bucks a year I think that number is going to grow as T

grows the L2 version of that number there is Big too um there there's money being lost to Mev in a way that it shouldn't be period full stop um intuitively the biggest victims here are like a and compound and def5 protocols those are the ones that are like losing that money and aren't getting it um and so I think they should get most of it and the number that makes sense to me is they get half the other half goes to the infrastructure required to capture this Meb um the next biggest victim here is chain link actually because like chain link um link has robust economics for some of the other services they provide

like their VFR thing Randomness ccip all this kind of stuff but for their old school price feeds they don't they're not getting paid by a lot of people for providing like what is a very useful and important service so like Chen link is a victim here and I like lending protocols have told me like they want to figure out a way to pay chain link also because it makes their protocols sustainable like otherwise it doesn't really make sense like gen like could just be like okay they're literally paying millions of dollars a years in gas to publish prices onto the blockchain and we got to figure out a way to make that P sustainable um so uh you know the way we look at it again we're not um uh this is

a conversation we have with our our partners but I we think half goes to uh the integrating protocol um and the rest get split between the the infrastructure provider fighers which would be oval chain link and Flash spots I find it that that obal's able to create this auction to like arrive at an efficient price but then when it comes to like how to reallocate like the proceeds of that auction it's just like 50 and like a like a split is they're not like an option mechanism to then arrive at another efficient price for redistributing that yeah called competition right it's like you know that's Market forces at work

right so um from my perspective and like look I'll be a little bit businessing here right and this is poor the advantage I'm doing this on behalf of like Uma token holders but I'm also doing this on behalf of a token holders and comp token holders and Link token holders right like all these guys get to get paid um from money that none are getting paid for and I want all they compound link and in token holders to get paid um uh competition is real though too right so we think that our infrastructure has a cost and a service and it's going to go to the Token holders um if somebody else produces a

different infrastructure then there'll be a price battle right and that's the way it works um and I think that that is kind of the way it should work yeah I think you guys got push back because of the first ah no you Tak get all this all this hard-earned Revenue to your token holders when it's like well isn't that a sign of a of a strong you know project trying to to acove value for their their token holders but I think there's I think there's a bit of I I again in crypto if you're making money you're like people are are angry you're doing that wrong weird it's weird man but then you ask people like what are

they here for it's a weird one it's a weird one The Vibes Andy we are here for the Vibes Good Vibes only I'm curious what Chris has to say about this like on the economic side where you see this going like yeah for sure I mean the the the thing I was going to say earlier was just like I think it's important to remember like where the money is coming from right like Searchers are making the same right their money is not affected what we're taking money from is from the valid dator right so like the net cash flows in the system stay the same it's just like the amount that ends up at the valid dator goes down um and when we think about like where in the supply chain is there control right like this is part of I think when we think about

like protocols that internalize Meed it's like the further they are up the supply chain like the more control you have in some ways like the person who's submitting the transaction can choose where to send that transaction when you're using M Block Locker or whatever right and you can control like Whata you enter and all that kind of stuff so when we think about like the protocol recapturing value from the validator like these aren't even like you know related entities almost in like a direct way so it it feels like a lot more like natural to start internalizing that um and yeah when we think about like mayed minimization versus capture versus like all these systems like I think just ultimately like creating a venue that like prices it as appropriately as possible so that that the value that

ends up being leaked from the system goes down and you can keep it internally between like all the parties involved right there's not like some third party that's just making money so like you know pay a pay chain link like decrease the amount that they liquidate like the user that got liquidated how much they got wrecked like let's keep it internal within the system rather than just like leaking it out and then it's just like a drain on the system totally agree and understand completely I think um perhaps the economic Flack comes from those who who have this ideological Viewpoint of crypto with regards to being a public good um or perhaps large pools of validators um but like the decrease in yield from staking from losing this

amount of capital it can't really be that significant I mean like it it must be minuscule like a tenth of a percent a quarter of a tenth of a percent or something um so to that end I'm not even sure the validators would even really like care that much it's just it seems like seems like it's more of this public good dilemma so we've kind of gotten into the weeds pretty heavily let's talk more about like practical implementation um and kind of what this looks like going forward so I guess like what does a practical implementation look like of this like on the tech side on the on the governance side how do you foresee this being used so like we mentioned ear like it's designed to be as simple as

possible to use just simp looking like chain link um so like an integration flow looks really like deploying your own oval instance um and like you know the um team is uh geared in position to help with that and then swapping out uh your chainlink integration to use obal instead right like you just swap the address that you used so for an existing money market that's done for a governance action so it's deploying it creating a payload to do the upgrade hot E I was going to is like just the one thing that I want to be super clear on is obal's not an oracle this is the thing that I'm just trying to like message time and time again um we don't we don't change or control chain link

prices we simply run an auction on chain link prices to capture that value so the only thing I want to just be super clear about is when we say you're like you're not you're not swapping chain link for oal you are using chain link and adding on bolting on obal to capture that money and it's like a Nuance point but I say again Chris wrap your chain Ling integration in all um keep going yeah and that's basically it right like there's a component that uh there's like an an oval node if you go into the docs you'll see like there's a component that needs to like create the transaction that's actually backround but this is something

that like uh we could do on your behalf and you can also run one of these if you wanted to but functioning from like an actual implementation perspective that's like introducing this rapper and and that's it so the real question for protocols is like you know how much AB are we generating um and is this like small amount of effort worth free money basically and I just very concrete sorry Andy to be very concrete by the time this podcast is out there'll be like an a forum proposal up uh uh for integrating FAL in a pilot program is the part I want to underscore CU like like I care a lot about om doing things in a phased way like just a conservative

way so it's integrating obal on a pilot program on two isolated markets that together represent less than like way less than 1% of ob's total PDL so they're like siloed and isolated um and uh the proposal here is to have a a experiment with Meb capture um using obal in a phased and Safe Way um that doesn't affect the vast majority of the markets um and the actual like governance vote here is just replace one address with the wrapped with the oval address that robs chain link so it's literally swap one uh one address in your protocol for this other address and that's it so the integration technically is stupidly

simple and that was by the design yeah yeah yeah but like look I I gotta like be proud of my team here right like I I don't know whose idea was like we sh ideas but like Chris an te designed this thing so it's like oh you want to make hundreds of millions of dollars of money like swap one address for this other dress and like wow like duh it's kind of cool yeah so and is that applicable to all money markets I mean obviously OB come out of the big ones but is that like is there a specific type or is there specific parameters that you guys need or so so the answer the short answer is anything that uses chain link price feeds could get wrapped with uh obal uh

anything that uses [ __ ] price feeds on ethereum Main neet can can get those price feeds wrapped with oval uh the Nuance Daner is like there's always like different use cases that maybe need maybe like we need to look at more carefully um but like for a this is true um and for most protocols we believe that this is also true so let's call it 90% of the time there's nothing to do other than Swap and address what about a a protocol that's using some other Oracle like anything you're right like herck or hit or something yeah um oal supports chain link they're like the leader in in D5 it's um we we focused on chain

link because it makes sense and it's like their market dominance is just really big and um uh this is also like what you know aan cop on use and they also want Jan link get paid so it just made sense yeah it's no surpris that um the market was pretty excited about uh this news um perhaps they're speculating on this bringing future cash flows to Uma token holders in addition to the already saking yield for uh participating in the optimistic Oracle um kind of confirmations and things what uh in in a world where we're integrating with a you

know Uma just obtains this new stream of Revenue um up to the tune of could be several million dollars a year more less you know is there any thought that's gone into kind of what you guys would like to do um with this extra Revenue um so two things I want to like reframe it and put it back uh to uh first of all I think the people that should be most excited about this are like a token holders and comp token holders and also link token holders and token holders right like trust me I care about our community but like Uma token holders are only going to

get Revenue if a comp and like link to rers do too so there's a really in my opinion cool aligned incentive thing here too like we work for those guys right so Uma is working for all the other def protocols too I'm just you know if you're another D protocol listening to this I love you too trust me we're just pointing to the two guys that do a chunk of TBL right but we're working for those guys to make them money and then if they get Revenue we to will be cut um where should let token Revenue Go I mean look I think it's it should go to the Dow and the Dow the side I think it should ultimately get return to token holders so you know um there is some feedback in our community

it's kind of interesting um some people are Community were like really wanted to know where this money would go and I was like guys don't you think we should get the money first and then figure this out probably it's probably decent idea really hards trying to single-handedly bring back defi summer coins one by one bring them out of the ashes that would make me so happy just to see a and Link and comp just start ripping everyone on Twitter is like talking about salana meme coins and it's just like def5 [ __ ] summer 2.0 baby OG defi summer he every style MV style ogdy summer MV style like about he G be God um anything else that's super

important guys that you would like to touch on with regards to this so Rob do you have any questions I mean I was gonna take this across to across like like there's tons of I I imagine there's tons of overlap there's like an inter inter section of oval and across and Chris is shaking his head yes I'm going to let him just please run with this and all of your wildest imagination sure I mean I think the main connection here is like what we're doing is Building Systems to price things that are currently not very well priced that are like either mispriced or there is no venue to price them um acrosses like this intense based bridge and uh you

know services a bunch of different domains and there's a bunch of different relays or sort of these actors who facilitate the bridging um and right now there isn't like a really good venue to price the way that they interact with the system there's like a lot of gas races there's a lot of these kinds of uh onchain behavior that could be more optimally priced so uh I think the long Arc of this is around Building Systems that we can modular in a modular way attach to other systems and create better venues to price them what would that mean for across ultimately lower fees uh higher fulfillment fter fulfillment time and you you basically create a space where relays can participate on on filling relays in a similar way that uh Liquidators bid on

the right to backround something you create a this this venue to to to uh to fulfill a request to bridge um and yeah like as the multi-domain chain Spacey bols I think there's going to be a lot of setups where you have these like offchain actors for forti ipating and competing to fulfill onchain intent and oval and like the system of like tools that we're building out here is just like one venue that we think is pretty powerful and more than just oracles so maybe there's some Alpha there but yeah I think it's a it's a pretty interesting uh way of framing things for sure the only thing I'll add Chris right it's like our team both the across and human teams are becoming experts and literally at the frontier of blockchain

systems that incentivize offchain actors to do useful things so oal is incentivizing offchain actors Searchers Liquidators to efficiently do um onchain liquidations or onchain Price updates um and there's actually lots of ways where that goes across is incentivizing op chain actors relays to efficiently do bridge transactions and like the parallels and the the the con C between these I didn't see this you know even six months ago it's pretty wild and I really do also think particularly in um a multi-chain world uh that this type of architecture

uh is going to not only be common I think it's going to be required in many these cases and so I'm pretty stoked that on both both kind of Protocols are got many common design patterns um that working really well I saw a meme a few days ago from a mutual friend uh arud from leafy about uh essentially uh all the NPC's building uh ultimate intent pools and it just made it just made me think because like there's a lot of like when you talk about offchain actors like in

intents are like the offchain element of a transaction that ultimately gets settled and executed onchain so is there like a is there like a Utopia here where like there's a global intent pool and it's like optimistically settled and like Searchers or M like optimizing for meev and reallocating that back to the users is that like yeah pretty much Robbie like pretty much like like to make this less abstract um intense is this weird generalized world word but let's call it a cross chain

limit order um with like an action on the end right and we can generalize over time but it's just it's an order ticket literally like visually imagine you like like the breakfast buffet or something you like write down your order ticket and you sign the bottom of it as your offchain signature um and so everybody's got all these and they're all dumped into some pool uh that would be ideally a decentralized system um and you run auctions on filling all of them in a decentralized way and the people running those auctions are like I don't know figure I'll continue with the breakfast but the analogy it's like Chef's trying to make you your omelette and they're

conven to see who does it at the cheapest price right uh and they go and they they do that and then they' kill you um and like this is a very efficient and cool way to get instant fills with huge amounts of competition in a cross chain interop landscape well recapturing all the me they could possibly capture it's freaking cool so yeah let's do it yeah I had two questions one is there any problems that options don't solve uh basically no

uh so uh I don't know I mean you get in more specificy types of options but like um there's like a guy that like maybe it wasn't a Nobel Prize but there's an my buddy who's an economist um his colag like one a big prize for a paper about auctions for kidneys like so you're you need a kidney like how do you get a Kidney donor auctions right and it's not exactly an auction it's like a mechanism to bch thing it's like you can figure out with math the most efficient way to allocate that subject to set of constraints um and generally speaking if you zoom out and think about an auction that way where what you're trying to do is incentivize competition to deliver a

product or service subject to a set of constraints that is a very useful tool in the types of Crypt systems are building very cool I don't know if Rob's got one more yeah well my my second question there is I guess a little bit a little bit more practical which is that um like when we're talking about offchain actors and onchain actors and let's say I have an order to go either offchain to onchain or onchain to offchain like I I imagine there's a world somewhere where like this uh filler could fill my onchain order let's say I want to go I

want to offramp right where like a there's there's an entity that bids to fill my offchain order and like just pays me in like venmo or cash app or Apple pay and like it's something that looks a lot like local Bitcoins but like a lot more modern and faster and cheaper is that possible with this kind of like relayer filler system via options the only like hiccup there is how do you verify that OB Shain action happened right and so there's wiggle room here so you know like how do I how do I

verify I mean honestly there is real world examples of this that are outside of crypto too how does like UPS verify they delivered a package to your door or Dell or whatever right well they take a picture of it now generally say look here door but like that's not perfect um and so that's where it gets messy the beautiful thing about blockchain systems is we can publicly verify things once you introduce the offchain kind of messy real world that verification becomes harder and you you might have to do like good enough type approaches here where you like trust the venmo API that says you sent money to this address and then you can verify that like the Beno

transaction happened mostly right yeah yeah that's the beauty of blockchains is verifiability it's the best thing I I just kind of kind of take us to the end here um just like one last thing about across is like I think it's the best Bridge from l2s to l2s um you know there's quite a bit of competition in things but so far I would like to see it be used across like every L2 possible just curious like how you guys are going about your development resources and how much effort it takes to like onboard another 20 optimistic in ZK rollups in the next like year or two years uh two answers right so if um

we've G to make it and we're trying to make it super easy to support um certain platforms so like optimism super chain arbiture morbit polyon cdk right um so idea of build support for those uh those stacks and then make it easy to deploy to like every new chain that comes on there y that's something that we're working on um it's harder if you're like a oneoff specialized mpoke chain because like there's more develop likely there's more development work there um uh but yeah Andy that's that's like how we're thinking about it and yeah we want to be the stack level yeah we want to be everywhere the

users want to be Obviously good for us um we just need to prioritize engineering resources as like sensibly as we can yeah um and the last one would just be that let's say we we we think across to every AR from orbit chain all the optimism in super chain chains um would you guys need to find a new system of Rel layers for each new chain integration or would you just imagine to be porting over the existing ones or how would that how does the the intense system scale for sorry Andy for Rel layers or for on the oval side no sorry for for for

across like how how does the the intense filling system um basically with your third party uh relayer scale to like multiple chains that are different app chains or different general purpose Chains It's a little bit nuanced right it's like um so there's a bunch of constraints here right so it's like okay if they're evm compatible chains like okay fine all all the relayer infrastructure will work on that chain um the constraint might be how does that relayer balance inventory between uh that chain and some other chain how do they do that and you know across is designed because Rel layers can take repayments on different chains

we actually have a lot of tools to help efficiently rebalance inventory yep um but um like does this chain have a a a a cheap and fast way to move canonical assets like using the canonical Bridge there how slow is it how much use do you have there are questions there that um could make that more difficult um uh I think it's very solvable but it's kind of a messy problem i' put it that way yeah gotcha well thanks guys um Chris nice aing bro and uh hope you sleep well tonight