[FIP - 363] Fraxlend Pilot Program with Oval on sUSDe/FRAX and USDe/FRAX

Simple Summary

This proposal seeks to implement Oval into the sUSDe/FRAX and USDe/FRAX Fraxlend markets as a pilot program. Oval will enable Fraxlend to recapture liquidation MEV that is currently lost to block builders and proposers. After evaluating Oval’s effectiveness, Fraxlend can consider whether to enable Oval on other markets.

Abstract:

This proposal seeks to implement Oval into the sUSDe/FRAX and USDe/FRAX markets as a pilot program.

Oval is a liquidation MEV recapture tool composed of 2 parts:

1. A simple, audited smart contract that wraps an oracle price feed. 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.
2. 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 Frax to recapture a portion of the MEV that is currently being lost on liquidations. Frax can decide what to do with their portion of the recaptured MEV (ie. return to lenders or borrowers, protocol revenue).

The sUSDe and USDe markets have been chosen as they use a single price feed that is mutable via governance and Chainlink has a USDe/USD price feed available. Oval already has pre-written and audited Chainlink adaptors, so only minor revisions are required to the Fraxlend smart oracle contract. The integration process is simple and will require minimal developer time from the Fraxlend. This pilot program will allow Frax to evaluate the effectiveness and potential scalability of Oval for broader application within its markets.

Motivation:

When a liquidation occurs on Fraxlend (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, Fraxlend 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. Frax is then free to decide what to do with their portion of the recaptured MEV (ie. return to lenders or borrowers, protocol revenue).

Specification & Rationale:

What is Oval?

Oval enables liquidation MEV capture by wrapping oracle 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 Fraxlend an order flow auction is triggered using Flashbots' MEV Share—a battle tested 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 oracle price is automatically released and Fraxlend liquidations function as normal. This approach utilizes the solid foundation of Chainlink price feeds and MEV-Share to extract MEV from liquidations.

The diagram below showcases, at a high level, a comparison between current liquidations and liquidations with Oval.

Oracles & Oval

Oval is not a price feed oracle

• Oval wraps incoming prices from oracle price feeds, shielding them from MEV searchers.
• The Oval contract will use the Oracle price feed and initiate an auction for the MEV searchers to bid for access to liquidations.
• If no one participates in the auction, the price update will be released after 12 seconds (1 block).
• All Fraxlend logic checks on the price feed are downstream of Oval and can remain as is.

Implementation

Deploying Oval requires two simple steps:

1. Deploy Oval smart contracts for the sUSDe and USDe markets
2. Reference the Oval wrapped contracts in a new Fraxlend oracle smart contract
3. Update the markets oracle addresses to the new Fraxlend oracle

We recommend that Fraxlend receives their Oval revenue to a Frax treasury or governance controlled multi-sig for the pilot program. After the pilot program, Frax governance 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.

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.

Options:

• For: Integrate Oval into the sUSDe and USDe Fraxlend Markets
• Against: Do nothing