Additional revenue stream for Moonwell ecosystem via OEV implementation

Proposals
1

This proposal aims to introduce a new revenue stream for the Moonwell DAO by implementing Oracle Extractable Value (OEV) technology. By using RedStone’s solution, Moonwell can capture the extra value generated during liquidations, redirecting it back into the protocol reserves instead of being lost to third-party liquidation bots. The initial rollout will test the solution on the AERO market on Base, with plans to expand to other markets based on its success. RedStone will cover all associated costs, ensuring seamless and low-risk integration.

ABOUT REDSTONE

RedStone is the fastest-growing oracle in 2024. Our clients include leading DeFi protocols such as Morpho, Venus, Enzyme, Pendle, FraxLend, Euler, Silo, Gearbox, EtherFi, Ethena, Puffer, Renzo, Lombard and 100+ other clients. Our team has been supporting Base since day 1 mainnet launch and we are backed twice by Coinbase Ventures. RedStone specializes in the delivery of LST, LRT and other types of price feeds and is the leading BTCfi oracle as the creator of the only in-market Bitcoin Liquid Staking Oracle for Lombard, Solv, pumpBTC and others.

RedStone’s mission is to enable DeFi protocols and dApp’s builders to reach their full potential with versatile, gas-optimized and robust price feeds delivered cross-chain. Our team consists of seasoned engineers with an average of 15+ years of dev experience and a hard-working BD & Marketing team supporting partner protocols at every step: conferences, Twitter spaces, targeted intros, etc. Our technology has been acknowledged by the leading figures in the crypto space, we are proud to be backed by the most renowned Web3 Entrepreneurs such as Stani Kulechov (Aave), Sandeep Nailwal (Polygon), Alex Gluchovski (zkSync), Emin Gün Sirer (Avalanche), Richard Ma (Quantstamp) and many more.

ORACLE EXTRACTABLE VALUE

OEV is a value that can be captured during liquidations. Liquidations usually generate profit thanks to bonuses intended to motivate multiple parties to send a liquidation transaction. The bonus is captured only by the first liquidator, therefore liquidators compete to place the transaction as early as possible, ideally just after the Oracle update. Effectively it’s a race to liquidate straight after the price update is delivered on-chain that triggers liquidation of the position.

The idea behind OEV is to redirect the value captured by the MEV operator to the parties controlling price updates - Oracles and the Protocol. For every price update that may trigger a liquidation an auction is created and the collected payments are shared between both the source of data (Oracle) and the protocol itself. This OEV switch would direct the 50% Moonwell split of OEV back to the AERO market as reserves, generating more revenue for the protocol. The suggested solution includes the implementation of an auction with an MEV search solution on Base within the price feed liquidating a position. The implementation is done in a way that doesn’t interfere with the existing code of the Moonwell protocol minimizing any potential risks and side effects. It also means that traditional liquidations will still take place if there are any potential edge cases or execution failure scenarios where the auction might not perform as expected. We have successfully implemented the above flow with one of the largest lending protocols in DeFi and are rolling it out with the next protocols currently.

COMPETITIVE EDGE FOR MOONWELL

The implementation would make Moonwell more secure and resistant to bad debt, allowing faster liquidations via dedicated auctions.

The value captured via the OEV mechanism would be redirected into the Moonwell pool increasing the atractiveness of rates in comparison to other lending markets. We propose a 50/50 split of the value captured between the protocol and the other part covering infrastructure & maintenance costs. RedStone will cover all the costs associated with setting up, testing and monitoring the solution and will be in close contact with core Moonwell contributors for any further requests or suggestions.

NEXT STEPS

We suggest the first rollout of the solution on Moonwell’s AERO core market and after the first successful period expanding to other markets as Moonwell sees fit. AERO seems like a good fit with the number of positions and volatility of the asset. The success will be determined by the number of successful OEV liquidations and the total value captured by the protocol. The suggested planned rollout includes:
Phase 1: Initial setup and integration (2 weeks)
Phase 2: Testing period on AERO market (4 weeks)
Phase 3: Review and assessment of results (2 weeks)
Phase 4: Expansion to other markets based on results (TBD)

4 Likes
2

I have some concerns about the Oracle Extractable Value (OEV) proposal and would appreciate clarity on the following points:

  1. Implementation Details: Can you provide a detailed breakdown of how the OEV technology will be integrated into Moonwell’s existing framework, and what steps are being taken to ensure it does not increase vulnerability to attacks or bugs?

  2. Security Measures: What specific security protocols will be implemented to safeguard against oracle manipulation or other forms of exploitation?

  3. RedStone’s Role: How will Moonwell maintain control over its operations with RedStone’s involvement? What are the exit strategies if the partnership does not meet expectations?

  4. User Transparency: How will the changes be communicated to users, ensuring transparency, and how will you address potential concerns about fairness in value extraction?

  5. Testing and Assurance: What kind of testing and audits will be conducted before and after implementation to ensure the system’s integrity, especially during the initial AERO market trial?

  6. Scalability: What metrics will be used to decide whether to expand the OEV system to other markets, and how will scalability issues be managed?

  7. Financial Impact: How will the financial benefits be measured, and what mechanisms are in place for redistributing or reinvesting any captured OEV?

  8. Governance and Oversight: How will the community be involved in oversight, and what governance structures will be in place to monitor the OEV system’s performance and impact?

  9. Market Impact Analysis: Have you studied potential impacts on market dynamics? If so, what are your findings, and what contingency plans are there for any negative market behavior?

  10. Rollback Plan: What is the plan if significant issues arise post-implementation? Is there an easy way to revert or adjust the system without causing disruption?

Looking forward to your responses to better understand the proposal’s implications.

3

I am voting FOR this proposal at the Snapshot phase, although I have a couple comments/questions.

Is there a place where we can view the proceeds/revenue generated for this? I’m also open to hearing everyone’s thoughts on how this split should be distributed moving forward. I do think that in order for this to be enacted, we should have some visibility on how much revenue is created from OEV. I’m also curious to know what the expected revenue gain here is as well, any revenue gain at all is welcomed.

Overall, though the proposition of using some part of the value capture to pay for continued maintenance and integration between Redstone and Moonwell seems fair though.

4

I’m Jakub, the founder of RedStone. Thank you for the excellent questions. Please take a look at the answers and don’t hesitate to follow on if anything requires more information.

  1. Implementation Details: Can you provide a detailed breakdown of how the OEV technology will be integrated into Moonwell’s existing framework, and what steps are being taken to ensure it does not increase vulnerability to attacks or bugs?

I would say that the strongest advantage of our design is abstracting away all the OEV capture mechanics requiring no changes to the existing Moonwell code. This will reduce risk of introducing unforeseen vulnerabilities by modifying the logic of the lending process.

On the RedStone end any potential price update is offered to solvers which could bid for a possibility to bundle that with a liquidation transaction. The process takes ~300ms. In case no solvers are found the price is also updated on-chain following the standard commitments regarding heartbeat and deviation threshold.

  1. Security Measures: What specific security protocols will be implemented to safeguard against oracle manipulation or other forms of exploitation?

RedStone will fetch data from multiple on-chain pools where AERO is traded. RedStone designed a price discovery methodology that takes into account the real-time liquidity and slippage available on every venue eliminating the possibility of manipulating the price by making a single large trade. The approach is battle-tested in delivery of the most popular assets traded on-chain such as USDe from Ethena,weETH(ether.fi), ezETH(Renzo), swETH(Swell), puffETH(Puffer) and many otters (RedStone)

  1. RedStone’s Role: How will Moonwell maintain control over its operations with RedStone’s involvement? What are the exit strategies if the partnership does not meet expectations?

At any time Moonwell could switch back to the previous Oracle setup substituting a single address in their configuration.

  1. User Transparency: How will the changes be communicated to users, ensuring transparency, and how will you address potential concerns about fairness in value extraction?

RedStone proposed 50% of value share. All of the revenue will be publicly visible on-chain and the flow of funds could be audited by anyone.

  1. Testing and Assurance: What kind of testing and audits will be conducted before and after implementation to ensure the system’s integrity, especially during the initial AERO market trial?

RedStone went through 6 audits in total (Peckshield, ABDK three times, Holborn, Spearbit). Our partner that implements the auction logic also went through an audit with Spearbit.

During the integration process RedStone will provide regular reports on the performance of the OEV extraction logic.

  1. Scalability: What metrics will be used to decide whether to expand the OEV system to other markets, and how will scalability issues be managed?

Expanding to other markets could be implemented by switching to RedStone as data providers (single parameter) in the Moonwell configuration.

The decision could be made based on the performance of OEV capture on the AERO market. We recommend moving step by step to allow enough time for the solvers to implement efficient algorithms for detecting and executing liquidations.

  1. Financial Impact: How will the financial benefits be measured, and what mechanisms are in place for redistributing or reinvesting any captured OEV?

All the flow of funds will be transparent and visible on-chain. Initially, the funds will be directed to the pool benefiting all the participants.

In the future, we could direct the funds to other targets depending on the Moonwell governance.

  1. Governance and Oversight: How will the community be involved in oversight, and what governance structures will be in place to monitor the OEV system’s performance and impact?

At any point in time Moonwell is in full control of switching back from RedStone to previous oracles.

The results are visible onchain and RedStone will provide a full summary of the performance to inform the community about OEV capture efficiency.

  1. Market Impact Analysis: Have you studied potential impacts on market dynamics? If so, what are your findings, and what contingency plans are there for any negative market behavior?

The OEV mechanism is introduced in a backward compatible manner, meaning that if there is no liquidation triggered during the bidding process, the price update will still be executed. Existing liquidation bots will still be able to submit their transactions without any amendments. Therefore, the risk of the market acquiring bad debt due to the issues with the bidding process is eliminated.

However, we understand that it may take some time for the existing solvers to adapt to the new bidding mechanism. This means that the OEV capture will increase gradually when more and more actors will switch to the new model and the bidding fees will increase due to the increasing competition.

  1. Rollback Plan: What is the plan if significant issues arise post-implementation? Is there an easy way to revert or adjust the system without causing disruption?

As the solution doesn’t require any changes in the Moonwell code it could be easily reverted to the previous setup without causing any issues.

2 Likes