Oracle Extractable Value (OEV) is a subset of MEV related to the way oracles are currently designed. Any update to data feeds, or a lack thereof, can create opportunities for OEV such as arbitrage and liquidations. During each of these interactions value is leaking from the dApp users to both searchers and validators. Learn more about OEV in a summary of the OEV Litepaper.
Integrating OEV data feeds can turn this fee previously being imposed on your users into a powerful economic incentive driving value to your ecosystem. OEV data feeds will maximize the value returned to your dapp from OEV through a sealed bid auction process similar to the one you might be familiar with from Flashbots and MEV-Boost.
Instead of overpaying for liquidations with a fixed incentive, that during large liquidation opportunities can be much too high than it needs to be, a sealed bid auction hosted at the oracle can minimize the value being paid out and return most of it back to the dapp. The liquidations will also be able to occur in a more timely manner because you do not have to wait for a deviation threshold to trigger oracle updates, creating a lower latency and more robust liquidation process.
Within certain DeFi protocols the arbitrage created due to oracle latency can undermine the ability for an LPs ability to be profitable. In turn this forces protocols, particularly derivatives, to impose higher fees on users. Capturing OEV at the data feed level can help improve LP profitability by auctioning off the arbitrage opportunities and returning the corresponding value to dApps. More accurate data and value capture from the auction can be used to increase profitability and sustainability of liquidity provision, allowing for a more optimal market making protocol for apps that use oracles. Better market making from a dapps LPs creates a flywheel effect of drawing more liquidity to the application while being able to lower fees and list more assets, which then attracts more users and volume.