Are Block Builders the Key to Solving Ethereum’s MEV Centralization Woes?

Post-Merge Ethereum will trigger a paradigm shift that’s much more far-reaching than a mere switch from proof-of-work to proof-of-stake. Adopting a modular approach at the infrastructure level may usher in a new breed of stakeholder: the block builder.

This article originally appeared in Valid Points, CoinDesk’s weekly newsletter breaking down Ethereum’s evolution and its impact on crypto markets. Subscribe to get it in your inbox every Wednesday.

Under proof-of-work, Ethereum has two major stakeholders on the transaction side: users and miners. There are, of course, several other key groups such as core developers, exchanges and wallets, but without users and miners, there would be no network.

Users pay gas fees to have their transactions processed by miners who collect those transactions from the Ethereum "mempool," which is a database of unconfirmed transactions, and place them into blocks in a specific order. Miners typically operate in groups called mining pools. The idea is to pool resources in order to generate a consistent level of revenue for each miner and to benefit from the experience, expertise and software infrastructure of the mining pool operator.

Mining pool operators are very powerful players in the Ethereum network, because of their ability to determine transaction order and therefore extract “maximal extractable value” (MEV) for all blocks processed by their pool.

MEV involves optimizing the mining process to maximize revenue. This is typically achieved by determining which transactions to include and in what order. Ideally, the most profitable configuration of transactions with the highest level of fees is chosen.

Read more: The Problem With MEV on Ethereum

According to CryptoCompare, only five mining pools controlled 65.4% of mining activity on the Ethereum network last November. That raises serious concerns about centralization deep in Ethereum’s infrastructure. Case in point: Ethermine alone controlled 25% of all mining during that month.

As Ethereum switches from proof-of-work to proof-of-stake, miners will disappear and validators will replace them. There will be a key difference, however. Instead of combining the process of creating and validating blocks, Ethereum’s post-Merge proof-of-stake system will adopt a modular approach.

Modularity is when individual components of a system independently execute specific tasks. The concept has been around in computer science since the 1960s. We saw the emphasis on modularity when Eth1 and Eth2 were renamed. Ethereum’s original proof-of-work chain became Eth1, the “execution layer” where Ethereum’s applications reside, while the Beacon Chain became Eth2, the “consensus layer” where nodes will agree on the state of the network.

This modular approach will eventually carry over into the processing of transactions in the form of proposer-builder separation (PBS). In its most basic sense, PBS simply involves splitting block building and block validation into two distinct activities. The result is a new stakeholder group called the block builder.

In a recent episode of the “Bankless” podcast, Matt Cutler, co-founder and CEO of Blocknative, provided an overview of block builders and how he sees them cooperating with other key stakeholders in the Ethereum ecosystem.

Cutler describes how MEV searchers and miners currently interact. Searchers typically use sophisticated bots that seek to maximize MEV in a variety of ways. Some of those ways like arbitrage are benign, while other ways like front-running are perceived as malicious. In either case, the searcher sequences transactions, produces a revenue-optimized transaction bundle and then offers that bundle to a miner or validator for inclusion in a block in exchange for a cut of the profits.

In a post-Merge proof-of-stake system, block builders will enter the scene. Instead of searchers offering transactions directly to validators (also called proposers), they will send optimized transaction bundles to block builders. A third-party system called MEV-Boost will then aggregate optimized blocks from a variety of builders and offer them to validators. Finally, validators will select and propose the most profitable blocks to the Ethereum network.

Flashbots, the creators of MEV-Boost, explain that MEV centralization occurs when mining and staking pools vertically integrate with trading firms to increase MEV profit. The Flashbots website claims MEV-Boost was created to prevent post-Merge MEV centralization and to cultivate a diverse network of block builders.

Read more: Is Ethereum Staking Pool Lido’s Growth an Omen of Centralization?

According to Cutler, the Ethereum community is so bullish on MEV-Boost that developers plan to incorporate the concept of PBS into Ethereum’s core protocol a year or two after the transition to proof-of-stake. In the meantime, if all goes according to plan, MEV-Boost will be available immediately after the Merge.

The following is an overview of network activity on the Ethereum Beacon Chain over the past week. For more information about the metrics featured in this section, check out our 101 explainer on Eth 2.0 metrics.

Disclaimer: All profits made from CoinDesk’s Eth 2.0 staking venture will be donated to a charity of the company’s choosing once transfers are enabled on the network.

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Valid Points incorporates information and data about CoinDesk’s own Ethereum validator in weekly analysis. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.

You can verify the activity of the CoinDesk Eth 2.0 validator in real time through our public validator key, which is:

0xad7fef3b2350d220de3ae360c70d7f488926b6117e5f785a8995487c46d323ddad0f574fdcc50eeefec34ed9d2039ecb.

Search for it on any Eth 2.0 block explorer site!