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Private Order Flows and Builder Bidding Dynamics: The Road to Monopoly in Ethereum's Block Building Market

Shuzheng Wang, Yue Huang, Wenqin Zhang, Yuming Huang, Xuechao Wang, Jing Tang

Abstract

Ethereum, as a representative of Web3, adopts a novel framework called Proposer Builder Separation (PBS) to prevent the centralization of block profits in the hands of institutional Ethereum stakers. Introducing builders to generate blocks based on public transactions, PBS aims to ensure that block profits are distributed among all stakers. Through the auction among builders, only one will win the block in each slot. Ideally, the equilibrium strategy of builders under public information would lead them to bid all block profits. However, builders are now capable of extracting profits from private order flows. In this paper, we explore the effect of PBS with private order flows. Specifically, we propose the asymmetry auction model of MEV-Boost auction. Moreover, we conduct empirical study on Ethereum blocks from January 2023 to May 2024. Our analysis indicates that private order flows contribute to 54.59% of the block value, indicating that different builders will build blocks with different valuations. Interestingly, we find that builders with more private order flows (i.e., higher block valuations) are more likely to win the block, while retain larger proportion of profits. In return, such builders will further attract more private order flows, resulting in a monopolistic market gradually. Our findings reveal that PBS in current stage is unable to balance the profit distribution, which just transits the centralization of block profits from institutional stakers to the monopolistic builder.

Private Order Flows and Builder Bidding Dynamics: The Road to Monopoly in Ethereum's Block Building Market

Abstract

Ethereum, as a representative of Web3, adopts a novel framework called Proposer Builder Separation (PBS) to prevent the centralization of block profits in the hands of institutional Ethereum stakers. Introducing builders to generate blocks based on public transactions, PBS aims to ensure that block profits are distributed among all stakers. Through the auction among builders, only one will win the block in each slot. Ideally, the equilibrium strategy of builders under public information would lead them to bid all block profits. However, builders are now capable of extracting profits from private order flows. In this paper, we explore the effect of PBS with private order flows. Specifically, we propose the asymmetry auction model of MEV-Boost auction. Moreover, we conduct empirical study on Ethereum blocks from January 2023 to May 2024. Our analysis indicates that private order flows contribute to 54.59% of the block value, indicating that different builders will build blocks with different valuations. Interestingly, we find that builders with more private order flows (i.e., higher block valuations) are more likely to win the block, while retain larger proportion of profits. In return, such builders will further attract more private order flows, resulting in a monopolistic market gradually. Our findings reveal that PBS in current stage is unable to balance the profit distribution, which just transits the centralization of block profits from institutional stakers to the monopolistic builder.

Paper Structure

This paper contains 26 sections, 6 theorems, 42 equations, 11 figures, 3 tables.

Table of Contents

  1. Introduction
  2. Background
  3. Proposer Builder Separation.
  4. Robust Fairness.
  5. Differences in PBS
  6. Dataset
  7. Information Difference
  8. Auction Strategy Difference
  9. Centralization in Builder Market
  10. Robust Fairness
  11. Experimental Evaluation
  12. Implications of Drifting to Monopoly
  13. Proposer Revenue Reduction
  14. Block Construction Discrimination
  15. After Reaching Monopoly
  16. ...and 11 more sections

Key Result

Theorem 1

Strong builder $\mathcal{P}_i$ bids less aggressively than Weak builder $\mathcal{P}_j$ for each valuation $v$ while being more likely to win in a single round.

Figures (11)

  • Figure 1: Two-phase auction in PBS.
  • Figure 2: Proportion distribution of private rewards among builders.
  • Figure 3: Proportion distribution of private transaction counts among builders.
  • Figure 4: Weekly distribution of connected searchers since the emergence of rsync-builder.
  • Figure 5: Bidding strategies and winning rate of builders.
  • ...and 6 more figures

Theorems & Definitions (8)

  • Theorem 1
  • Theorem 2
  • Theorem 3
  • Definition 1: Stochastic Approximation renlund2010generalized
  • Lemma 1: Zero Point of SA renlund2010generalized
  • Definition 2: Attainability renlund2010generalized
  • Lemma 2: Stable Zero Point of SA renlund2010generalized
  • Lemma 3: Unstable Zero Point of SA renlund2010generalized