Unpacking the Evolution of Decentralization in Ethereum
Since its inception, Ethereum has continually emphasized the broadening of its decentralization. This has been reflected in the increase of global node participation and the diversification of clients. However, a significant aspect fostering Ethereum's centralization has been identified in its block construction method, providing a springboard for the introduction of the Proposer-Builder Separation (PBS).
The Centralizing Impact of MEV
The essence of this centralizing feature emerges when examining Miner Extractable Value (MEV). As we've discussed earlier, after users execute transactions, they enter a reservoir of pending transactions, the mempool, a term coined from 'memory pool.' Block validators, in their quest to capitalize on MEV, can inspect this mempool to exploit selling priority access and manipulating block construction.
Despite the implementation of countermeasures like Flashbots' MEV-Boost, Ethereum has witnessed an extraction of 170k+ ETH ($320m+) in the form of MEV since the September 2022 merge.
Proposer-Builder Separation: A Solution to Value Extraction and Block Manipulation
Enter Proposer-Builder Separation (PBS), a solution to this prevalent issue of value extraction and block manipulation. By introducing a clear distinction between block proposing and block building, PBS aims to completely eliminate a block builder's capacity to manipulate individual transactions within each block constructed. This stands true unless explicit collusion occurs, a scenario that is nearly impossible considering the randomness of proposer and building rights.
The Significance of PBS: Cementing Decentralization and Censorship Resistance
Ethereum's cornerstone features, decentralization and censorship resistance, are extended to active network contributors like block builders. The separation of block builders and proposers curtails the power of block builders to censor transactions. The separated block proposer then assumes the role of safeguarding transactions against potential censoring by block builders.
By bolstering censorship resistance, the Ethereum network can operate as a neutrally credible and secure network, thereby enhancing its overall value proposition.
There are three entities in the new PBS Ethereum:
1. Builders - highly sophisticated actors that physically build the blocks maximizing for MEV and then bid them out to validators
2. Relayers- known middle-men with reputational risk to receive blocks from Builders, hash it, and relay on to the validators
3. Validators -simply accept the block with the highest bid and block rewards (without knowing the contents)
To combat the risks of consensus networks getting centralized due to the economics of maximal extractable value (MEV), a solution like Proposal-builder separation (PBS) is needed. PBS also prevents transactions from being censored by validators.
How PBS Works
Currently, the block proposer (validator) chooses which transactions to include in the next block. Proposers include those transactions first in the block that pays the highest priority fees. Proposers also choose transactions that allow them to maximize their profits by using sophisticated MEV strategies. This can threaten decentralization on Ethereum network as large staking pools can implement advanced MEV strategies to generate profits. Seeing this, solo stakers would also like to join staking pools to earn more staking rewards. PBS fixes issues with MEV. After implementing PBS, solo stakers will have an equal opportunity to generate more staking rewards.
Under PBS, the block building and block proposing practices will be assigned to two different actors in the network. Block builders create exec block bodies (an ordered list of transactions) and submit bids for the blocks. The proposer will accept the block with the highest bid. The proposer will be aware of the content of the exec block once they select the header that wins the auction. Before selecting the header, the content of the exec block will not be revealed to the proposer, to prevent the proposer from copying the builder strategy without compensating the builder.
Currently, MEV-Boost, an implementation of PBS built by Flashbots, is being used by many validators to combat the negative effects of MEV. It is playing a critical role in the Ethereum ecosystem since in-Protocol PBS is not implemented yet. A large actor or builder can still censor a particular transaction. For a builder to censor a transaction, they can raise the priority fees for their transactions to such a high amount that builders will prefer only their transactions for inclusion in the block. Builders control the power not to include your transaction if they don't like it or maybe for some other reason.
The Future of PBS: An Ongoing Endeavor
Currently, PBS is in an advanced research phase within the Ethereum Foundation. Despite the progress made, essential design questions need to be resolved before incorporating it into Ethereum clients. As such, a finalized specification remains elusive, implying that the implementation of PBS could take a year or more.
In the interim, users and protocols can utilize various technologies to retain as much MEV as possible. Third-party solutions, such as Flashbots, will play a pivotal role during this transitional period, to counteract the problems that emerge due to MEV.
As we move forward, the emergence of mechanisms like PBS highlights the continued evolution of the Ethereum network towards greater decentralization, providing a robust framework for managing the complexities of MEV and censorship resistance.
