Galaxy swastika details MEV supply chain and decentralization path

Galaxy 10,000 words detailed MEV supply chain and decentralization path

Original source: Foresight News

Key points

The MEV supply chain has become more complex since the creation of MeV-Boost, the standardized software used by PoS verifiers on Ethereum to earn MEVs;

The new stakeholders, called block builders, are responsible for building a complete block by optimizing the transactions contained in the block to maximize the return on tips and MEVs;

Block builders develop proprietary models to simulate blocks and effectively propagate through off-chain MEV markets called relays;

Because of the expertise required to become a builder, the fear is that in the long run the builder landscape will become centralized;

To combat the negative network effects of builder centralization, Ethereum developers and the Flashbots team are discussing several potential solutions, such as reviewing boycott lists, partial block auctions, and SUAVE.

introduction

Ethereum achieved a maximum extractable value (MEV) of $133 million between January 1, 2022 and December 31, 2022. (The data in the table below contains data obtained by Flashbots based on a new method of identifying MeVs on Ethereum, and the numbers may differ from those in Galaxy Research's MEV report last year).

Total MEV revenue in 2022 was significantly lower than in 2021 compared to the same period last year, and one of the reasons is that the bear market caused a sharp decline in DeFi activity on Ethereum. In addition, increased competition among MEV searchers has made the DeFi market more efficient, thereby reducing MEV margins. Until the end of the third quarter, most MEV revenue went to Ethereum miners. However, after the merger activation, most of the MEV revenue began to go to the verifier, as the verifier replaced the miner as the primary security provider and block proposer of the network.

As of December 2022, approximately 80% of Ethereum verifiers receive MEV revenue through third-party neutral software called MeV-Boost. MEV-Boost, designed by Flashbots in collaboration with Ethereum core developers, is software that enables verifiers to connect to multiple off-chain markets to auction off block space (also known as Repeaters). Through the repeater, the verifier receives a block containing the tip and a block containing the MEV built by a third-party block builder.

Third-party block builders and Repeaters are new entities in the Ethereum MEV space, thanks to the advent of MeV-Boost software and the open source of block builder and repeater code. Historically, Flashbots  Once the only repeater operator, mining pools connect to Flashbots Repeaters to earn MEV revenue. However, due to the open source of MeV-Boost and repeater technology, other MEV Repeaters (such as the Dreamboat repeater operated by Blocknative) are starting to compete with Flashbots MEV Repeaters and help decentralize the MEV infrastructure. Flashbots MEV Repeaters remain by far the most utilized, generating 81% of MeV-Boost blocks.

The long-term motivation for the persistence of multiple Repeaters on Ethereum remains unclear. Moreover, the concern is that over time, the specialization of block builders and the rise of order flow payment (PFOF) activities could lead to monopolies by a single builder. Since MeV-Boost is designed to support only full block auctions, there is another concern that transaction reviews by dominant MEV infrastructure operators such as Flashbots will lead to a decrease in the neutrality of the network. As of January 20, 2023, about 67% of the blocks created daily on Ethereum are actively reviewed by Repeaters.

This report will provide an overview of the Ethereum MEV landscape after the merger. First, we'll give an overview of the MEV-Boost architecture and its key stakeholders, including searchers, block builders, Repeaters, and validators. We'll then discuss concerns about repeater scrutiny and builder centralization due to MEV-Boost and the long-term solutions being developed by the Ethereum core developers and the Flashbots team to address these issues. For an in-depth look at the basics of MEVs on Ethereum, including what it is, how it is created and how it resembles traditional finance, read this Galaxy Research report as the basis for this report.

Overview of MEV-Boost

MEV-Boost is an early implementation of Proposer Builder Separation (PBS) on Ethereum. PBS refers to the separation of responsibilities for building blocks and block proposals. Traditionally, the security providers of the public blockchain, whether miners or verifiers (or a mining pool made up of both), have been responsible for building blocks containing user transactions and submitting them to the network for verification. Under PBS, the role of the security provider is limited to submitting blocks, while responsibility for block construction falls to third parties. The motivation for splitting these responsibilities is to reduce the amount of expertise and hardware needed to run an Ethereum verifier. By ensuring that competition among validators does not depend on expertise or equipment, the barrier to entry for new participants into the validator pool remains low. Encouraging as many participants as possible to contribute to the security and decentralization of Ethereum is PBS's primary goal.

MEV-Boost is a preliminary step toward realizing the full vision of PBS, as MEV-Boost software relies on the off-chain market, also known as a repeater. The role of the repeater is to ensure honest behavior between the builder and the verifier by checking block reward payments, monitoring activity between participants, and ensuring that the verifier does not "steal" block information to get ahead of the builder. The whole vision of PBS is to not trust a third party repeater and write the rules of honest participation between builders and verifiers into Ethereum's protocol layer. Because of the complexity of the merger, the core Ethereum developers agreed to delay embedding PBS's coding into Ethereum's protocol layer. At the same time, in order to address the direct impact of MEV dynamics on validators, the core Ethereum developers and Flashbots R&D team created MeV-Boost.

MEV-Boost is "ancillary" software that runs alongside the core software of the Ethereum verifier, namely the execution layer and consensus layer client packages. By running the MeV-Boost software, the verifier node operator can connect to multiple Repeaters and start accepting pre-built blocks from the block builder that contains the MEV. The verifier receives block rewards and block headers only from the secondary. They do not see the contents of a block until it is included on the chain. This level of privacy ensures that a verifier cannot preempt building blocks by copying and recreating blocks built by a third-party builder. Blocks produced by Flashbots MEV Repeaters are estimated to be twice as profitable as other blocks. Locally built blocks are those that the verifier builds itself from the local view of the Ethereum memory pool. Blocks from relays are built by builders, who package transactions from searchers, private order flows (meaning directly from individuals and entities), and local memory pools.

Searchers

Searchers look for opportunities to extract MEVs by sorting user transactions within a block. Searchers actively monitor the common memory pool and determine profit-maximizing scenarios, sometimes resulting in increased DEX slippage or unexecution. For more information on MEV types and strategies, read this Galaxy Research report. Mevs' strategies often mimic those used in traditional stock markets, such as front-running trading, "sandwich attacks," stop-losses and arbitrage. In 2022, the most profitable MEV strategy is arbitrage. According to EigenPhi, arbitrage accounts for about half of all MEV revenue generated in 2022. The chart below illustrates the percentage of arbitrage revenue searchers earn per day as a percentage of MEV revenue:

While some types of MEVs are beneficial to end users, such as arbitrage and follow trading, others are not. Certain DeXes, such as CowSwap, are designed to reduce harmful MEVs in the chain by making the execution of orders that benefit the end user more profitable. On CowSwap, professional searchers called solvers bid for the right to execute user transactions on the chain. solvers that can provide the best order execution will be able to offer the most competitive price for the user's trades, and can gain a competitive advantage by establishing an exclusive relationship with the builder so that the user's trades are executed first, or by grouping multiple user trades together to minimize trade slips. Although you can't be preempt or "sandwich attacked" by regular searchers while executing user transactions. But in these cases, solvers are the ones paying the price for poor order execution, because solvers' payment of transaction fees to the user occurs before any transaction is executed on the chain.

There are over 10 solvers competing for user deals on CowSwap. However, CowSwap is just one of many Dexes on Ethereum, where monitoring user transactions and bundling them can be a lucrative activity. On other DEX such as Uniswap and Curve, users execute their own transactions directly on the chain, and general searchers bid for the right to reorder the order of transaction execution on the repeater, which is discussed in more detail later in this report. The most profitable and skilled searchers on Ethereum are those experts who specialize in monitoring and analyzing activity on the chain, especially DeFi transactions. Search also requires a deep knowledge of financial markets and trading, as these skills are essential for identifying and exploiting inefficient markets that create MEVs. Below are the top 10 most competitive searchers on Ethereum in 2022.

MEV is a zero-sum game. There are limited opportunities to extract value from reordering transactions, and the searchers who identify MEV opportunities the fastest are usually the searchers who earn the most MEVs. To maximize revenue, competitive searchers will write scripts to automate tasks to capture easily identifiable MEV opportunities. In addition, searchers can run dedicated hardware or subscribe to a paid service that provides low-latency visualization tools for Ethereum's memory pool to learn more quickly about pending user transactions. To outmaneuver other searchers, experienced searchers may deploy complex strategies including multiple Token transactions, bots, and manual searches via on-chain activities for higher profits. For a detailed view of searchers' arbitrage strategies on Ethereum and later Avalanche, read this blog post by Google product manager Daniel McKinnon. For a detailed overview of the more complex MEV strategy, read this tweet from Flashbots product lead Robert Miller.

Block Builders

The builder is the new stakeholder in the MEV supply chain, responsible for packaging transactions from searchers, as well as from public memory and private trade order streams into blocks. The builders themselves are also searchers of sorts, since the task of building a profit-maximizing block does not depend solely on reordering the searchers' bundled transactions, but also on how to fill the block space beyond the bundled transactions with profitable transactions from mempool and other sources. The latter activity requires some understanding of basic search strategies. While searchers may specialize in the task of extracting MEVs from specific DeFi protocols, builders typically have a broader awareness of qualifying transactions contained in blocks and specialize in the task of performing block-wide simulations from multiple sources.

High performance hardware

The task of simulating multiple transactions in a block, calculating and evaluating their value is computationally intensive and requires complex hardware similar to a full node. Block builders need to have their own unique techniques, just like searchers, in order to effectively simulate complete blocks based on incoming transaction data. Builders often wait until the last minute to submit a full block in order to maximize the potential MEV value contained in the block, which requires extremely low latency to propose the block and view the Ethereum memory pool.

Before the merger, the task of packaging searchers' transaction packages into blocks used to be the responsibility of miners and pools.According to the user's anonymous Twitter profileIt's no surprise that Builder 0x69, one of the top block builders on Ethereum, is itself a former mining pool operator.

Before the merger, miners spent most of their electricity calculating hashes. The first miner to find an acceptable hash will have the right to pack the next block. Miners also consume electricity to order trade packs from searchers to maximize the rewards they receive from a block. Fast forward to January 2023, and the validators who now replace miners consume little power when submitting blocks on Ethereum because they are chosen randomly by the protocol. Furthermore, if they do not earn MEV rewards and build blocks from the local memory pool, the verifier will order the transactions within the block in order of highest to lowest priority fee, without complex block simulation.

Searcher collaboration

In addition to sophisticated hardware, block builders rely on close collaboration with professional searchers who identify MEVs from strategies that are more complex and profitable than their own. From the searcher's point of view, the builder may preempt the searcher transaction package and steal their MEV, which is why some searchers choose to build blocks themselves when they have sufficient funds and resources, and why credibility as an honest builder is key to facilitating close collaboration between professional builders and independent searchers. In addition to working closely with searchers, block builders compete through private order streams. Blocknative, a blockchain infrastructure company that operates block builders and Repeaters, estimates that about 3.8 percent of transactions in blocks built by third-party builders come from private sources outside the public memory pool.

Block subsidy

Once the builder has identified a profitable block, they calculate the bid included in that block, which is either a bid fee for the preferred packaged block or a fee paid directly to the verifier by the block builder. The higher the bid, the more likely the builder is to get the blocks it builds packaged on the chain. The final area of competition among builders is subsidies. At least five builders on Ethereum appear to be submitting blocks with bids higher than the block award value, suggesting that these builders are subsidizing their blocks in some way. Four of the top 10 block builders in terms of the number of blocks submitted daily are subsidizing their blocks.

According to BloXroute founder Uri Klarman, BloXroute builders can use revenue from other businesses to continuously subsidize their blocks. Builder 0x69 seems to be using subsidies as a temporary means to encourage more deal pack traffic from searchers and build trust with searchers. Another explanation could be that some block subsidies are implemented by paying directly from the searcher to the builder for transaction packages that are not captured on the chain.

The prevalence of subsidies has helped some builders (such as Builder0x69 and BloXroute) leapfrog others. Ultimately, however, it is a combination of factors that determine its profitability. In the past week, the two most profitable block builders on Ethereum, Flashbots and beaver.build, have combined to link more than 16,000 blocks without using any subsidies.

repeater

Delving into the competitive dynamics of block builders requires considering the fact that block builders such as Flashbots are also operating their own MEV Repeaters. Although there is little financial incentive for businesses to run their own Repeaters, the number of repeater operators has only grown since the switch to PoS. Most carriers do not earn revenue from their repeater operations, in part because the first entity to build open source, unlicensed and high performance relays provided the service for free and made it a public good.

Flashbots is a venture-backed business that has been building and operating MeV-related infrastructure on Ethereum for years. Given that today's most popular Repeaters are still operated by Flashbots, it is not cost-effective for most Repeaters to operate high-performance and competitive Repeaters for a fee. However, BloXroute is a blockchain infrastructure company that also operates and subsidizes its own block builders, and is one of the few companies that charges for its successor services. Most others, including Blocknative, Relayooor, Agnostic and Ultrasound do not charge.

The incentive for the entity to operate the repeater

The motivation for entities to start Repeaters may be to increase their brand awareness and help the MEVs on Ethereum become more decentralized. Builder 0x69 stated in a Discord post that they started relayooor Repeater with the goal of having "at least 1 fully open source non-censored permissionless repeater" running on Ethereum. But with the advent of two more Repeaters, Builder 0x69 adds that relayooor could be phased out by the next Ethereum network upgrade. An increase in the number of Repeaters is good for the health of Ethereum, and diversity ensures that potential bugs in the software of any one repeater do not massively impede verifiers from getting MEVs, as they can easily switch to using other Repeaters. This is the same rationale for promoting client diversity on Ethereum.

Central to the MeV-Boost software implementation is the ability of the validators to connect to multiple Repeaters, thereby avoiding over-reliance on one MEV infrastructure provider. Repeaters' optionality is a particularly important feature from the verifier's point of view, because before the merger, the only relay miners used to earn MEVs by manipulating MEV-Geth software was the Flashbots relay. Flashbots Relays reviews transactions to comply with U.S. sanctions. As of December 2022, there are 10 relays on Ethereum, six of which do not review user transactions. Five of the six non-censored relays, which include Agnostic, Ultrasound, Relayoor, Bloxroute Ethical, Bloxroute Max Profit and Manifold, do not require permission, This means that any builder can submit a block to the repeater. The only non-vetted relay that requires permission and requires that the block builder be whitelisted before submitting a block is Bloxroute Ethical. Bloxroute Ethical intentionally rejects blocks from block builders that are detected to be coming from private order streams, in order to provide users with a more "ethical" relay option. Flashbots relays, which require review but no licensing, dominate the market as the most popular relay and also win the most blocks. However, its dominance is waning, as the chart below shows:

In addition to altruistic reasons, builders may choose to run their own high-performance relays so that their blocks can reach the verifier faster than otherwise. Permissive relays that accept blocks from any builder must emulate each block proposed by the builder to ensure that the submitted block is valid. This creates a lag in blind auctions hosted on unlicensed relays. Trusted relay builders who are whitelisted and whose blocks do not need to be checked can be quickly tracked through the block bidding process, which is why some builders may choose to vertically integrate their MEV operations and operate their own relays.

The cost of running the relay

Depending on the performance of the repeater, the cost of operating the repeater can vary considerably. For example, permissive Repeaters are open to more builders, thus potentially creating more lucrative MEV blocks that need to be protected against denial-of-service attacks and spam. In addition, high-performance relays that try to minimize the amount of latency when sending blocks to validators on Ethereum must set up multiple servers to handle variable load conditions and maintain high-bandwidth networks. This is especially important given that Repeaters must emulate blocks submitted by third party or non-whitelisted block builders to ensure they are valid and redisplay all verifiers connected to the repeater at each epoch. The cost of these to run a high performance and competitive repeater can be thousands of dollars per month. However, not all Repeaters are optimized for performance, especially those that are funded as public goods.

In addition to the differences in technical capability and capacity of each repeater, the degree of reliability varies. Repeaters' biggest competitive advantages are uptime, reliability, and a proven track record of fair processing of blocks between block builders and verifiers. Repeaters are in a unique position within the MEV supply chain on Ethereum. As infrastructure, the repeater can learn information about the block and its contents before the verifier submits it on the chain. Therefore, block builders and validators must trust relay operators not to do evil. Evil relay operators may make changes to the original relay specification published by Flashbots that allow them to pre-emt other block builders on bids. To improve trust in Repeaters, most Repeaters operators open source their software and create public endpoints for anyone to monitor their relay activity in real time.

BloXroute's MEV repeater experienced problems a few days after the merge activation, causing the verifier to miss about 88 blocks submitted on the network. BloXroute reimburses the verifier for money lost due to the temporary failure of the repeater. Compensation for validators is a controversial decision that has been seen by other relay operators, such as Blocknative, as creating "negative economic benefits." Based on the cost of running a high performance repeater that competes with a Flashbots repeater, which is a zero cost operation for the user, and the expectation of compensating for user repeater failures, there does not seem to be a strong incentive for relay operators to build a high performance repeater. In fact, although most major pledge pools on Ethereum are connected to multiple Repeaters, Flashbots Repeaters are dominant due to the largest number of blocks submitted. So competition among Repeaters, like competition among block builders, may diminish over time and lead to centralization.

verifier

Verifiers on Ethereum earn passive income. Beyond their initial deposit of 32 Ethereum pieces and software configuration, verifiers have little room to materially increase their rewards for further optimization, which is by design. If consuming more power or using expensive dedicated hardware does affect verifier rewards, then competition among verifiers will lead to specialization and potentially centralization. As Ethereum founder Vitalik Buterin puts it, the goal is to keep the verifiers "as dumb as possible."

One of the criticisms of MEV-Boost is that in order to reduce the risk of specialization and centralization among verifiers, the network transfers this risk to third-party builders. Flashbots and the Ethereum core developers believe that entities that do not interact directly with the Ethereum protocol involve less risk than validators. However, the trend towards centralization among block builders still leads to the same concern that MEV rewards will be concentrated into a small group of experienced participants who can then exert influence over Ethereum by accumulating more ETH. Solutions to the block builder centralization problem are discussed in detail in the next section of this report.

While there is little chance of specialization when operating validators, there is such a problem when it comes to the pledge pool. Pledge pools are entities that operate verifiers on behalf of individuals. Pledging through pools rather than setting up separate validators has several advantages. The entities most capable of providing pledge services are typically cryptocurrency trading platforms, as they already hold and deploy capital on behalf of individuals.

From a trading platform's perspective, offering a pledge service is an easy way to incentivize users to hold assets on their platform for longer by offering them a deposit yield. Most pledge pools also provide the user with the ability to pledge less than 32 ETH and provide a degree of insurance against the failure of the verifier's technical setup. The second and third largest pledged entities on Ethereum are trading platforms.

最大的质押实体是流动性质押服务提供商 Lido。流动性质押衍生品（LSD）是代表质押 ETH 的资产，可以在以太坊上自由交易和转移。用户经常将他们的 LSD 重新抵押到 DeFi 应用（例如 Aave）以获得额外收益。Index Coop 协议为用户提供了一种称为 icETH 的衍生资产，它自动将质押 ETH 获得的 LSD Token 抵押到 Aave 中获得收益，然后用于购买更多质押的以太坊。有时，Index Coop 的收益率几乎是普通抵押 ETH 收益率的两倍。

重复质押的 ETH 带来的丰厚收益使流动性质押服务提供商在采用方面相对于个人质押者和常规质押池具有竞争优势。然而，在流动性质押服务提供商中，竞争格局的特征是「赢者通吃」。尽管还有其他流动性质押提供商，但没有一个像 Lido 一样受欢迎，因为 Lido 的 stETH Token 在 DeFi 市场上积累了最高的流动性。stETH 的深度流动性部分是由于与 Curve 和 Yearn Finance 等主要 DeFi 协议的关键集成。由于更大的技术或监管风险，stETH 的替代品通常以比 ETH 更大的折扣进行交易，并且没有提供与 stETH 一样高的回报。与过去的趋势相反，像 Frax Finance 这样的新质押协议部署了双 Token 模型，让用户获得高于平均水平的收益。在中心化交易平台之外，唯一最适合作为质押池竞争的实体是为用户提供 LSD 的服务，而在这些服务中，拥有最高市场深度的 LSD 协议通常是首选。

Repeater review problem

The MEV supply chain on the merged Ethereum remains vulnerable to regulation due to over-reliance on Flashbots products such as Flashbots Repeaters. More than 60% of all blocks published on Ethereum are built through Flashbots relays, thus enforcing the act of reviewing user transactions. In addition to other review Repeaters such as Bloxroute's "regulated" Repeaters, the block percentage for reviewing user transactions is about 70%.

Since the merger and activation of the MEV-Boost software, the number of non-censored Repeaters running on Ethereum has gradually increased. In November 2022, three new operators, Gnosis, Ultrasound Money, and Builder 0x69 launched their own relay infrastructure to improve Ethereum's censorship resistance. However, the dominance of Flashbots Repeaters has not been materially diminished by the advent of other new Repeaters, as Flashbots Repeaters have maintained a record of near-perfect uptime since their introduction and have free, permissionless, and other features, This means that verifiers and block builders do not have to pay or be whitelisted to connect to the trunk. As mentioned earlier, reliability is one of the most important competencies of a relay, which is why the longer a Flashbots repeater is kept running without interruption, the more it becomes one of the Repeaters that all verifiers trust and use MEV-Boost connections.

Ethereum core developers and the Flashbots team see the relay review as a short-term issue, as there are plans to remove the relay from the MEV supply chain entirely, even if the relay diversification does not improve. The full vision of PBS that inspired MEV-Boost incorporated the role of relays into the Ethereum protocol.

Protocol built-in PBS

The separation of block proposals and builds, sometimes called protocol built-in PBS, was the original motivation for building MEV-Boost as a temporary solution to mitigate the centralization impact of MEVs after the Ethereum merger. The implementation of PBS is an active area of research among Ethereum's core developers, in addition to other important protocol-level changes ongoing that focus on scalability and status expiry, such as danksharding and state expiry. One of PBS's central challenges was to devise a way to facilitate block auctions in a decentralized manner. Protocol built-in PBS will require the Ethereum protocol to create and record a canonical list of block bids from the block builder, and ensure that the verifier receives payment from the builder after the performing builder submits the block.

The original proposal for PBS, written by Vitalik Buterin in June 2021, offered two different ideas for implementation. The first idea suggests that the block builder publish a portion of the block they first create to the chain, along with the amount they pay the verifier and the cryptographic signature verifying that the block is the block they submitted. The verifier who chooses to submit the next block on Ethereum will review the payment list, select the highest one, and then the "winning" block builder will expose the entire contents of the block for the verifier to submit.

The second approach is similar, but instead of the verifier picking from a partial block list, the verifier signs a statement promising to pick from a different transaction package, providing a higher level of optionality and flexibility for execution on the verifier chain. The second method requires a new restriction and penalties if they do not present one of the transaction packages in their list. Since Vitalik Buterin's original proposal, there has been new community discussion around alternative paradigms of PBS, such as redesigning the core mechanism so that the bidding process takes place in a single slot  Not two (slot is the unit of time on the beacon chain that lasts for 12 seconds, during which the verifier can submit a block).

Phil Daian, founder of Flashbots, has also floated the idea of a "lightweight" version of PBS, in which verifiers and builders do not participate in block auctions at all. Instead, the verifier selects the most profitable payment from the builder by creating a new transaction type. The new transaction type transfers the rights over the availability of the block data to the chosen builder.

Protocol Mandatory verifier Commitment (PEPC)

In addition to PBS built into the protocol, Ethereum developers are considering another possible framework for enabling block auctions within the protocol. Called Protocol Mandatory Verifier Commitment (PEPC), this framework attempts to enforce the allocation mechanism of block rewards by having verifiers enforce more complex rules around how blocks are created, such as enforcing limits on Gas usage, limiting the use of block space, communication state access lists, and specifying compatibility of transaction flows. EigenLayer is a smart contract protocol currently under development that can be used as a testing ground for PEPC and other experiments related to applying additional forfeiture conditions to verifiers.

EigenLayer 协议使验证者能够通过将其质押的 ETH 重新质押到以太坊、其他应用和替代区块链协议中来获得额外收益。在 EigenLayer 上设想了两种再质押模式：通过更新验证者取款凭证进行本地再质押，以及通过将流动性质押衍生 Token 存入 EigenLayer 智能合约来进行流动性再质押。通过对验证者实施额外的罚没条件，EigenLayer 的再质押成为可能。根据验证者通过 EigenLayer 协议选择加入的中间件和规则，对不当行为有额外的惩罚，可以最大限度地减少再质押对以太坊安全的危害。

EigenLayer expects to roll out its repledge service in 2023. In the first phase of its rollout, EigenLayer will only allow verifiers to select a select set of repledge middleware. For example, verifiers will be able to re-pledge to the Eigen Data Availability Layer, which is designed to serve Layer 2 Rollup such as Arbitrum and Optimism with highly customizable and highly scalable data availability services. Over time, however, EigenLayer's vision is to enable permissionless innovation and enable users to create and launch their own repledge middleware. A repledge middleware that could theoretically be developed on top of EigenLayer in the future is the partial block auction component.

Due to the use of MEV-Boost and Repeaters, verifiers cannot insert their own transactions into a block built by a third party builder because they cannot see the content of the block until they submit it to the chain. The repeater shows only the block header and reward to the verifier. Only after the verifier commits a particular block by signing the block header does the relay send back the full contents of the block for the verifier to commit on the chain. This is to ensure that the verifier cannot look at the block content and reconstruct it on its own. However, if additional penalty rules are imposed by EigenLayer on the verifier rebuilding blocks, there is a stronger guarantee that the blocks originally constructed by the block builder are properly retained, otherwise the repledge verifier will be severely penalized.

The EigenLayer protocol will act as middleware software to facilitate the bidding process between block builders and verifiers for portions of the block space. This is an important feature that removes concerns about repeater censorship and ensures that Ethereum's censorship resistance is enhanced by the ability to return transactions that the verifier proposes to include in the block. In addition, EigenLayer's long-term vision is to support a whole suite of repledge middleware and penalty schemes that are the basis of PEPC's research. Many components of PEPC will be tested by development of EigenLayer, such as how the core principles behind PBS are currently tested by MEV-Boost before PBS is built into the protocol.

Protocol with built-in PBS and PEpcs is likely years away from implementation. Further research is needed on the complexity of solutions within the protocol and the impact on the behavior of validators. In addition to further research, there are other protocol-level upgrades aimed at improving Ethereum's virtual machines and scalability that are likely to take priority now that the merger is over. However, there is still a risk that the repeater will preemt the block builder until the in-protocol solution for the MEV block auction is ready. To mitigate this risk, relay diversity is important in the short term, as are other temporary solutions, such as through new smart contract protocols (such as EigenLayer) or alternative network-level solutions (such as the closed beacon chain concept). As background, the concept of a closed beacon chain developed by Gnosis CEO Martin Kppelmann proposes selectively encrypting user transactions through distributed key generation so that the contents of the transaction are not leaked before being included on the chain. A proof of concept for a closed beacon Chain is expected to be implemented with the Gnosis Chain later this year.

Block builder centralization problem

Beyond the repeater review, there is concern that block builders will be concentrated in a small number of specialized entities. Building profitable blocks is a resource-intensive activity because the block builder has only a short amount of time (about 12 seconds) to run multiple different block simulations to determine the block that maximizes returns. Leaving the resource-intensive and highly optimizable block builder activities to the combined verifier naturally provides a large, complex pledge pool with an advantage over the independent verifier, as the former can invest in the best block building solution, while the latter cannot. Thus, to prevent MEVs from becoming Ethereum's centralizing force, MEV-Boost separates block building activities from verifiers. Under the PBS model, the verifier, whether operated by a large pledge pool or an independent node operator, can outsource the responsibility for building profitable blocks that include MEV rewards to a third party block builder, and in this way avoid the concentration of MEV rewards into a large pledge entity.

However, outsourcing block building activities to third-party block builders means that the block builder market still has the potential to become centralized. While this is better than the validator becoming centralized because of the MEV, it is still less than ideal and creates regulatory risks at the beginning of the MEV supply chain. To mitigate the negative externalities of builder-centralization, Flashbots has made small tweaks to the MEV-Boost software in recent months, most notably allowing verifiers to set a minimum bid by setting the minimum bid above zero if the reward for a block built by a third-party builder does not exceed a certain threshold, The verifier node operator can automatically build blocks locally from the Ethereum memory pool. In addition to the minimum bid, Ethereum core developers are making adjustments to the Ethereum engine API to help verifiers more easily compare rewards for locally built blocks and third-party built blocks.

As of December 31, 2022, 75% of the MEV-Boost block was built by Flashbots. Through competition, the dominance of Flashbots block builders is diminishing. By the end of December 2022, the percentage of blocks built by anonymous builders had increased from less than 10 percent in September 2022 to nearly 50 percent.

In addition to increasing competition, Ethereum core developers and the Flashbots team are discussing a number of other solutions to address the negative externalities of block builder centralization.

Censorship boycott list

The first and simplest solution is to review boycott lists (crLists). It's an idea that core Ethereum developers have been talking about since as early as January 2022. It proposes a list of transactions that third-party block builders must include when building blocks. This ensures that even if the block build market does become centralized, builders have no right to review transactions to reduce Ethereum's trusted neutrality by building regulatory blocks. By using crLists, the verifier will be able to force a list of transactions from the common memory pool that the block builder must accept into their block. In terms of implementation, crLists is not difficult. Robert Miller, product lead at Flashbots, said in the podcast that crLists could be implemented in as little as 2 to 3 months if there is enough consensus among the core Ethereum developers for code updates. However, there is little consensus among developers on enforcing crLists at the protocol level, as some argue that crLists is not a short-term solution to the builder centralization problem. Some developers believe that addressing the root of the problem by decentralizing the role of the builder rather than implementing crLists would be a more effective solution.

Cooperative building block

The Ethereum community is currently working on how to redesign the core responsibilities of the block builder so that multiple builders collaborate to create a block. The builder relies on highly specialized algorithms to combine transactions from searchers and local memory pools. Multiple builders can run their algorithms to collaboratively build a block, and a combination of different aggregation techniques may result in a block that is more profitable than one. Creating blocks independently, rather than in collaboration with others, is only possible if the builder can run their algorithm independently and hide parts of the block's contents to prevent other builders from stealing their MEVs. Through decentralized computing and hardware developments, several independent builders can pool resources together to build blocks without compromising sensitive information. Discussions around breaking the responsibility of the block builder often rely on the use of advanced cryptography, such as zero knowledge and polynomial commitments. A Decentralized Block Builder Approach Compared to crLists. Several independent builders may pool resources together for block building without disclosing sensitive information. Discussions around breaking the responsibility of the block builder often rely on the use of advanced cryptography, such as zero knowledge and polynomial commitments. The decentralized block builder's approach is a less well-defined and developed area of research than crLists.

SUAVE

Flashbots is actively working on a solution to decentralize the role of building blocks by collaborating on building blocks. The project is called the Single Unifying Auction for Value Expression (SUAVE). SUAVE was introduced by Flashbots co-founder Phil Daian on October 14, 2022, during Devcon, the annual Ethereum developer conference. Daian describes it as a MeV-aware encrypted memory pool that is used to return MEV profits to the end user. In late November, Flashbots published a blog post titled "The Future of MEV is SUAVE" that revealed more details about the project. The blog describes SUAVE as an independent blockchain network that can be used to extract cross-chain MEVs. "Importantly, SUAVE goes beyond the sequencing of a single blockchain. We design SUAVE as a memory pool and block generator for all blockchains," the article said.

Today, there are few technical details about how SUAVE works. The currently available information about SUAVE illustrates the mental framework that inspired the product architecture, rather than detailing the architecture of SUAVE itself. In theory, SUAVE would be a blockchain capable of accepting expressions of user preferences from multiple blockchains and then assisting a decentralized network of block builders to propose blocks to each network in a trust-free manner. The SUAVE chain will consist of three main components: a universal preference environment, an optimal execution marketplace, and a decentralized block building network.

The preference environment is conceived to be as flexible as possible, meaning that users should be able to express not only their preferences for MEVs, but also their preferences for the ordering or placement of any type of transaction within the block. This preference will be associated with bidding contracts in which the user will lock up a certain number of ETH to incentivise the execution of their preference, which may be as complex as the state representation of the block or as simple as packaging a transaction into the next block.

The preferences are then passed on to the execution market. In an execution market, participants called performers compete to provide the best possible execution of user preferences. Today, the block builder can be considered the enforcer of the searcher's bid. On the SUAVE chain, the performer will process various transaction preferences in exchange for ETH locked by the user in the preferred market. The final part of the SUAVE chain is the decentralized builder marketplace. Details about the market are the least detailed of the three. At best, SUAVE chains will enable blocks to be built collaboratively among builders, using secure enclaves to protect block content privacy.

The performer will scan the preference market and run algorithms to combine different user preferences and searcher transaction packages in a block. These blocks are iterated, improved, and propagated among performers so that the final block is enriched by the contributions of multiple performers. In this way, while SUAVE's decentralized block building network may introduce more delays in the block building process, it may also result in more valuable blocks, as these blocks produce blocks that benefit from many builders and block building algorithms.

To ensure that user preferences are not compromised during block building, builders will be required to run their transaction sequencing algorithms within secure enclaves, which are isolated computing environments where code and data are processed on computers. Historically, there have been hardware-related vulnerabilities involving the use of secure enclaves, which is why their use in SUAVE could pose a security risk. Flashbots has mentioned that they are exploring alternatives to secure enclaves, including trusted execution environments, full homomorphic encryption, threshold encryption, and multi-party computing. However, according to   According to Flashbots, secure enclaves are the best short-term solution to facilitate decentralized block building over the next 3 to 6 months, based on the maturity of the technology available today. The full vision of SUAVE supporting all three of the above components may take many years to implement.

Flashbots talked a lot about SUAVE, but few details are publicly available today. Some notable aspects of SUAVE's design remain unclear, including:

Cross-domain block space auction. It is not yet clear how the SUAVE chain will support cross-domain block space auctions and insert other alternative Layer 1 blockchains. In order for the bidding contracts in the preferred market to be priced and paid for in ETH, the SUAVE chain will require users to bridge their assets, but details about the architecture of such Bridges are not yet known. However, a recent proposal on the Flashbots forum suggested building SUAVE as a Layer 2 Rollup on Ethereum instead of a Layer 1 blockchain, which would reduce the bridging risk.

User rebates. At present, the exact mechanism by which users will receive rebates on the MEVs they will draw from the transactions remains unclear, although it will reportedly be the first part of the SUAVE implementation.

Use safe enclaves. It is not clear how SUAVE will use secure enclaves to diversify the role of the block builder, as SUAVE may allow executors to host their own enclaves on their own devices, or it may require executors to use trusted cloud hosting solutions.

Closely related to the research on mitigating builder centralization highlighted above, developers at Flashbots and the Ethereum Foundation are discussing solutions in several other areas of MEV, such as:

Improve user transaction privacy.Sometimes referred to as programmable privacy, developers are actively investigating ways to lower barriers to cooperation between builders by enhancing privacy guarantees for user transactions.

The MEV is returned to the end user.The current supply chain of MEVs on Ethereum ensures that most of the value growth of MEVs goes to the block proposer, the verifier on Ethereum, which may incentivize the verifier to collude. MEV smoothing  Is another area of research by Ethereum's core developers, trying to minimize the MEV's block reward differences and prevent verifiers from colluding.

Cross-chain MEV.There is also renewed interest in how MEV mitigation strategies on other Layer 1 blockchains, such as Cosmos, interact with those developed on Ethereum, especially given the trend of increasing DeFi activity on other chains.

conclusion

MEV-Boost enables a more decentralized supply chain of MEVs, in which several different entities can participate as block searchers, builders, validators, or Repeaters. The dominance of Flashbots should be seen as a description of the state of Ethereum before the merger, which will take time to shake off. Despite initial concerns about network censorship and builder centralization, early data on MEVs on Ethereum since the merger suggest that competition among builders is increasing, and that various censor-resistant relays are slowly undermining the dominance of Flashbots relays. However, in the absence of strong incentives to encourage competition among searchers, block builders and relays, the fear is that the MEV supply chain will be dominated by a small number of knowledgeable stakeholders.

Flashbots as an organization continues to work on democratizing MEV, becoming a powerful builder of Ethereum by subsidizing other Repeaters and open sourcing their strategy. Ethereum developers and researchers are working on ways to remove the trusted relay Settings needed to connect builders to validators. However, there are several outstanding issues related to the implementation of PBS, and other major upgrades to the Ethereum protocol, such as proto-danksharding, may be prioritized by core Ethereum developers prior to the implementation of PBS. As a result, the Flashbots team and other new entities in the MEV supply chain are working to further optimize block building and relay technology to make it more resilient and efficient.

Fears of block builder centralisation, while less realistic, remain possible, especially if DeFi activity picks up and MEV yields become more profitable. As a result, developers are pursuing a variety of temporary implementation solutions, namely SUAVE and partial block auctions through smart contract protocols such as EigenLayer. Ethereum developers are gradually addressing MeV-related issues, but there is still a lot of work to be done before the negative externalities of MEVs are offset. While Flashbots has spearheaded a large portion of this effort, the open sourcing of the MEV infrastructure is expected to diversify the stakeholders involved. This could increase the amount of innovation in the future and increase the chances of DeFi on Ethereum creating a more level trading environment than traditional finance.

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