Ethereum's Proposer-Builder Separation Reduces MEV Centralization

Ethereum’s block building process is a complex system that determines which transactions are included in a block and in what order. This process is crucial for the network's efficiency, decentralization, and fairness. Over time, Ethereum’s block production has evolved, particularly with the introduction of Maximally Extractable Value (MEV) and the shift from validator-driven selection to specialized builders.

Ethereum organizes time into discrete units called slots and epochs. A slot is a 12-second period in which a single block can be proposed. If no validator submits a block within a slot, it is skipped. An epoch consists of 32 slots, totaling 6.4 minutes. At the end of each epoch, validator duties are shuffled to ensure decentralization and security. Ethereum achieves economic finality after 2 epochs, making it nearly impossible to revert the blocks.

Ethereum has a large number of validators, and to efficiently validate transactions and attest to block validity, validators are divided into committees. Each committee consists of a subset of validators randomly assigned at the beginning of an epoch using RANDAO. This ensures that no single validator has disproportionate influence. Each committee participates in voting on blocks and confirming their validity. The size of a committee depends on the total number of active validators in the network, but generally, each committee has at least 128 validators.

In each slot, there are N committees assigned, and each committee has M validators. Aggregators in each committee are tasked with aggregating the attestations of their respective committee, resulting in a final aggregated attestation for each slot. The proposer of the next slot picks up these N attestations. During an epoch, every active validator is a member of exactly one committee, and the protocol adjusts the total number of committees in each epoch according to the number of active validators. The current design is to have 64 committees per slot.

The beacon chain shuffling provides a minimum of 1 epoch lookahead on the validator's upcoming committee assignments for attesting. Validators can calculate the subnet id, join the respective committee, and be prepared for their duties. Additionally, a validator might be assigned as the aggregator of a specific committee and must subscribe to the respective topic.

Within each slot, a single validator from the respective committee is selected as the proposer to create and submit a block. The proposer’s role is crucial as they construct a block by including pending transactions and attestations, sign and broadcast the SignedBeaconBlock to the network, and earn rewards for successfully proposing valid blocks.

MEV is the additional profit extracted by validators by reordering, including, or censoring the transactions within a block. Common MEV strategies include front-running, back-running, and sandwich attacks. Before Ethereum transitioned to Proposer-Builder Separation (PBS), validators had full control over transaction ordering and could directly extract MEV or outsource it to specialized searchers. However, this led to centralization of MEV power, increased censorship risk, and network congestion with high gas fees.

To address these issues, PBS was introduced, splitting the responsibilities of block production between block builders and validators. Block builders specialize in constructing optimized blocks, often incorporating MEV strategies, while validators simply select the most profitable block offered by builders. This process involves builders competing to construct the most profitable block, bidding to propose their block to validators, and validators selecting the highest-bidding builder’s block.

Currently, users submit transactions via JSON-RPC connected wallets, which are then submitted into the public mempool. Searchers scan the mempool for MEV opportunities and submit transactions accordingly. Builders construct execution payloads using received transactions, including bundles sent by searchers, high-priority transactions, and general transactions ordered to maximize revenue. Relays validate the payloads sent by various builders and choose the one with the maximum profit/bid. The relay-proposer communication ensures that the proposer does not cheat by sending only the header of the selected block payload.

Builders may censor transactions, particularly those interacting with OFAC addresses, to avoid legal repercussions. Inclusion Lists are a solution to transaction censoring, enforcing that transactions in the list must be included in the block. FOCIL is a new design proposed in 2024 that builds on Inclusion Lists to increase credible neutrality by allowing multiple validators to provide suggestions on the Inclusion List for a specific slot.

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PBS offers several benefits for MEV management, including decentralization of MEV extraction, fairer revenue distribution, and more efficient block space utilization. However, it also presents challenges such as centralization risk among builders and trust in off-chain MEV relays. Despite these challenges, PBS represents a significant step forward in managing MEV and ensuring the fairness and efficiency of the Ethereum network.