Who Wins Ethereum Block Building Auctions and Why? (2407.13931v1)

Abstract: The MEV-Boost block auction contributes approximately 90% of all Ethereum blocks. Between October 2023 and March 2024, only three builders produced 80% of them, highlighting the concentration of power within the block builder market. To foster competition and preserve Ethereum's decentralized ethos and censorship-resistance properties, understanding the dominant players' competitive edges is essential. In this paper, we identify features that play a significant role in builders' ability to win blocks and earn profits by conducting a comprehensive empirical analysis of MEV-Boost auctions over a six-month period. We reveal that block market share positively correlates with order flow diversity, while profitability correlates with access to order flow from Exclusive Providers, such as integrated searchers and external providers with exclusivity deals. Additionally, we show a positive correlation between market share and profit margin among the top ten builders, with features such as exclusive signal, non-atomic arbitrages, and Telegram bot flow strongly correlating with both metrics. This highlights a "chicken-and-egg" problem where builders need differentiated order flow to profit, but only receive such flow if they have a significant market share. Overall, this work provides an in-depth analysis of the key features driving the builder market towards centralization and offers valuable insights for designing further iterations of Ethereum block auctions, preserving Ethereum's censorship resistance properties.

• The paper’s main contribution is its empirical analysis of Ethereum’s MEV-Boost auctions, revealing the strategic factors driving builder success.
• It demonstrates that exclusive order flow and low-latency bidding significantly boost profitability while reinforcing market centralization.
• Findings underscore that combining diverse order flows with innovative bidding tactics can mitigate decentralization threats in block-building processes.

Insights into Ethereum Block Building Auctions: An Empirical Analysis

Introduction

The paper "Who Wins Ethereum Block Building Auctions and Why?" offers an empirical analysis of MEV-Boost block auctions on the Ethereum blockchain, which is essential for maintaining decentralized finance protocols. This work aims to dissect the factors that contribute to the success of specific block builders in winning auctions and earning profits. It is crucial to understand these dynamics to preserve Ethereum's decentralized ethos and enhance competition among block builders.

Key Findings

Several essential findings emerge from this research:

1. Market Centralization: A significant concentration of power exists within the Ethereum block builder market. Between October 2023 and March 2024, three block builders—beaverbuild, rsync, and Titan—produced approximately 80% of MEV-Boost blocks. This centralization raises concerns about censorship resistance and the overall health of the network.
2. Order Flow Diversity and Access: The research reveals a positive correlation between a block builder's market share and the diversity of order flow they receive. Additionally, profitability correlates with access to Exclusive Providers (EPs). Builders need differentiated order flow to profit, creating a "chicken-and-egg" problem where significant market share is necessary to attract valuable order flow, and valuable flow is necessary to build that market share.
3. Impact of Exclusive Order Flow: Exclusive order flow provides approximately 66.69% of all block value while consuming only 19.6% of the blockspace. This indicates that MEV (Maximal Extractable Value) searchers predominantly avoid the public mempool, sending their transactions directly to builders.
4. Strategies for Success:
   • Block Packing: Builders who concentrate valuable transactions at the top of the block (ToB) tend to be more successful.
   • Subsidization: Some builders heavily subsidize their blocks to gain market share, a strategy that is mainly adopted by new entrants struggling to gain traction.
   • Latency and Bidding: Successful builders employ advanced bidding strategies, often placing multiple bids with short intervals, reflecting the fast-changing value of block payloads. This competitive bidding highlights the importance of low-latency infrastructure.
   • Bidding Cancellations: Builders frequently cancel bids to adapt to new information, especially when involved in latency-sensitive arbitrage strategies.

Practical and Theoretical Implications

Practical Implications:

• Validator Incentives: Identifying and understanding the dynamics that incentivize validators and builders can help in designing better block auction mechanisms to ensure fair rewards distribution and decentralized validation.
• Regulatory Considerations: Centralized block building creates a single point of failure, potentially attracting regulatory scrutiny and necessitating mechanisms to foster decentralization.
• Improved Auction Formats: Shifting to a sealed-bid auction format could mitigate the competitive latency strategies, ensuring a more level playing field.

Theoretical Implications:

• Economic Models of MEV: The findings can refine economic models of MEV extraction and distribution, accounting for how diverse order flows and bidding strategies influence profitability.
• Decentralization Metrics: Measures of decentralization must consider not just validator distribution but also the centralization of block proposal and building mechanisms.

Speculations on Future Developments

Future developments in AI and blockchain technologies could provide more robust tools for analyzing and managing order flows and bidding strategies. Integrating machine learning could optimize the bid-cancellation strategies and predict the most profitable order flow compositions dynamically, thus enabling more sophisticated and adaptive builder strategies. Mechanisms such as trusted execution environments (TEEs) and decentralized builders (e.g., SUAVE) are potential game-changers that can decentralize block building further, ensuring fair and transparent validation processes.

Conclusion

The comprehensive empirical analysis provided by this paper underscores the intricacies of Ethereum's block-building market. The identified factors such as order flow diversity, access to EPs, and sophisticated bidding strategies accentuate the current trends toward centralization. Addressing these tendencies is essential to safeguard Ethereum's decentralized and censorship-resistant properties. The insights offered by this paper are invaluable for designing advanced solutions and mechanisms to preserve and enhance the decentralized nature of Ethereum block auctions.