ePBS Enhancements in Ethereum

• ePBS is a protocol upgrade enshrining on-chain proposer-builder separation to mitigate MEV risks and reduce centralization in block production.
• It implements native MEV mitigation strategies, including burn auctions and reward smoothing, which smooth reward variance and promote economic fairness.
• The enhancements reduce validator operational complexity by offloading heavy computation and introduce measures to address the free option problem and safeguard network liveness.

Enhanced Proposer-Builder Separation (ePBS) refers to a set of protocol-level and systemic upgrades, most notably within Ethereum and analogous decentralized systems, that enshrine the previously off-chain separation of block proposers and block builders into the on-chain protocol. The primary motivations are to standardize the block building (auction) process, mitigate trust and centralization vectors associated with private relays (like those used in MEV-Boost), manage Maximal Extractable Value (MEV), and optimize validator operations. However, these changes introduce new challenges, most notably economic liveness risks such as the "free option" problem. The set of enhancements encompasses new on-chain auction mechanisms, MEV mitigation strategies, operational optimizations, economic design innovations, and targeted countermeasures for emergent risks.

1. Formalization and On-Chain Enshrinement of Proposer-Builder Separation

ePBS, as proposed in Ethereum (notably via EIP-7732 for the Glamsterdam upgrade), transitions the proposer-builder separation from off-chain infrastructure to the consensus protocol itself (Koegler, 22 Jun 2025). Under the enshrined scheme, the selection and handoff of block-building rights occur entirely on-chain, replacing third-party relays and trust-based handshakes by:

• Having proposers commit the winning builder's payload header on-chain at the start of the slot;
• Builders placing collateralized bids that are deducted from their on-chain balance upon block selection;
• Introduction of a Payload Timeliness Committee (PTC) which oversees timely payload reveals, providing an honest contribution weighting of approximately 40% to fork choice for compliance.

This design removes the operational reliance on off-chain relay intermediaries (such as MEV-Boost), integrating all communication and selection logic into validated consensus.

Context and Significance:

This on-chain auction significantly reduces centralization risk and enhances transparency. Trustless proposer-builder exchange eliminates relay censorship and single points of failure, thus supporting decentralization and liveness. The mechanism also enables validators to operate lighter clients, as they are no longer responsible for full block construction.

2. Native MEV Mitigation and Reward Smoothing Mechanisms

A central aim of ePBS is to curtail the negative externalities of MEV concentration and extraction. Two key strategies are implemented:

• Committee-Driven MEV Smoothing: Attestation committees share rewards derived from MEV and priority fees from proposed blocks, reducing the variance of validator rewards and diminishing the incentive for centralization or collusion among large stakeholders.
• Burn Auctions and MEV Burn: Builders may commit to burning Ether as a bid, rather than simply transferring it to proposers. This burn mechanism (e.g., “spam resistant block creator selection via burn auction”, “MEV burn—a simple design”) acts as a spam filter and stimulates deflationary pressure on Ether’s circulating supply.

Technical Details:

• The burn auction model imposes a minimum base fee, determined in part by the collective observation of validator committees, on builder bids. Only those bids which exceed this floor are eligible.
• This proof-of-burn approach aligns with EIP-1559 fee market concepts, but instead targets builder auction spam resistance and redistributes MEV value to all holders (via supply shrinkage) rather than to individual block proposers.

3. Reduction in Validator Operational Complexity and Overhead

The enshrinement of PBS externalizes the MEV-heavy computation previously borne by validators and introduces efficiency in block propagation:

• Validators need only process block headers and select from on-chain payload bids, rather than performing transaction ordering, MEV searching, and full payload processing.
• The separation of block header and payload propagation improves propagation latency and enables more timely attestations by committees.
• These changes collectively enhance network scalability and security by allowing validators to focus strictly on consensus and attestation duties, minimizing the risk of chain stagnation due to invalid or delayed payloads.

Context:

By offloading computation to highly specialized builders, validator requirements become less resource-intensive, lowering economic and technical barriers for participation and diversity.

4. The Free Option Problem in ePBS and Liveness Risk

A novel risk emerging from the ePBS upgrade is the "free option" conferred to builders under the protocol’s dual-deadline system (Mazorra et al., 29 Sep 2025). Specifically:

• The builder, having won the on-chain auction and made the requisite commitment, gains a window (e.g., 8 seconds) in which they may, without penalty, choose not to reveal the execution payload or blobs if external market conditions shift unfavorably.
• Exercising this option voids the slot (producing an empty block), degrading network liveness, especially during periods of high volatility and external price fluctuation (e.g., CEX-DEX arbitrage opportunities).
• The theoretical model expresses the builder's profit as

$$\Pi_\tau(y) = \mu + (1 + r_\tau) y - P_\text{DEX}(y/P_0)$$

where $\mu$ is block value independent of risky asset position, $y$ is DEX trade size, $r_\tau$ is price return, and $P_\text{DEX}$ is the AMM cost function.

Empirical estimates indicate the option is exercised in approximately 0.82% of all blocks (for an 8-second window), rising to as much as 6% during high-volatility periods, precisely when liveness is critical.

5. Mitigation Strategies: Window Shortening and Penalty Imposition

The free option problem may be mitigated with systematic protocol adjustments:

• Reduction of the Option Window: Tightening the time between commitment and reveal (from 8 to 2 seconds) reduces average exercise probability by over 77%. The primary trade-off is potential impairment of blob propagation and scalability benefits.
• Penalties for Option Exercise: Introducing a direct penalty for withholding payload/blobs (either static or dynamically adjusted) reduces both option value and exercise probability:

$$V^*(p) = \max_y E[ \max\{ -p, \mu + r y - P_\text{DEX}(y/P_0) \} ]$$

with $$\frac{\partial V^*}{\partial p} = -\Pr[\mu + p + r y < P_\text{DEX}(y/P_0)]$$. Empirically, a penalty of 0.075 ETH reduces exercise rates by around 75%.

Dynamic penalty schemes, e.g., via online projected gradient descent adjusting the penalty according to past exercise rates, further tailor incentives. A necessary consideration is that excessive penalties may discourage builder participation, impacting proposer revenues.

6. Socioeconomic and Tokeneconomic Implications

The ePBS upgrade extends beyond technical robustness to address economic fairness and monetary properties:

• Censorship Resistance: Eliminating relay-based auction intermediaries reduces the attack surface for censoring or front-running transactions.
• Reward Equity: Committee-driven MEV smoothing limits reward variance, thus reducing the resource gap between large and small validators.
• Deflationary Dynamics: MEV burn and burn auction mechanisms incrementally decrease Ether supply, contributing to a systemic deflationary pressure that can benefit long-term holders.
• Economic Liveness and User Protection: Mitigations for the free option problem are especially significant for protecting users during periods of exceptional market volatility, when the uncensored, timely execution of transactions is most critical.

7. Ongoing Directions, Limitations, and Technical Considerations

Implementation of ePBS enhancements requires reconciliation of several trade-offs:

• Ensuring protocol scalability, particularly for blob propagation, while minimizing option window lengths.
• Balancing punitive and incentive mechanisms for builders to maintain robust participation and network throughput.
• Accurately calibrating MEV smoothing and burn parameters to prevent both MEV centralization and liquidity draining from network participants.
• Extending monitoring and attestation committees (PTCs) to robustly enforce payload timeliness and liveness, including handling misbehavior and slashing conditions.

Further research and deployment experience will determine the optimal balance among these competing priorities as Ethereum and other decentralized protocols evolve to fully enshrine proposer-builder separation and its associated enhancements.