MEV-Boost & Proposer-Builder Separation (PBS) in Ethereum

Maximal Extractable Value (MEV) and Proposer-Builder Separation (PBS) are critical concepts in the current and future landscape of Ethereum, particularly after its transition to Proof-of-Stake (PoS). They aim to address the complexities and potential centralizing forces introduced by MEV.

Maximal Extractable Value (MEV)

What is MEV?

MEV, or Maximal Extractable Value, refers to the maximum value that can be extracted from a blockchain by reordering, including, or excluding transactions within a block. This value is extracted by block producers (validators in PoS, miners in PoW) and other sophisticated actors (called “searchers”) who observe the public mempool (where unconfirmed transactions reside) and strategically manipulate transaction order.

How MEV is extracted:

• Arbitrage: Identifying price discrepancies of an asset across different decentralized exchanges (DEXs) and executing a series of trades within a single block to profit from the difference.
• Liquidations: Profiting from liquidating undercollateralized loans on DeFi lending protocols by being the first to submit the liquidation transaction when certain price conditions are met.
• Sandwich attacks: A common and often detrimental MEV strategy where a searcher sees a large incoming swap transaction in the mempool. They then place a buy order before the victim’s transaction and a sell order after it, profiting from the price movement caused by the victim’s trade.
• Generalized frontrunning/backrunning: Placing transactions strategically before or after other transactions to profit from their effects.

Why MEV is a problem:

• Centralization risk: Extracting MEV can be highly profitable and requires specialized infrastructure, algorithms, and capital. This can lead to an “MEV-driven arms race,” where large staking pools or professional entities with superior resources can outcompete smaller validators, potentially leading to centralization of block production.
• User harm: Practices like sandwich attacks directly extract value from ordinary users, leading to worse execution prices.
• Network instability: The high value of MEV can incentivize validators to “reorg” (reorganize) blocks that have already been finalized, to capture missed MEV opportunities. This undermines the security and finality of the blockchain.
• Fairness and censorship concerns: The ability to include, exclude, or reorder transactions can lead to unfair transaction ordering or even censorship of certain transactions if block producers decide not to include them.

Proposer-Builder Separation (PBS)

PBS is a fundamental design principle and a roadmap item for Ethereum that aims to mitigate the negative effects of MEV by decoupling the roles of block production. Instead of a single validator performing both tasks, PBS separates them into two distinct roles:

1. Proposer (Validator): Responsible for proposing a valid block to the network. Their primary role is to select the most profitable block header presented to them and commit it to the blockchain. They are chosen pseudorandomly by the protocol to propose a block in a given slot.
2. Builder: Specialised entities (not necessarily validators) that construct the actual contents of the block (the “payload”). They are responsible for selecting, ordering, and bundling transactions to maximize MEV and overall block value. Builders compete in an auction to sell their built blocks to proposers.

How PBS works:

1. Searchers identify MEV opportunities and create “bundles” of transactions (e.g., arbitrage sequences) to capture that value. They often pay “bribes” to builders to include their bundles.
2. Builders gather transactions from the public mempool and private transaction relays (like Flashbots Protect RPC) and combine them with searcher bundles. They then create a complete block payload, optimizing for total value (transaction fees + MEV).
3. Builders bid for block space: Builders submit bids (often in ETH) representing the value of their constructed block to relays.
4. Relays act as trusted intermediaries. They aggregate bids from multiple builders and verify the validity of the proposed blocks without revealing their full contents. They then pass the “block header” (a summary of the block, including the payment to the proposer) of the highest-bidding block to the current proposer.
5. Proposer selects the best block: The proposer receives multiple block headers from various relays and selects the one offering the highest payment. They then sign the header, effectively committing to that block, and publish it to the network.
6. Full block disclosure: Once the proposer signs the header, the relay reveals the full block contents to the network for propagation and validation. The builder’s payment to the proposer is usually included as a transaction within the block itself.

MEV-Boost: The Current Out-of-Protocol Implementation of PBS

While full, “enshrined” PBS (ePBS) is a long-term goal for Ethereum, MEV-Boost is an out-of-protocol middleware developed by Flashbots that has already implemented a form of PBS in Ethereum since The Merge.

• Middleware: MEV-Boost runs as a separate piece of software alongside a validator’s consensus and execution clients.
• Competitive marketplace: It connects validators to a marketplace of independent block builders.
• Validator choice: Validators opt-in to use MEV-Boost. When it’s their turn to propose a block, MEV-Boost queries a network of “relays” that collect blocks from various builders. It then presents the validator with the most profitable block header, which the validator signs and publishes.
• Democratizing MEV: MEV-Boost allows solo stakers and smaller validators to access the highly profitable MEV opportunities that were previously only accessible to large, sophisticated players, thereby democratizing MEV rewards.

Impact of PBS (and MEV-Boost) on Ethereum Decentralization:

PBS, through MEV-Boost and its future enshrined form, aims to significantly improve Ethereum’s decentralization in several ways:

Benefits for Decentralization:

• Reduces validator complexity and resource requirements: By outsourcing block building to specialized entities, validators no longer need to run complex MEV-extracting software or maintain highly optimized infrastructure. This lowers the barrier to entry for solo stakers and allows them to participate profitably without specialized MEV knowledge.
• Democratizes MEV access: MEV-Boost allows all validators, regardless of size or technical sophistication, to earn a share of MEV. This helps distribute MEV profits more widely and reduces the economic incentive for validator centralization.
• Increased competition among builders: A competitive market for block building means that builders must offer attractive bids to proposers, potentially leading to more efficient MEV extraction and a fairer distribution of value.
• Censorship resistance (potential): In a truly competitive builder market, if one builder attempts to censor transactions, other builders who include those transactions could outbid them. This makes systemic censorship more difficult, especially with future protocol-level solutions like Censorship Resistance Lists (crLists).
• Separation of concerns: Explicitly separating the roles allows for specialization. Builders can focus on optimizing blocks, while proposers can focus on validating and proposing them, leading to a more robust and modular network.

Risks and Challenges for Decentralization (especially with current MEV-Boost):

• Relay centralization: MEV-Boost relies on “relays” as trusted intermediaries. A small number of relays currently handle a significant portion of block traffic. This centralization of relays introduces a potential single point of failure and a vector for censorship (as seen with OFAC compliance by some relays). This is a major driver for “enshrined PBS” (ePBS), which aims to remove the need for trusted third-party relays.
• Builder centralization: While PBS aims to increase competition, there’s a risk that the block-building market could become centralized around a few dominant builders due to economies of scale, access to exclusive order flow, or superior infrastructure. If a few builders control a large percentage of block production, they could exert significant influence over transaction ordering and potentially engage in censorship.
• Trust assumptions: In the current MEV-Boost model, validators implicitly trust relays not to act maliciously (e.g., provide invalid blocks or steal MEV). While these are detectable, the system isn’t fully trustless without enshrined PBS.
• Communication overhead: The off-chain communication between builders, relays, and proposers adds complexity and can introduce latency, potentially leading to missed slots or reorgs if not managed efficiently.

Enshrined PBS (ePBS)

The long-term vision for Ethereum is Enshrined PBS (ePBS), where the proposer-builder separation is built directly into the Ethereum protocol itself, eliminating the need for external middleware like MEV-Boost and the trusted relays. This would:

• Remove trusted relays: ePBS aims to create a trustless mechanism for builders to submit bids and for proposers to select blocks, eliminating the need for centralized relays.
• Stronger censorship resistance: By making builder competition an in-protocol feature, it becomes much harder for any single entity to systematically censor transactions.
• Reduced attack surface: Integrating PBS into the core protocol can reduce the risks associated with out-of-protocol solutions and improve overall network security.

In summary, MEV is a significant force in Ethereum that can both generate value and introduce centralizing pressures. Proposer-Builder Separation, currently implemented through MEV-Boost, is a crucial step towards addressing these challenges. While it has already brought substantial benefits in democratizing MEV and reducing validator complexity, the journey towards a fully trustless and censorship-resistant ePBS remains a key area of research and development for Ethereum.