One of the many goals of the 2022 Ethereum Merge was to make Ethereum more decentralized. From a validator perspective, it’s not doing badly. Statistics show Coinbase is the largest, controlling almost 12% of staked ETH (although some claim it’s closer to 30%). However, validators don’t create the content of the blocks. Block builders are the ones who include transactions, decide on their order and then bid in the auction to get their block included. This month a single block builder, Beaverbuild, has built more than half of Ethereum’s blocks.
Over 85% of blocks were built by the top two builders, and more than 90% by the top three.
This drive towards centralization is driven by maximal extractable value (MEV) where the block builder reorders transactions to gain an advantage. This usually involves a combination of front running pending transactions and arbitrage.
In the past all pending Ethereum transactions were publicly visible and block builders would select transactions and build blocks. However, in a desire to avoid others seeing transactions, high frequency traders (and other bot operators) have direct relationships with block builders, sending their transactions to them privately. These transactions are only private in the pending state.
Recent research from blocknative found that more than half of Ethereum gas fees are now paid by these private blocks, and these blocks account for 30% of all blocks.
This centralization of the block building function was predicted early last year in a paper published by the Special Mechanism Group (now part of Consensys). The group has proposed one of the potential solutions to address the challenge.
High frequency traders drive centralization
They predicted that high frequency traders (HFTs) would want to use private transactions and the potential profits mean the associated block builder can outbid other builders. Specifically, HFTs tend to arbitrage between prices on centralized exchanges (CEXs) such as Binance and decentralized exchanges (DEXs) such as Uniswap. HFTs want to ensure their transactions come at the top of the block, for which they’re willing to pay handsomely.
Beaverbuild was identified as one of the HFTs, and EigenPhi claims that Symbolic Capital Partners is the HFT associated with Beaverbuild.
Any other player who wants to ensure their transactions are in the winning block is likely to go directly to Beaverbuild. After all, they account for more than half of winning blocks. Failing that, they’d go to the number two, Titan. Given the proposed solutions are still at the research stage, the real question is what can be done soon?
