Original Title: 《PBS: Neutralizing the Dark Forest》

Author: pseudotheos

Compiled by: The Way of DeFi

Domothy and I co-authored this article. PBS is still an active area of research, but this comprehensive article aims to summarize the research progress and directions so far.

In the existing architecture, block proposers (formerly miners) select transactions from the mempool to build blocks. On Ethereum, these are composed of validators who run both consensus clients and execution clients. Theoretically, block builders would choose transactions that pay the highest fees—but this is not a strict requirement. Since a block builder has complete control over tx ordering and inclusion, they can run complex MEV strategies. MEV is very common wherever there is activity, making Ethereum the most lucrative MEV battleground, with over $675 million extracted to date.

Data Source: Token Terminal

## 1. Quick Introduction to MEV

Technically, Ethereum transactions are just a series of bytes. Therefore, the costs involved in creating and sending them are negligible. A good example is on-chain arbitrage. When the same asset is priced differently across exchanges, it creates opportunities for value extraction. Any money earned from this transaction, minus gas fees, is essentially the profit extracted from economic activity on the blockchain.

However, there is a problem: due to the transparency of the blockchain, anyone with a node can identify and submit the same transaction. No matter how many people send their transactions, there will only be one winner: the one whose submitted transaction gets confirmed. As you might imagine, this greatly favors those who decide which transactions enter the next block and in what order, as they can simply exploit these transactions!

This example illustrates the so-called "MEV opportunity." Given the list of pending transactions waiting for confirmation and the current global state of Ethereum, there exists a specific transaction order that allows block builders to extract maximum value from the ecosystem. Most of the time, MEV opportunities are more complex and require multiple transactions to be executed in the correct order, but the principle remains the same: block builders have a significant advantage.

## 2. The Evolution of MEV

A few years ago, when Ethereum was still protected by Proof of Work (PoW), the concept of MEV was primarily theoretical. In contrast, transactions were simple: "This is what I want to do, and this is how much I'm willing to pay the miner to include it in the next block."

Miners would simply look at the pending transaction list, sort by highest fees, and include as many transactions as possible in a block. The complexity of the transactions themselves was irrelevant. This satisfied some fairness concepts: each miner would run the same code, follow the same rules, and earn the same amount of money (proportional to their hash power).

But in short, this could not last. Financial incentives breed competition, and the most inclusive MEV transactions win, as miners are also economically incentivized to choose the most profitable transactions. In these cases, miners are the ones profiting the most, without needing to play any games. If there is enough competition, profits always tend to go to the miners (or validators, in the case of PoS Ethereum).

Short-term: Gas Wars

The first consequence quickly became apparent. Every MEV transaction, regardless of success, still counts as an attempt included on-chain. This wasted a significant amount of Ethereum's already limited block space, leading to fees that were incredibly high.

Data Source: Etherscan

Mid-term: Centralization of Consensus

As miners realized the power they had as block builders, a new force of centralization emerged. Regardless of bids, block builders could guarantee the inclusion of their MEV transactions.

Note: After EIP-1559, block builders still need to pay the base fee.

The new strategy was for block builders to actively monitor the chain for MEV opportunities and directly exploit their power. It is easy to see why this is a powerful vector for centralization, independent of the consensus mechanism: creating blocks more frequently leads to more MEV extraction. Unfortunately, over time, MEV broke the guiding principle of fairness through economies of scale.

Long-term: Misaligned Incentives

This centralization led to second-order consequences: in addition to ordering transactions within a block, block builders could also choose to add their blocks as expected or roll back the blockchain a few blocks to effectively "steal" all MEV opportunities from recent transactions. In some extreme cases, stealing MEV from the previous block might be a more profitable option, easily leading to unstable blockchains continually splitting into smaller forks, resulting in longer settlement times.

Fortunately, the last issue never materialized at the base layer. However, relying on a few outstanding actors to act against powerful economic incentives is not the level of resilience Ethereum aspires to. Over a sufficiently long timeframe, if left unchecked, MEV poses an existential threat to Ethereum.

## 3. Potential Solutions

There are currently many proposals to mitigate the aforementioned consequences of MEV, and it remains an open area of research. Some potential solutions include:

1. Mandatory Fee-based Block Ordering

Results:

(1) Back to gas wars;

(2) Validators can ignore inconvenient transactions due to lack of mempool consensus;

2. Mandatory Random Order of Transaction Inclusion

Open question: Who decides what is random?

Results:

(1) Back to gas wars;

(2) Increased latency in transaction consensus;

(3) Validators can artificially keep blocks empty aside from their MEV transactions, leading to a poor experience.

3. Encrypted Mempool

Results:

(1) Reduces toxic MEV;

(2) Requires an increased assumption of validator honesty;

(3) Increases latency; (4) Increases complexity;

(5) Increases censorship resistance;

(6) Self-contained MEV for validators is unaffected.

Researchers are exploring more potential solutions, including cryptographic methods and cryptoeconomic approaches. "Solving MEV" as a whole is impossible. Any barriers will lead to deeper MEV extraction, exacerbating centralization. Surprisingly, the next best thing is to accept that MEV is inevitable, and whether we like it or not, it will always be a vector for centralization.

## 4. Block Building Market

The solution is to separate the process of proposing blocks from the process of building them, hence the name Proposer-Builder Separation (PBS). The idea of "block proposer" has existed in Ethereum's PoS design. Every 12 seconds, a validator is selected as the block proposer. How the block is built is irrelevant. The expected job of the validator is to propose it to the rest of the network, while the job of every other validator is to validate it to ensure it does not violate any rules.

The overall idea of PBS is that block builders will compete and submit bids to any validator responsible for proposing blocks. The only thing this validator needs to do is propose the highest-bid block.

With PBS, the highly adversarial MEV battleground is carefully isolated to where block building occurs. Additionally, the auction system allows all validators to easily benefit from MEV opportunities discovered by block builders, regardless of scale.

Abandoning and turning the whole thing into a large auction, without truly attempting to fix MEV itself, seems like something we do not want to see. However, MEV is simply too profitable to be viewed as some rare edge case. If we do not explicitly stipulate such auctions in the protocol, they will still exist in some form, except they will be off-chain, opaque, and subject to the centralizing forces mentioned earlier. It is easy to see what private block building auctions would look like if left unchecked, and all the damage they could cause to the decentralization and trust neutrality of the blockchain.

With PBS, we instead benefit from this inevitable economic reality— we can design rules around what such a market should look like and eliminate the parts we do not like. We can make it fair, transparent, and accessible to every validator.

Ideal Block Building Market

What should an ideal market look like?

1. Neutral

(1) Block proposers should not have incentives to favor certain block builders;

(2) Block builders should have no incentives to favor certain block proposers;

2. Minimal Block Proposer Overhead

(1) Low hardware requirements allow for more block proposers in the market;

3. Bundled Security

(1) Block proposers should not be able to intercept built blocks and replace their own transactions with MEV transactions;

4. Simplicity of Consensus

(1) Blocks built by the block building market should not require significant changes to the consensus layer.

Existing Block Building Markets

Implementing PBS directly in the protocol would be complex and take some time. In the meantime, several off-protocol solutions have emerged to achieve the same goals, but they come with some subtle trade-offs. While not formally written into the protocol, off-protocol implementations allow for a higher degree of experimentation and provide an excellent testing ground for eventual implementation. Flashbots has created a block building market that includes all-or-nothing bundles and conditional payments.

Their tools include:

1. MEV-Geth

(1) Detrimental to client diversity

(2) Only works before the merge

2. MEV-Boost

(1) Client-agnostic, addressing issues from previous implementations

(2) Validators cannot manipulate blocks (they only receive the block body after signing the block header)

However, off-protocol markets still have some drawbacks:

(1) Relayers still need to be trusted

(2) Censorship issues

Image Credit: Jon Charbonneau and Delphi Digital

## 5. Remaining Issues

Proper PBS design remains an active area of research. We have guiding principles, but the final implementation is not easy.

1. Centralization of Block Builders

Centralization of block builders is less harmful than centralization of block proposers, but still not ideal. Therefore, we are conducting research to ultimately create a decentralized block builder network, hoping it can outperform centralized entities.

2. Censorship Issues

Implementing crLists still allows for censorship, but in a competitive market, long-term transaction censorship becomes too costly, requiring block builders to fill blocks. If block builders do not fill blocks, the space will be filled with transactions chosen by block proposers. This increased defense significantly reduces the existential threat posed by extreme centralization of block builders. Encrypted mempools can also simultaneously address censorship issues and toxic MEV, but require upgrades to the underlying protocol.

3. High MEV Disparities

Even if profits are democratized through PBS, the luck of block proposers remains an incentive for pooling staked ETH. The more validators an entity owns, the more likely it is to propose blocks and receive MEV rewards. Implementing MEV smoothing in the core protocol would allow us to achieve an ideal fairness scenario, where staking rewards are proportional to the amount staked, as MEV rewards would be aggregated and evenly distributed to validators. Furthermore, if implemented optimally, in-protocol MEV smoothing would reduce incentives to circumvent the in-protocol PBS design.

4. Formal Specifications

There are many important research initiatives in the PBS space, but there is a noticeable lack of formal analysis regarding incentives or economics. Additionally, the research space is rapidly evolving, and there will inevitably be more developments before we reach the analysis and implementation stages.

## 6. Conclusion

In the past few years, much has happened in MEV and protocol research, and the more we understand it, the broader the topic becomes. Although we still have unresolved issues, we are on the path toward a decentralized, highly resilient, and neutral global network. If you want to delve deeper, Domothy has compiled a list for further reading here.