Based on -
https://arxiv.org/pdf/2305.19037.pdf

In September 2022, Ethereum underwent a significant transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS). This transition brought with it another paradigm shift known as the Proposer-Builder Separation (PBS) scheme. This new scheme aimed to decentralize block validation by separating the roles of selecting and ordering transactions in a block (the builder's role) from validating its contents and proposing the block to the network (the proposer's role).

In the PBS landscape, proposers, who are validators in the PoS consensus protocol, now rely on specialized block builders to create blocks with the most value. Additionally, a new player, the relay, has emerged in this ecosystem, acting as a mediator between builders and proposers. This blog post will delve into the intricacies of the PBS scheme, its promises, and the realities observed since its implementation.

The Promise of PBS:

The Proposer-Builder Separation (PBS) scheme introduces a competition aspect to block assembly in the Ethereum network. Here's how it enhances efficiency:

Traditionally in blockchain, a single entity (a miner in Proof-of-Work, or a validator in Proof-of-Stake) is responsible for both assembling transactions into a block and proposing that block to be added to the blockchain.

In the PBS scheme, this process is divided into two distinct roles:

1. Builders are responsible for gathering pending transactions from the transaction pool, assembling them into a block, and then bidding for their block to be proposed. Each builder may have different strategies for which transactions they include, depending on the transaction fees (also known as gas fees in Ethereum), the strategic ordering of transactions for MEV extraction, and their available resources.

2. Proposers are responsible for receiving the blocks assembled by builders, running an auction for these blocks, and then proposing the block from the highest bidder to be added to the blockchain.

This separation of roles increases efficiency in several ways:

1. Resource Allocation: Builders, having to compete with each other, are incentivized to make the best use of their available block space. They try to fill their block with the highest-value transactions (those with higher fees and MEV opportunities) to increase their chances of winning the auction.

2. Incentive Alignment: The auction process ensures that block space is allocated to those who value it the most. This system promotes an efficient market where block space, a scarce resource, is used optimally.

3. Increased Participation: By separating the roles of building and proposing, the scheme may encourage a more diverse set of participants to participate in the network, further improving decentralization and security.

4. MEV Optimization: Builders can exploit various MEV strategies, choosing and ordering transactions that provide additional value. This opportunity to maximize MEV extraction leads to highly efficient blocks and promotes a more competitive and robust ecosystem. While PBS does not directly prevent MEV, it can potentially change the dynamics of how MEV is exploited:

   1. More Competition for MEV: By separating the roles of proposer and builder, there may be more entities competing for MEV, which could lead to a more efficient market for MEV and potentially reduce the profitability of MEV over time.

   2. More Transparency: In some implementations of PBS, the bids from builders could be made public, which would bring more transparency to MEV extraction.

5. Complementarity between Top-of-Block and Block Body Opportunities: In PBS, the auction for the right to propose a block doesn't differentiate between top-of-block and block body opportunities. This can create a complementarity where a builder's ability to extract MEV from one

The Role of OFAs in PBS:

Order Flow Auctions (OFAs) are venues where order flow providers (like wallets) sell the exclusive right to execute their users' transactions. In the context of Ethereum and the Proposer-Builder Separation (PBS) scheme, OFAs play a crucial role in the dynamics of block building and transaction inclusion.

1. The Role of OFAs in PBS: In the PBS scheme, builders gather transactions and assemble them into blocks. They then compete against each other in an auction for the right to have the block they assembled proposed by the proposer. The right to build a block is valuable for several reasons, most notably because users pay tips for inclusion and builders can exploit MEV (Maximal Extractable Value) opportunities.

2. Private Order Flow and OFAs: Historically, most transactions have been forwarded to the public mempool, meaning all block builders have access to the same transactions. However, some builders have access to private order flow which is not available in the public mempool. The availability of private order flow is likely to be further supplemented in the near future by the advent of OFAs.

3. Impact of OFAs on PBS Equilibrium: The paper demonstrates that builders with superior top-of-block capabilities are likely to dominate OFAs and subsequently use the private order flow obtained in these OFAs to dominate the PBS auction. This complementarity is a strong centralizing force that threatens to suffocate small builders and upset the currently somewhat pluralistic builder equilibrium.

4. Centralizing Tendency of PBS with OFAs: The results suggest a troubling centralizing tendency of PBS when private order flow is available via an OFA. In particular, a builder with an advantage, be it deterministic or stochastic, at extracting top-of-block opportunities, will win the OFA. With access to the private transactions, it will then win the PBS auction more often, and have higher profits, than it would have in the counterfactual world without OFAs/private transactions.

OFAs represent a significant shift in the dynamics of the PBS scheme, potentially leading to a more centralized and less equitable Ethereum ecosystem. The paper suggests that modifying PBS to disentangle the intertwined dynamics between top-of-block extraction and private order flow could lead to a fairer and more decentralized Ethereum.

The Reality of PBS:

Despite its noble intentions, the PBS scheme has faced several challenges in practice. A study conducted on the PBS landscape revealed significant centralization among builders and relays. This centralization is contrary to the decentralization goal of PBS and poses a significant challenge to the scheme's effectiveness.

Moreover, the study found that PBS tends to stimulate censorship rather than reduce it. Transactions from sanctioned addresses were twice as likely to be included in non-PBS blocks compared to PBS blocks, suggesting that the current implementation of PBS does not effectively prevent censorship.

The Role of Relays:

Relays play a crucial role in the PBS scheme, acting as mediators between builders and proposers. They are entrusted with the responsibility of transmitting the most lucrative blocks from the builders to the proposers. However, the study found instances where relays did not uphold their commitments. There were cases where proposers did not receive the full promised value, and there were significant gaps in their censorship and MEV (Miner/Maximal Extractable Value) filtering policies.

The Flashbots relay, which spearheaded PBS, is the largest in the PBS landscape, consistently accounting for more than half of all blocks proposed through PBS from November 2022 onwards. However, its market share has been decreasing since January 2023.

Improving the Proposer-Builder Separation (PBS) scheme involves addressing its current challenges. Here are some technical suggestions:

1. Decentralization: Develop a protocol that encourages more participants to become builders and relays. This could involve creating a staking mechanism where participants can stake a certain amount of Ethereum to become a builder or relay. This would not only incentivize participation but also create a penalty system for misbehavior.

2. Censorship Resistance: Implement a zero-knowledge proof system that allows builders to prove that they have included all transactions that meet certain criteria, without revealing which transactions they have included. This would make it harder for builders to censor transactions without being detected.

3. Reliability and Trustworthiness of Relays: Implement a blockchain-based reputation system for relays. Each relay could have a reputation score that is updated based on its performance. Relays that fail to deliver the promised value or adhere to censorship and MEV filtering policies would see their reputation score decrease, affecting their future participation in the PBS scheme.

4. Incentives for Relays: Introduce a smart contract that provides rewards to relays based on their performance. The rewards could be a share of the transaction fees from the blocks they help propose. This would incentivize relays to uphold their commitments and perform their roles effectively.

5. Security in Native PBS Implementation: Implement a multi-signature scheme for block proposal. This would require both the builder and the proposer to sign a block before it is proposed, ensuring that both parties agree on the contents of the block. This would also make it harder for a single party to manipulate the contents of a block.

6. Transparency: Implement a blockchain explorer specifically for the PBS scheme. This would allow anyone to view the performance of builders and relays, including the blocks they have proposed and their adherence to censorship and MEV filtering policies. This would increase transparency and accountability in the PBS process.

These technical improvements would address the current challenges in the PBS scheme and make it more effective in achieving its goals of decentralizing block validation and preventing censorship.

The Proposer-Builder Separation scheme in Ethereum represents a significant shift in the blockchain landscape. While it promises to decentralize block validation and prevent censorship, the realities observed since its implementation suggest that there are still challenges to overcome. The role of relays, in particular, needs further scrutiny and improvement. As the Ethereum community continues to refine and improve this new scheme, it will be interesting to see how these challenges are addressed and how the PBS landscape evolves.

Interesting Opinions and Future Reading/Watching:

https://twitter.com/pseudotheos/status/1494431791196913672?lang=en

https://notes.ethereum.org/@vbuterin/pbs_censorship_resistance

https://ethresear.ch/t/unbundling-pbs-towards-protocol-enforced-proposer-commitments-pepc/13879

Based on -
https://arxiv.org/pdf/2305.19037.pdf

In September 2022, Ethereum underwent a significant transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS). This transition brought with it another paradigm shift known as the Proposer-Builder Separation (PBS) scheme. This new scheme aimed to decentralize block validation by separating the roles of selecting and ordering transactions in a block (the builder's role) from validating its contents and proposing the block to the network (the proposer's role).

In the PBS landscape, proposers, who are validators in the PoS consensus protocol, now rely on specialized block builders to create blocks with the most value. Additionally, a new player, the relay, has emerged in this ecosystem, acting as a mediator between builders and proposers. This blog post will delve into the intricacies of the PBS scheme, its promises, and the realities observed since its implementation.

The Promise of PBS:

The Proposer-Builder Separation (PBS) scheme introduces a competition aspect to block assembly in the Ethereum network. Here's how it enhances efficiency:

Traditionally in blockchain, a single entity (a miner in Proof-of-Work, or a validator in Proof-of-Stake) is responsible for both assembling transactions into a block and proposing that block to be added to the blockchain.

In the PBS scheme, this process is divided into two distinct roles:

1. Builders are responsible for gathering pending transactions from the transaction pool, assembling them into a block, and then bidding for their block to be proposed. Each builder may have different strategies for which transactions they include, depending on the transaction fees (also known as gas fees in Ethereum), the strategic ordering of transactions for MEV extraction, and their available resources.

2. Proposers are responsible for receiving the blocks assembled by builders, running an auction for these blocks, and then proposing the block from the highest bidder to be added to the blockchain.

This separation of roles increases efficiency in several ways:

1. Resource Allocation: Builders, having to compete with each other, are incentivized to make the best use of their available block space. They try to fill their block with the highest-value transactions (those with higher fees and MEV opportunities) to increase their chances of winning the auction.

2. Incentive Alignment: The auction process ensures that block space is allocated to those who value it the most. This system promotes an efficient market where block space, a scarce resource, is used optimally.

3. Increased Participation: By separating the roles of building and proposing, the scheme may encourage a more diverse set of participants to participate in the network, further improving decentralization and security.

4. MEV Optimization: Builders can exploit various MEV strategies, choosing and ordering transactions that provide additional value. This opportunity to maximize MEV extraction leads to highly efficient blocks and promotes a more competitive and robust ecosystem. While PBS does not directly prevent MEV, it can potentially change the dynamics of how MEV is exploited:

   1. More Competition for MEV: By separating the roles of proposer and builder, there may be more entities competing for MEV, which could lead to a more efficient market for MEV and potentially reduce the profitability of MEV over time.

   2. More Transparency: In some implementations of PBS, the bids from builders could be made public, which would bring more transparency to MEV extraction.

5. Complementarity between Top-of-Block and Block Body Opportunities: In PBS, the auction for the right to propose a block doesn't differentiate between top-of-block and block body opportunities. This can create a complementarity where a builder's ability to extract MEV from one

The Role of OFAs in PBS:

Order Flow Auctions (OFAs) are venues where order flow providers (like wallets) sell the exclusive right to execute their users' transactions. In the context of Ethereum and the Proposer-Builder Separation (PBS) scheme, OFAs play a crucial role in the dynamics of block building and transaction inclusion.

1. The Role of OFAs in PBS: In the PBS scheme, builders gather transactions and assemble them into blocks. They then compete against each other in an auction for the right to have the block they assembled proposed by the proposer. The right to build a block is valuable for several reasons, most notably because users pay tips for inclusion and builders can exploit MEV (Maximal Extractable Value) opportunities.

2. Private Order Flow and OFAs: Historically, most transactions have been forwarded to the public mempool, meaning all block builders have access to the same transactions. However, some builders have access to private order flow which is not available in the public mempool. The availability of private order flow is likely to be further supplemented in the near future by the advent of OFAs.

3. Impact of OFAs on PBS Equilibrium: The paper demonstrates that builders with superior top-of-block capabilities are likely to dominate OFAs and subsequently use the private order flow obtained in these OFAs to dominate the PBS auction. This complementarity is a strong centralizing force that threatens to suffocate small builders and upset the currently somewhat pluralistic builder equilibrium.

4. Centralizing Tendency of PBS with OFAs: The results suggest a troubling centralizing tendency of PBS when private order flow is available via an OFA. In particular, a builder with an advantage, be it deterministic or stochastic, at extracting top-of-block opportunities, will win the OFA. With access to the private transactions, it will then win the PBS auction more often, and have higher profits, than it would have in the counterfactual world without OFAs/private transactions.

OFAs represent a significant shift in the dynamics of the PBS scheme, potentially leading to a more centralized and less equitable Ethereum ecosystem. The paper suggests that modifying PBS to disentangle the intertwined dynamics between top-of-block extraction and private order flow could lead to a fairer and more decentralized Ethereum.

The Reality of PBS:

Despite its noble intentions, the PBS scheme has faced several challenges in practice. A study conducted on the PBS landscape revealed significant centralization among builders and relays. This centralization is contrary to the decentralization goal of PBS and poses a significant challenge to the scheme's effectiveness.

Moreover, the study found that PBS tends to stimulate censorship rather than reduce it. Transactions from sanctioned addresses were twice as likely to be included in non-PBS blocks compared to PBS blocks, suggesting that the current implementation of PBS does not effectively prevent censorship.

The Role of Relays:

Relays play a crucial role in the PBS scheme, acting as mediators between builders and proposers. They are entrusted with the responsibility of transmitting the most lucrative blocks from the builders to the proposers. However, the study found instances where relays did not uphold their commitments. There were cases where proposers did not receive the full promised value, and there were significant gaps in their censorship and MEV (Miner/Maximal Extractable Value) filtering policies.

The Flashbots relay, which spearheaded PBS, is the largest in the PBS landscape, consistently accounting for more than half of all blocks proposed through PBS from November 2022 onwards. However, its market share has been decreasing since January 2023.

Improving the Proposer-Builder Separation (PBS) scheme involves addressing its current challenges. Here are some technical suggestions:

1. Decentralization: Develop a protocol that encourages more participants to become builders and relays. This could involve creating a staking mechanism where participants can stake a certain amount of Ethereum to become a builder or relay. This would not only incentivize participation but also create a penalty system for misbehavior.

2. Censorship Resistance: Implement a zero-knowledge proof system that allows builders to prove that they have included all transactions that meet certain criteria, without revealing which transactions they have included. This would make it harder for builders to censor transactions without being detected.

3. Reliability and Trustworthiness of Relays: Implement a blockchain-based reputation system for relays. Each relay could have a reputation score that is updated based on its performance. Relays that fail to deliver the promised value or adhere to censorship and MEV filtering policies would see their reputation score decrease, affecting their future participation in the PBS scheme.

4. Incentives for Relays: Introduce a smart contract that provides rewards to relays based on their performance. The rewards could be a share of the transaction fees from the blocks they help propose. This would incentivize relays to uphold their commitments and perform their roles effectively.

5. Security in Native PBS Implementation: Implement a multi-signature scheme for block proposal. This would require both the builder and the proposer to sign a block before it is proposed, ensuring that both parties agree on the contents of the block. This would also make it harder for a single party to manipulate the contents of a block.

6. Transparency: Implement a blockchain explorer specifically for the PBS scheme. This would allow anyone to view the performance of builders and relays, including the blocks they have proposed and their adherence to censorship and MEV filtering policies. This would increase transparency and accountability in the PBS process.

These technical improvements would address the current challenges in the PBS scheme and make it more effective in achieving its goals of decentralizing block validation and preventing censorship.

The Proposer-Builder Separation scheme in Ethereum represents a significant shift in the blockchain landscape. While it promises to decentralize block validation and prevent censorship, the realities observed since its implementation suggest that there are still challenges to overcome. The role of relays, in particular, needs further scrutiny and improvement. As the Ethereum community continues to refine and improve this new scheme, it will be interesting to see how these challenges are addressed and how the PBS landscape evolves.

Interesting Opinions and Future Reading/Watching:

https://twitter.com/pseudotheos/status/1494431791196913672?lang=en

https://notes.ethereum.org/@vbuterin/pbs_censorship_resistance

https://ethresear.ch/t/unbundling-pbs-towards-protocol-enforced-proposer-commitments-pepc/13879