Understanding Ethereum's Centralization in Block Building
Ethereum, one of the leading platforms in the world of blockchain technology and cryptocurrency markets, is facing a notable challenge with centralization, especially when it comes to block building. In August, a single block builder, Beaverbuild, constructed more than half of Ethereum's blocks.
The Ethereum Merge in 2022 aimed to make the network more decentralized. While Ethereum's validators are somewhat spread out, with Coinbase holding the largest share at nearly 12% of staked ETH, the real concern lies with block builders. Validators only propose blocks, whereas block builders are responsible for including transactions and determining their order.
The Role of Block Builders
Block builders play a critical role in the network by participating in auctions to have their blocks included in the blockchain. Currently, the top two block builders are responsible for constructing over 85% of all blocks, with the top three building more than 90%. This level of concentration highlights a significant deviation from the intended decentralization.
Maximal Extractable Value (MEV) and Centralization
The centralization issue is driven by Maximal Extractable Value (MEV), where block builders reorder transactions to maximize profits. This often involves front-running pending transactions—essentially, positioning certain transactions ahead of others to capitalize on price differences.
Previously, all Ethereum transactions waiting to be confirmed were visible to everyone. However, high-frequency traders (HFTs) and bot operators now send their transactions directly to block builders like Beaverbuild, keeping them private until confirmed.
Recent studies show that these private transactions account for over half of Ethereum's gas fees and make up 30% of total blocks. High-frequency traders, such as those associated with Beaverbuild, often arbitrage between centralized exchanges (CEXs) like Binance and decentralized exchanges (DEXs) like Uniswap, ensuring their transactions are prioritized.
Potential Solutions and Challenges
The centralization of block building was foreseen in research by the Special Mechanism Group, which proposed solutions still under study. Currently, traders aiming to secure their transactions in a winning block might directly approach Beaverbuild, or alternatively, Titan, the second-largest builder.
As the Ethereum community searches for effective solutions, the pressing question remains: what can be done in the short term to address this centralization and preserve Ethereum's decentralization vision?
