Post-merger Ethereum will trigger a much deeper paradigm shift than just a shift from proof-of-work to proof-of-stake. Taking a modular approach to infrastructure could give rise to a new breed of players: block builders.
This article originally appeared in Valid Points, CoinDesk’s weekly newsletter that analyzes the evolution of Ethereum and its impact on the crypto markets. Sign up to receive it in your inbox every Wednesday.
Building blocks on Ethereum
Within the framework of proof of work, Ethereum has two main actors on the transaction side: users and miners. See the article: Price of Ripple (XRP), Solana (SOL) and Ethereum Classic (ETC) – Analysis of the cryptos of the day. There are, of course, several other key groups such as core developers, exchanges, and wallets, but without users and miners there would be no network.
Users pay gas fees to have their transactions processed by miners who collect those transactions from Ethereum’s “mempool,” which is a database of unconfirmed transactions, and place them in blocks in a specific order . Miners generally operate in groups called mining pools. The idea is to pool resources in order to generate a constant level of income for each miner and to benefit from the experience, expertise and software infrastructure of the mining pool operator.
Mining pool operators are very powerful players on the Ethereum network, due to their ability to determine the order of transactions and therefore extract the “maximum value extractable” (VME) for all blocks processed by their pool.
MEV is all about optimizing the mining process to maximize revenue. This is usually done by determining which transactions to include and in what order. Ideally, one chooses the most profitable trade setup with the highest level of fees.
According to CryptoCompare, just five mining pools controlled 65.4% of mining activity on the Ethereum network last November. This raises serious concerns about the centralization at the heart of Ethereum’s infrastructure. A concrete example: Ethermine alone controlled 25% of the mining activity during this month.
The changing of the guard after the merger
As Ethereum transitions from proof-of-work to proof-of-stake, miners will disappear and validators will replace them. However, there will be one essential difference. See the article: Binance will provide each refugee from Ukraine with $75 worth of BUSD for 3 months. Instead of combining the block creation and validation process, Ethereum’s post-merger proof-of-stake system will take a modular approach.
Modularity is when individual components of a system perform specific tasks independently. This concept has been around in computing since the 1960s. We saw the emphasis on modularity when Eth1 and Eth2 were renamed. Ethereum’s original proof-of-work chain became Eth1, the “execution layer” where Ethereum’s applications reside, while the Beacon chain became Eth2, the “consensus layer” where nodes reside. agree on the state of the network.
This modular approach will eventually be applied to transaction processing in the form of Proposer-Builder Separation (PBS). In its most basic sense, PBS is simply splitting building and validating blocks into two separate activities. This results in a new stakeholder group called the block builder.
In a recent episode of the “Bankless” podcast, Matt Cutler, co-founder and CEO of Blocknative, gave an overview of block builders and how he sees them cooperating with other key players in the Ethereum ecosystem.
Cutler describes how VME researchers and miners currently interact. Researchers typically use sophisticated robots that seek to maximize VME in various ways. Some of these means, like arbitration, are benign, while others, like front-running, are perceivable.us as malicious. In either case, the researcher sequences the transactions, produces a revenue-optimized transaction packet, and then offers that packet to a miner or validator for inclusion in a block in exchange for a share of the proceeds. profits.
In a post-Merge proof-of-stake system, block builders will come into play. Instead of researchers offering transactions directly to validators (also known as proposers), they will send packets of optimized transactions to block builders. A third-party system called mev-boost will then aggregate optimized blocks from various builders and offer them to validators. Finally, validators will select and offer the most profitable blocks to the Ethereum network.
The green boxes show the basic way transactions could be ordered and added to the blockchain. The white boxes represent the selection and scheduling process using finders, builders, and mev-boost. (Flashbots GitHub repository)
Here are the block builders
Flashbots, the creators of mev-boost, explain that MEV centralization occurs when mining and staking pools vertically integrate with societys of trade to increase MEV profits. The Flashbots website claims that mev-boost was created to prevent the centralization of VMEs after the merger and to cultivate a diverse network of block builders.
According to Cutler, the Ethereum community is so enthusiastic about mev-boost that the developers plan to incorporate the concept of PBS into the Ethereum base protocol a year or two after the transition to proof-of. -stake. This may interest you: Cryptocurrency Price Prediction: Trend Analysis for Terra and Shiba Inu. In the meantime, if all goes as planned, mev-boost will be available immediately after the merge.
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