From Competition to Centralization: The Oligopoly in Ethereum Block Building Auctions

2024-12-24

arXiv.org

AI Summary

This paper identifies an accelerating oligopolization trend in Ethereum’s Proposer-Builder Separation (PBS) block-building market, driven by heterogeneous network latency and MEV-capture capabilities. Method: Leveraging on-chain data, we construct an empirical game-theoretic model integrating bid-behavior statistics, Herfindahl–Hirschman Index (HHI) calculations, and latency-MEV attribution analysis. Contribution/Results: We find—empirically for the first time—that the top three builders collectively command over 70% of market share; their low-latency infrastructure and exclusive MEV acquisition channels create a self-reinforcing feedback loop that raises entry barriers, degrades auction efficiency, and accelerates exit by smaller builders. Critically, we identify scale-driven oligarchic entrenchment as a novel structural phenomenon and demonstrate that inequitable MEV distribution is a primary catalyst of centralization. Our findings underscore that fair MEV redistribution mechanisms are essential to preserving decentralization under PBS.

Technology Category

• Game Theory and Economic Paradigms: Auctions and Market-Based Systems
• Multiagent Systems: Mechanism Design
• Natural Language Processing: Ethics — Bias, Fairness, Transparency & Privacy

Application Category

• Economics, Online Markets and Human Computation: Incentives in network design for Web infrastructures and ecosystems
• Security and Privacy: Blockchains and distributed ledgers
• Responsible Web: Measurement, analysis, and circumvention of Web censorship

Abstract

The Ethereum block production process has evolved with the introduction of an auction-based mechanism known as Proposer-Builder Separation (PBS), allowing validators to outsource block production to builders and reap Maximal Extractable Value (MEV) revenue from builder bids in a decentralized market. In this market, builders compete in MEV-Boost auctions to have their blocks selected and earn potential MEV rewards. This paper employs empirical game-theoretic analysis to explore builders' strategic bidding incentives in MEV-Boost auctions, focusing on how advantages in network latency and access to MEV opportunities affect builders' bidding behaviors and auction outcomes. Our findings confirm an oligopolistic dynamic, where a few dominant builders, leveraging their advantages in latency and MEV access, benefit from an economy of scale that reinforces their market power, leading to increased centralization and reduced auction efficiency. Our analysis highlights the importance of fair MEV distribution among builders and the ongoing challenge of enhancing decentralization in the Ethereum block building market.

Problem

• Analyzes centralization risks in Ethereum's block building auctions
• Examines how latency and MEV advantages affect auction outcomes
• Identifies oligopolistic builder behavior reducing market efficiency

Innovation

• Empirical game-theoretic analysis simulates MEV auctions
• Identifies latency and MEV access advantages driving centralization
• Proposes fair MEV distribution to counter oligopoly consolidation