Why Only 3 Builders Control All of Ethereum

Kubee Mensa, CEO of Gattica, discusses the evolution of block building in Ethereum, highlighting the transition of Gattica from a proprietary trading firm to a block building focus around the Ethereum merge in 2020. The firm’s trading experience has informed its approach to the challenges of block building, including optimization and service layers. The podcast emphasizes the increasing sophistication and competitiveness of the block building landscape, with rising expectations from block space consumers leading to more demanding technical capabilities and infrastructure.

Gattica operates an EV boost relay to connect validators with the block construction market and has developed an order flow auction platform to enhance transaction privacy and optimize gas fees. The conversation clarifies misconceptions about block building, noting that only about half of transactions in blocks come from the public mempool, with the rest sourced from private order flows. Block builders must manage multiple nodes globally to effectively funnel transactions, and private mempools play a crucial role in optimizing transaction execution.

The dominance of a few builders in Ethereum's block construction is discussed, specifically Titan, Beaver, and FlashBots, which collectively control over 90% of blocks. This concentration is driven by a competitive cycle where transaction fee optimization favors established players. Block builders cater to various consumers, including DeFi arbitrage traders, who require timely transaction inclusion, influencing block construction priorities.

The Proposer Builder Separation (PBS) model allows builders to set the Coinbase address and collect fees, while validators propose blocks based on the highest payment offered. Current filtering options for validators are limited, primarily focusing on compliance with the OFAC SDN list. Strategic decisions by trading firms to keep valuable order flow in-house have intensified competition, with service providers assisting originators without their own block builders.

Ethereum is working on initiatives to enhance on-chain liquidity quoting, addressing high costs and improving trading competitiveness. A new mechanism allows smart contract originators to act on their state before others, preventing toxic takers and resulting in tighter spreads. Revenue distribution from transactions is often concentrated, with priority fee-based transactions being contentious, especially during volatility.

Private order flow is essential for transaction optimization, requiring trust from parties sharing data. Significant transaction volume is necessary for effective optimization, and trust is vital in decentralized setups. Builders are advised to specialize in a niche to establish market presence before expanding. The relationship between builders and searchers is based on trust, with mechanisms needed to ensure fair compensation for submitted bundles.

The potential for vertical integration between builders and validators could improve access to competitive blocks, but maintaining decentralization among validators is crucial. Current solvers in Ethereum operate based on the last block's state, which can lead to non-optimal routes. There is exploration of integrating off-chain execution logic into block construction to enhance efficiency.

Excitement surrounds upcoming developments in Ethereum, particularly regarding enshrined proposable separation and pre-confirmations. The Ethereum Proposer/Builder Separation (EPBS) aims to incorporate market structures into the core protocol, addressing the Fair Exchange problem and ensuring trustless payments. However, its complexity poses challenges for implementation. The future of block building is expected to evolve, influenced by protocols like EPBS and Fossil, which will introduce more constraints in block construction.

The dynamics of power between block builders and transaction originators are shifting, with both parties holding significant influence. Proposers have a monopolistic advantage, setting reserve prices that can exclude certain transactions. Originators can enhance their negotiating power by banding together, reflecting a marketplace dynamic where both sides navigate their interests amid increasing constraints. There is a noted lack of educational resources on block building, but initiatives like the Block Space Forum aim to provide high-level content about the roles of block builders and other actors in the ecosystem.