Proposer Builder Separation for Ethereum Explained
“Solutions like PBS (proposer-builder separation) necessary so most MEV is captured by the base asset” -@epolynya Source
Polynya believes that PBS is important for the sustainability of an L1, but what is PBS?
Proposer-builder separation is a design decision that allows the validators to equally reap the rewards of miner-extractable value (MEV). Without it, there’s an incentive and ability for validators to centralize by means of MEV. Normally validators have to compete with one another in the arena of MEV. However, MEV being a complex task, it’s hard to say whether all of them would participate, thus increasing the centralizing effect of the ones who do choose to use MEV.
With PBS, instead of forcing validators to compete with one another for MEV, they are separated from the builders of the blocks, so the builders may specialize in block building (MEV), and the validators can just focus on validating.
Builders of blocks get to order the transactions within them, therefore, can make a profit off of doing so. However, they still need a proposer to actually propose their block. They do this by paying a proposer a proposing fee (a % of the builder’s revenue). This creates a proposing fee market between builders and proposers. If a builder is also running a validator node, they would have to wait for their validator to be selected for block proposal. But rather than doing this, the builder can just build blocks all the time and make bids for their blocks to be proposed by whichever proposer is currently the leader.
If the block-building competition is fierce, they will be required to bid up as their bid approaches total revenue. This reduces their net income while increasing the net income of validators in general, making it harder for builders to centralize their potential % of total ETH staked. Previously validators could use MEV, buy more validators, have a greater chance at executing MEV, etc.
Proposer-Builder Separation prevents MEV from centralizing the validator set and instead greatly rewards all validators with MEV.
About the author
Andrew Scott Riley is a research consultant at Cyber Capital. With his computer science background, he analyzes cryptocurrency projects and whitepapers and compiles extensive research reports.
About Cyber Capital
Cyber Capital, Europe’s oldest cryptocurrency investment fund, is a fund manager that specialized in providing exposure to the crypto-asset markets as an alternative asset class. Cyber Capital is fully registered by the Dutch Authority for the Financial Markets under the AIFMD-light regime and the Dutch Central Bank.
