What is Proposer-Builder Separation (PBS)?
PBS is seen as a solution to preventing transaction censorship, validator centralization risks, and maximal extractable value (MEV) problems.
Validators and miners perform two critical functions that keep a blockchain network running:
- Block Building
In most blockchain protocols, a validator or a miner is randomly selected to be the block builder and the block proposer.
As a block builder, the validator/miner is responsible for ordering and bundling pending transactions to be added to the next block.
A concern about transaction censorship arises, as block builders are at their own discretion to pick and choose transactions to include in the next block.
- Block Proposal
Once the block is ready, the validator/miner broadcasts the proposed block to the rest of the network for consensus.
The network of validators/miners verifies the new proposed block by re-executing the transactions. If the block is valid, they add it to their own database. If there are two conflicting blocks, the block supported by the majority of validators/miners is considered the valid chain.
The block proposer receives block rewards for their work. The process continues. A new validator/miner is randomly selected to propose and build a new block.
PBS looks to decentralize validator/miner power and related risks by separating these two critical functions.
How Does Proposer-Builder Separation Work?
Out-of-Protocol Proposer-Builder Separation
Ethereum does not have in-protocol PBS features; therefore, it depends on third-party solutions.
A blockchain research organization called Flashbots develops an out-of-protocol PBS solution called MEV-Boost for Ethereum. At the time of writing, MEV-Boost was the most dominant PBS solution on Ethereum.
What MEV-Boost does is it creates a marketplace of block builders on Ethereum. Block proposers can outsource their block production duties to specialized block builders on MEV-Boost.
The proposer earns MEV rewards in the process, while the block builder keeps a portion of the MEV rewards for themselves.
In-Protocol Proposer-Builder Separation (Enshrined PBS)
As we mentioned before, Ethereum does not have in-protocol PBS. Developers are currently looking at ways to enshrine PBS features into the code of the Ethereum L1.
A major concern about out-of-protocol PBS solutions is the trust assumptions and centralization risks that the blockchain undertakes. For example, Flashbots’ MEV-Boost software is so popular that it accounted for nearly 90% of Ethereum blocks produced in 2022.
In-protocol PBS will see PBS implemented into the consensus layer of the Ethereum protocol. An in-protocol builder marketplace will rid the network of centralized parties called relays that act as auctioneers in Flashbots’ MEV-boost marketplace.
However, it could take a while for in-protocol PBS to be implemented on Ethereum.
Why is PBS Needed?
There are three key reasons why proposer-separation implementation is being proposed in PoS blockchains, including Ethereum.
1. Transaction Censorship
As mentioned earlier, the block builder has full autonomy on the transactions to include in the upcoming block.
With PBS, the block building power will be divided between two entities – a specialized builder and a block proposer. As a separate entity, the block proposer can take on the role of preventing transaction censorship.
There are areas of active research for ideas where builders must fully utilize the available block space and compulsorily add transactions from an “inclusion list” created by the block proposer.
2. Decentralizing Validator Power
Extracting the maximum value from a block (aka MEV) requires technical know-how and custom software that may be out of reach of hobbyist validators.
These conditions allow specialists and institution-operated validators to outperform individuals and hobbyist validators at MEV extraction. Staking returns for specialized operators will be higher, while home staking and solo staking will be disincentivized.
With PBS, the block proposer can simply pick the builder offering the highest block reward.
Ethereum first needs to implement in-protocol PBS to support the danksharding upgrade.
As the blockchain grows and higher network throughput is achieved, validators and nodes will have to cope with the extra data coming in. Without PBS, validators will be required to invest in powerful hardware. The high cost will increase the barrier to becoming a validator and, therefore, will hurt Ethereum’s decentralization.
When in-protocol PBS comes into play, specialized block builders will take up the responsibility to carry out expensive computational work. This will allow block proposers and other validators to cheaply and quickly check whether the block built by the builder is valid and honest.
The compromise that the network makes is that block building becomes expensive and centralized due to the specialized hardware needs, while block validation remains cheap and decentralized.
Proposer-builder separation is a hot topic of discussion in the blockchain industry.
PBS is poised to play a key role in the future of leading blockchains like Ethereum. New PBS ideas and solutions are being developed to help keep the expanding crypto industry sufficiently decentralized.