The Centralizing Effects of Private Order Flow on Proposer-Builder Separation

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dc.citation.journalTitleLeibniz International Proceedings in Informaticsen_US
dc.citation.volumeNumber282en_US
dc.contributor.authorGupta, Tivasen_US
dc.contributor.authorPai, Mallesh M.en_US
dc.contributor.authorResnick, Maxen_US
dc.date.accessioned2024-05-03T15:51:02Zen_US
dc.date.available2024-05-03T15:51:02Zen_US
dc.date.issued2023en_US
dc.description.abstractThe current Proposer-Builder Separation (PBS) equilibrium has several builders with different backgrounds winning blocks consistently. This paper considers how that equilibrium will shift when transactions are sold privately via order flow auctions (OFAs) rather than forwarded directly to the public mempool. We discuss a novel model that highlights the augmented value of private order flow for integrated builder searchers. We show that private order flow is complementary to top-of-block opportunities, and therefore integrated builder-searchers are more likely to participate in OFAs and outbid non integrated builders. They will then parlay access to these private transactions into an advantage in the PBS auction, winning blocks more often and extracting higher profits than non-integrated builders. To validate our main assumptions, we construct a novel dataset pairing post-merge PBS outcomes with realized 12-second volatility on a leading CEX (Binance). Our results show that integrated builder-searchers are more likely to win in the PBS auction when realized volatility is high, suggesting that indeed such builders have an advantage in extracting top-of-block opportunities. Our findings suggest that modifying PBS to disentangle the intertwined dynamics between top-of-block extraction and private order flow would pave the way for a fairer and more decentralized Ethereum.en_US
dc.identifier.citationTivas Gupta, Mallesh M. Pai, and Max Resnick. The Centralizing Effects of Private Order Flow on Proposer-Builder Separation. In 5th Conference on Advances in Financial Technologies (AFT 2023). Leibniz International Proceedings in Informatics (LIPIcs), Volume 282, pp. 20:1-20:15, Schloss Dagstuhl – Leibniz-Zentrum für Informatik (2023)en_US
dc.identifier.digitalLIPIcs-AFT-2023-20en_US
dc.identifier.doihttps://doi.org/10.4230/LIPIcs.AFT.2023.20en_US
dc.identifier.urihttps://hdl.handle.net/1911/115510en_US
dc.language.isoengen_US
dc.publisherSchloss Dagstuhl – Leibniz-Zentrum für Informatiken_US
dc.rightsExcept where otherwise noted, this work is licensed under a Creative Commons Attribution (CC BY) license. Permission to reuse, publish, or reproduce the work beyond the terms of the license or beyond the bounds of fair use or other exemptions to copyright law must be obtained from the copyright holder.en_US
dc.rights.urihttps://creativecommons.org/licenses/by/4.0/en_US
dc.titleThe Centralizing Effects of Private Order Flow on Proposer-Builder Separationen_US
dc.typeJournal articleen_US
dc.type.dcmiTexten_US
dc.type.publicationpublisher versionen_US
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