Ethereum overhaul risks creating a new class of kingpins


The much-anticipated Ethereum upgrade will create new participants called builders in the blockchain ecosystem, a move that risks upsetting the power structure of what is arguably the most important cryptocurrency network from the point of view. commercial.

Under the current system, networks of computers known as miners extract transactions from a special data pool and organize them into blocks that are added to the blockchain. The miners are being eliminated as part of a plan to reduce energy consumption. After the planned September upgrade known as Merge, the builders will collect the transactions into blocks, which they will then send to the validators. The validators will sign the order of the blocks that will form the updated blockchain.

This seemingly geeky change, part of a software update part called MEV-Boost, could make Ethereum more centralized, at least initially. While there are already more than 416,000 validators lined up to order transactions, there are only a handful of participants committed to serving as builders. The largest is Flashbots, which makes open source software used by trading robots.

Flashbots are already the dominant way for miners to collect fees from merchants by allowing their transactions to go ahead and otherwise bypass others. Other participants are considering becoming builders due to concerns that Flashbots or similar entities will have too much control if a major wallet starts sending all transactions to a builder.

“If wallets start sending transactions directly to a handful of block builders, it kills decentralization,” said Uri Klarman, CEO of BloXroute Labs, which has a network of servers that allows merchants to send transactions to the smallest miners. Quick. About 40% of all trade volume from decentralized finance apps, which allow people to trade, lend and borrow currencies, is routed through the network, he said.

A powerful digital wallet like MetaMask, which gives users the ability to buy, sell and receive cryptocurrency, could become a “kingmaker,” Klarman said. MetaMask is the most popular non-custodial wallet, with 30 million users.

A wallet service could favor one builder over all others and even decide to act as a builder, thereby controlling the flow of transactions, Klarman said.

MetaMask is owned by New York-based ConsenSys, which was founded by Ethereum co-founder Joseph Lubin. The software company dismisses the concern.

“We will never send all MetaMask transactions to a specific builder or vendor,” said Taylor Monahan, Global Product Lead at MetaMask. “MetaMask’s value stems from being a gateway to an exciting, vibrant, diverse and fair ecosystem. For that reason, MetaMask will always strive to make decisions that promote a healthy and decentralized Ethereum.”

The builder-validator role split was initially conceived as a way to increase the decentralization of Ethereum and take power away from validators.

Still, having very few constructors on the enhanced Ethereum chain poses potential problems. They could censor transactions from being included in blocks. Earlier this month, Flashbots blacklisted wallets associated with Tornado Cash, after the US Treasury Department sanctioned the mixer’s protocol.

If there are too few builders, they can also demand higher fees, and validators earn less. That could, in turn, lead to fewer validators deciding to get involved in network support. To date, miners have made around $240 million on the transaction reorganization service, called MEV, according to Flashbots. Fees are also expected to contribute significantly to validator revenue.

Ether gained as much as 7% to $1,640 at 11:55 a.m. in New York. This year she is down 56%.

Builders can also capitalize on the order flow of their users. If a builder knows that many users are ordering a particular token, they might buy a long position on it, for example.

It’s like “Robinhood, making money off of order flow,” said Nathan Worsley, referring to the commission-free trading firm. Worsley and his associates, who make money from trade reorganizations, liquidations and various complex exchanges, are considering becoming builders, he said.

Worsley is not alone in considering a change in approach due to the potential risks of centralization and shifting power.

We will monitor the situation. If it approaches a centralized build world, we will take action,” said Jonas Pfannschmidt of Blockdaemon, which runs validation nodes for clients.

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