Should You Be Concerned About Flashbots Censorship?

Flashbots — a research and development company vying to reduce the harm of Maximum Extractable Value (MEV) — has been at the center of centralization and censorship concerns since Ethereum’s move from proof-of-work to proof-of-stake.

MEV is extra revenue that can be made by rearranging the order of transactions in a block. It can emerge in the blockchain several ways, but most commonly through decentralized exchange (DEX) arbitrage.

If two DEXes offer the same token at different prices, for example, one can buy the token on the lower-priced DEX and sell it on the higher-end DEX with, in theory, zero risk. 

Such opportunities are uncovered by “searchers,” blockchain participants running complex, on-chain algorithms. The setup is intended to submit profitable trades to a public mempool on the protocol to await validation. 

Some searchers also use algorithms to run generalized front-runners — bots that detect profitable transactions in the public mempool and replace the existing address with their own transaction — fundamentally receiving the original searcher’s MEV.

This is where Flashbots comes in. To prevent other searchers from frontrunning transactions, the organization developed a tool — MEV boost — that allows its clients to directly submit MEV transactions to validators without having to reveal them to the public mempool.

Flashbots, or any other MEV-boost relay, acts as a mediator between block proposers and block builders, Friederike Ernst, chief operating officer at Gnosis — a decentralized infrastructure company and the co-host of the Epicenter Podcast — told Blockworks. 

Proposers will indicate how much they would be willing to bid for a block, then, once the highest bidder is secured, builders generate the block and send them off to validators. The problem, however, is that, so far, there are very few builders — leading to a centralization of builders in the ecosystem, Ernst said.

“In principle, this has been a particularly big issue since the Merge,” Ernst said. 

Ethereum validators must have security deposits of at least 32 ETH (roughly $41,000) to run a dedicated staking node on the blockchain. 

In an ideal world, a greater distribution of solo stakers would be able to mitigate centralization and bolster security. But ETH holders often have neither enough money, nor technical expertise, to operate a validator in such a fashion.

Solutions such as Rocket Pool can allow decentralized staking with 16 ETH (soon as little as 8 ETH), and simplify the staking process, while others participate in staking pools such as those provided by Lido and StakeWise, or centralized exchanges acting as custodians powering nodes via customers’ ether. 

MEV extraction is resource-intensive, and therefore is at risk of increasing validator centralization post-Merge, according to the Ethereum Foundation, as validators earn less without it.

This, combined with Flashbots’ decision to remain OFAC-compliant after the US Treasury sanctioned crypto mixing service Tornado Cash, has caused the wider Ethereum community to question if the world’s second-largest cryptocurrency is under censorship attack.

As the largest MEV-boost relay, Flashbots — which dominates nearly 81% of the market — is delaying transactions, including sanctioned Tornado Cash wallets — meaning transactions that interact with addresses related to the crypto-mixer are effectively banned from Flashbot blocks.

Over the past seven days, 52% of blocks from MEV-boost relays enforced OFAC compliance. 

Flashbots co-founder Stephane Gosselin stepped down from his position during this time “following a series of disagreements with the team.”

“It is crucial for there to be a diverse and competitive MEV ecosystem to preserve censorship resistance and other values that make our industry so exciting,” Gosselin tweeted.

Although it is unclear if censorship resistance concerns are what ultimately led Gosselin to leave Flashbots, the founder did post a poll on Twitter asking if censorship needed to be solved technically or politically.

Gosselin did not respond to a request for comment. 

Steady on a slippery slope

All in all, however, Ethereum developers, for the most part, say censorship anxieties are exaggerated. 

Uri Klarman, CEO of bloXroute Labs, a blockchain distribution network, told Blockworks that although more validators are turning to tap MEV boosts — and almost all them are using the Flashbots relay system — Ethereum will not likely turn into a censoring blockchain. 

“If I had an OFAC-restricted transaction, it [would] take more time for my transaction to be included, but eventually a validator, which isn’t ignoring [OFAC transactions] would include it,” Klarman said. “I would get a worse user experience — the transaction would take longer to be executed, but it will still be executed.”

Still, Klarman said, in an ideal situation, validators should not be able to censor at a building level at all. That’s a sentiment shared by Ernst.

“I would take the view that maybe extracting MEV is a bad thing and we should preclude this,” Ernst said. “By large, transactions on Ethereum are not encrypted, and we run into an issue where validators in principle can be opinionated about which transactions to include — and can push their own interests.”

Although Ernst does not think validators should be legally faulted for serving their own interests, she added, “morally, you can [fault them].”

“What we need to do is make sure validators don’t know what they’re signing,” she said. “We need to come up with a way to obscure the transactions that they’re signing from validators themselves.”

Ernst’s concerns have not gone unnoticed. 

The Ethereum Foundation is looking into solutions to resolve blockchain censorship through the proposer/builder separation (PBS). 

PBS is an evolving research area for Ethereum developers where block building and block proposing are assigned different roles within the network.

Similar to what Ernst suggested, a validator would simply accept a block with the highest bid without seeing the content of the block body until it wins the bid. This way, MEV cannot be controlled by parties ordering block transactions. 

Hybrid PBS is another proposed solution. In this model, there would be a witness who will be added as an intermediary node to prove the balance and nonce of the transaction sender. This would allow validators to statelessly verify blocks — meaning they no longer need to keep track of balances, deployed smart contracts, and associated storage within the entire transaction history.

The long-term goal of PBS is for it be protocol-native in Ethereum but a number of challenges still need to be addressed before PBS can be brought into use.

Get the day’s top crypto news and insights delivered to your inbox every evening. Subscribe to Blockworks’ free newsletter now.