License: Creative Commons Attribution 4.0 International license (CC BY 4.0)
When quoting this document, please refer to the following
DOI: 10.4230/LIPIcs.AFT.2023.20
URN: urn:nbn:de:0030-drops-192098
URL: http://dagstuhl.sunsite.rwth-aachen.de/volltexte/2023/19209/
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Gupta, Tivas ; Pai, Mallesh M. ; Resnick, Max

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

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LIPIcs-AFT-2023-20.pdf (1 MB)

Abstract

The 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.

BibTeX - Entry

@InProceedings{gupta_et_al:LIPIcs.AFT.2023.20,
  author =	{Gupta, Tivas and Pai, Mallesh M. and Resnick, Max},
  title =	{{The Centralizing Effects of Private Order Flow on Proposer-Builder Separation}},
  booktitle =	{5th Conference on Advances in Financial Technologies (AFT 2023)},
  pages =	{20:1--20:15},
  series =	{Leibniz International Proceedings in Informatics (LIPIcs)},
  ISBN =	{978-3-95977-303-4},
  ISSN =	{1868-8969},
  year =	{2023},
  volume =	{282},
  editor =	{Bonneau, Joseph and Weinberg, S. Matthew},
  publisher =	{Schloss Dagstuhl -- Leibniz-Zentrum f{\"u}r Informatik},
  address =	{Dagstuhl, Germany},
  URL =		{https://drops.dagstuhl.de/opus/volltexte/2023/19209},
  URN =		{urn:nbn:de:0030-drops-192098},
  doi =		{10.4230/LIPIcs.AFT.2023.20},
  annote =	{Keywords: Private Order Flow, PBS, OFAs, decentralization}
}

Keywords: Private Order Flow, PBS, OFAs, decentralization
Collection: 5th Conference on Advances in Financial Technologies (AFT 2023)
Issue Date: 2023
Date of publication: 18.10.2023

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