Bessie Liu

Concerns around possible censorship of Ethereum transactions was prevalent in the weeks leading up to and after the Merge, but the latest data shows that this upward trend may be reversing.



The Merge introduced changes to the process of block building alongside the transition from proof-of-work to proof-of-stake, that introduced some risk of centralization, particular with respect to MEV — or maximum extractable value.



Tracking site <a href="https://www.mevwatch.info/" target="_blank" rel="noreferrer noopener">MEV Watch</a> reveals that the percentage of censored blocks has dropped from its all-time high of 79% to roughly 70% over the past month. Anything less than about 99%, means Ethereum remains censorship free.



MEV refers to the maximum amount of income that can be earned by validators from the automated process of re-ordering transactions for inclusion in a block.



If MEV in a block exceeds standard <a href="https://www.blockworksresearch.com/glossary#block-reward" target="_blank" rel="noreferrer noopener">block rewards</a>, validators may choose to re-organize a block to capture the income generated by MEV for themselves. 



In order to prevent malicious MEV practices, validators choose to use MEV-Boost relays which allow them to request blocks from a network of builders.



But after the US Treasury’s Office of Foreign Assets Control (OFAC) <a href="https://blockworks.co/tornado-cash-sanctions-expose-potential-defi-achilles-heel" target="_blank" rel="noreferrer noopener">sanctioned crypto privacy service Tornado Cash</a>, popular MEV-Boost realy provider Flashbots — which is based in the US — decided to remain OFAC-compliant, meaning it would ignore any transactions which were restricted by OFAC.



That alone is not enough to censor Ethereum, although it can delay some transactions, Uri Klarman, CEO of relay provider bloXroute Labs previously told Blockworks.



“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.&nbsp;



Nevertheless, the concern within the Ethereum community is that if the proportion of censored blocks were to become too high, <a href="https://blockworks.co/news/ethereum-is-not-under-attack-understanding-mev-boost-relays" target="_blank" rel="noreferrer noopener">it could threaten</a> a fundamental ethos of Ethereum — credible neutrality — as well as a desirable feature of most public blockchain networks: censorship resistance.



Coming up with technical solutions to preserve these values is a major goal of the Ethereum community.



<h3 class="wp-block-heading">Developing SUAVE</h3>



Ethereum developers have also launched a new project to combat censorship.



Dubbed SUAVE, short for “Single Unifying Auctions for Value Expression,” the project aims to decentralize block building itself.



SUAVE was <a href="https://blockworks.co/news/ethereum-is-not-under-attack-understanding-mev-boost-relays" target="_blank" rel="noreferrer noopener">first teased </a>at Devcon, the Ethereum foundation’s annual conference, where Philip Daian, a Flashbots steward, said its latest technology would “make TradFi look embarrassing.” The project&#8217;s latest vision was unveiled in a <a href="https://writings.flashbots.net/the-future-of-mev-is-suave/">blog post</a> on Nov. 22. 



At a high level, SUAVE will be a new blockchain that acts as a plug-and-play <a href="https://www.blockworksresearch.com/glossary#mempool" target="_blank" rel="noreferrer noopener">mempool</a> and decentralized block builder for other blockchains. 



“SUAVE goes beyond sequencing for a single blockchain. We designed SUAVE to be the mempool and block builder for all blockchains,” Hasu, pseudonymous strategy lead at Flashbots <a href="https://twitter.com/hasufl/status/1595492568157937665" target="_blank" rel="noreferrer noopener">tweeted</a>.  



Through building a decentralized sequencing layer, the Flashbots team wants to “give domains control over their own validation guarantees and ensure smaller domains stay decentralized.”



Domains <a href="https://twitter.com/natanb55/status/1469103889056256005" target="_blank" rel="noreferrer noopener">means</a> any combination of layer-1 or layer-2 blockchains, but also side-chains, shards, and even centralized exchanges.



Flashbots does not intend to participate in the marketplace beyond bootstrapping, the company noted.&nbsp;



“We consider this strategy the most aligned with our mission and the health of the entire ecosystem,” the company said.



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Ethereum Reverses Post-Merge Censorship Trend

<div id="highlights-block_6352c6431a391" class="highlights">
 <ul>
 <li>52% of blocks from MEV-boost relays enforced OFAC sanctions in the past seven days</li>
 <li>81% of the MEV-Boost relay market is dominated by Flashbots</li>
 </ul>
 
</div>



<a href="https://cms.blockworks.co/flashbots-has-a-new-plan-make-tradfi-look-embarrassing/" target="_blank" rel="noreferrer noopener">Flashbots</a> — 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 <a href="https://cms.blockworks.co/ethereum-switches-to-proof-of-stake-after-7-years-of-work/" target="_blank" rel="noreferrer noopener">move from proof-of-work to proof-of-stake</a>.



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.&nbsp;



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.&nbsp;



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.&nbsp;



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



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 <a href="https://rocketpool.net/#stake-run-node" target="_blank" rel="noreferrer noopener">decentralized staking</a> 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 <a href="https://lido.fi/" target="_blank" rel="noreferrer noopener">Lido</a> and <a href="https://stakewise.io/" target="_blank" rel="noreferrer noopener">StakeWise</a>, 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, <a href="https://ethereum.org/en/developers/docs/mev/#validator-centralization" target="_blank" rel="noreferrer noopener">according to the Ethereum Foundation</a>, as validators earn less without it.



This, combined with Flashbots’ decision to remain OFAC-compliant after the US Treasury <a href="https://cms.blockworks.co/tornado-cash-sanctions-expose-potential-defi-achilles-heel/" target="_blank" rel="noreferrer noopener">sanctioned</a> crypto mixing service Tornado Cash, has caused the wider Ethereum community to question if the world’s second-largest cryptocurrency is <a href="https://twitter.com/koeppelmann/status/1580893089077809153" target="_blank" rel="noreferrer noopener">under censorship attack</a>.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">We reached another sad milestone in censorship: 51% This means if the censoring validators would now stop attesting to non-censoring blocks they would eventually form the canonical, 100% censoring chain. <a href="https://t.co/JrYUjowLpt">pic.twitter.com/JrYUjowLpt</a>&mdash; Martin Köppelmann 🇺🇦 (@koeppelmann) <a href="https://twitter.com/koeppelmann/status/1580893089077809153?ref_src=twsrc%5Etfw">October 14, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



As the largest MEV-boost relay, Flashbots — which dominates nearly <a href="https://www.mevboost.org/" target="_blank" rel="noreferrer noopener">81%</a> 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, <a href="https://www.mevwatch.info/" target="_blank" rel="noreferrer noopener">52%</a> 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 <a href="https://twitter.com/thegostep/status/1578520702574960640/photo/1" target="_blank" rel="noreferrer noopener">tweeted</a>.



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.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Does censorship need to be solved technically or politically?&mdash; Stephane (@thegostep) <a href="https://twitter.com/thegostep/status/1580181830632103936?ref_src=twsrc%5Etfw">October 12, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Gosselin did not respond to a request for comment.&nbsp;



<h3 class="wp-block-heading">Steady on a slippery slope</h3>



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



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.&nbsp;



“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.&nbsp;



The Ethereum Foundation is looking into solutions to resolve blockchain censorship through the <a href="https://notes.ethereum.org/@vbuterin/pbs_censorship_resistance" target="_blank" rel="noreferrer noopener">proposer/builder separation (PBS)</a>. 



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.&nbsp;



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.



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Ethereum Is Not Under Attack: Understanding MEV-boost Relays

<div id="highlights-block_634dba27c3ba7" class="highlights">
 <ul>
 <li>SUAVE has been in the works for over a year, according to Flashbots developers</li>
 <li>Further details about the project will be announced this week</li>
 </ul>
 
</div>



Flashbots, a research and development organization <a href="https://cms.blockworks.co/new-flashbots-upgrade-could-revolutionize-crypto-markets-after-the-merge/" target="_blank" rel="noreferrer noopener">with the goal to reduce</a> the potential harms of Maximum Extractable Value (MEV), revealed a new project to address centralization and censorship concerns on MEV extraction for Ethereum and Ethereum virtual machine-compatible blockchains.



The project, <a href="https://twitter.com/hasufl/status/1580983853824765952" target="_blank" rel="noreferrer noopener">code named SUAVE</a> which stands for “Single Unifying Auctions for Value Expression,” will be an open-source MEV-aware, privacy-focused, encrypted mempool for users and wallets, Philip Daian, a Flashbots steward said at Devcon Bogotá.



“We’re going to provide optimal user execution that harnesses MEV,” Daian said. “So we’re going to use MEV as this decentralized engine in the long term, to make sure the users get really the best execution on their trades in a way that’s really going to make TradFi look embarrassing very shortly.”



<h3 class="wp-block-heading">What is the SUAVE vision for MEV?</h3>



MEV refers to the maximum amount of income that can be extracted from block production after validators include or reorder transactions on a block.&nbsp;



If the MEV available in a block exceeds standard block rewards, validators could then reorganize the blocks to capture the value of the income generated by MEV for themselves, making it a risk for exploitation and centralization.



Flashbots has been actively working on reducing these problems through MEV-Boost, software that enables builders to auction blocks to validators and prevent MEV centralization by allowing each party to earn a contribution for their efforts.&nbsp;



SUAVE’s goal is to decentralize and democratize MEV-Boost by making it open source and widely available, even to competitors and users.



The overarching goal is to avoid entrenching centralized forces, such as private or exclusive order flow into the way relays and block builders do business, Daian said, “because these will destroy the system that we love, as a whole.”



<h3 class="wp-block-heading">Risk of centralization and a decentralized solution</h3>



After the <a href="https://cms.blockworks.co/tornado-cash-sanctions-expose-potential-defi-achilles-heel/" target="_blank" rel="noreferrer noopener">Tornado Cash sanctions</a>, Flashbots, a US entity, began omitting transactions related to the <a href="https://cms.blockworks.co/crypto-mixers-and-privacy-coins-can-they-resist-censorship/" target="_blank" rel="noreferrer noopener">cryptocurrency mixer</a> to remain OFAC-compliant. That’s led to a new worry — censorship.



As one of the largest MEV-Boost relays, Flashbots has the power to delay the incorporation of sanctioned transactions into Ethereum blocks — or slots as they’re now known, following the proof-of-stake consensus switch.



Flashbot’s avowed obligation to follow regulatory requirements has caused concern <a href="https://twitter.com/koeppelmann/status/1580893089077809153" target="_blank" rel="noreferrer noopener">among some</a> in the Ethereum community. But the consensus among developers seems to be that the concerns are <a href="https://twitter.com/basilesportif/status/1581906143538221058" target="_blank" rel="noreferrer noopener">mostly overblown</a>.



The Flashbots team is well aware of the potential pitfalls, and Daian said Flashbots “[does] not intend to impose our utility functions, or our legal risk analyses, on the Ethereum network, full stop.”



Indeed, the launch of SUAVE — a project that the Flashbots team has been working on for over a year — is expressly aimed at distributing the power of MEV, even if that means helping Flashbots’ competitors.



Further details about SUAVE are expected this week.



Macauley Peterson contributed reporting.



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Flashbots Has a New Plan: ‘Make TradFi Look Embarrassing’

Sebastian Sinclair

Macauley Peterson

<div id="highlights-block_633582cf84ede" class="highlights">
 <ul>
 <li>Labrys said it has been internally tracking protocol censorship since the merge and was troubled by what it has found</li>
 <li>Practically this is not problematic if censorship free blocks are simply delayed for a brief period of time, according to Ethereum co-founder Vitalik Buterin</li>
 </ul>
 
</div>



Following Ethereum network&#8217;s transition to Proof-of-Stake (PoS) earlier this month, a new addition to the ecosystem is already sparking censorship concerns in some circles.



Australian blockchain development agency Labrys told Blockworks that roughly 25% of new blocks added to the Ethereum chain post-Merge currently adhere to the Office of Foreign Asset Control’s (OFAC) requirements.



Labrys said it has been internally <a href="https://www.mevwatch.info/" target="_blank" rel="noreferrer noopener">tracking</a> protocol-level censorship since the Merge and was troubled by what it had discovered.



“It is concerning to see how quickly the potential for censorship has grown unchecked since the Merge and it’s projected to get much worse,” Labrys’ CEO Lachlan Feeney said. “It is critical for the long-term success of the entire blockchain industry, not just Ethereum, that layer-1 blockchains remain credibly neutral.”



<h3 class="wp-block-heading">Block building under proof-of-stake Ethereum</h3>



Under PoS, Ethereum users who hold more than 32 ETH can stake their ETH in a validator and earn a staking yield.&nbsp;



While staking can prove profitable, one way to increase returns is via a software add-on to take advantage of the Maximum Extractable Value (MEV) — formerly Miner Extractable Value under Ethereum’s old consensus model.



New software developed by crypto research organization Flashbots, dubbed Mev-boost, is predominant, allowing validators to increase the staking annual percentage rate by 1.5% — depending on network demand.



But there is a trade-off. When enabled, validators cease allocating which transactions go into their blocks and instead outsource block building to what is known as MEV-boost Relays, Labrys explained.



Relays are off-chain services that accept privately-created blocks by individual block builders. In turn, those builders determine which block — out of the ones their relay has received — is more profitable and submit that block to the software to be compared against the most profitable blocks other relays could build. The winning block is then proposed by the validator. 



The problem, according to Labrys, is that MEV-boost relay providers operate as regular business entities, with a large portion of them deriving from the US and thus subject to US jurisdiction.



This means censoring transactions the government doesn’t approve of, including those deriving from mixing service Tornado Cash, or disallowing transactions from sanctioned addresses under the mandate from OFAC.



Last month, <a href="https://cms.blockworks.co/tag/tornado-cash" target="_blank" rel="noreferrer noopener">Tornado Cash</a> — thought by US lawmakers to have been used to launder stolen funds linked to major hacks — was added to OFAC’s Specially Designated Nationals list, along with 45 associated Ethereum wallet addresses.



The issue is not that the relays refuse to relay blocks to Flashbots’ software, Labrys said. It’s that they’re relaying blocks that are stripped of any Tornado Cash transactions, essentially censoring these transactions and preventing them from getting confirmed on the blockchain.



<h3 class="wp-block-heading">No cause for alarm</h3>



Ultimately it’s up to the validators to decide whether to restrict their block proposals to those with only OFAC-compliant transactions — or any other discriminatory criteria — and validators typically work with multiple relayers, not only Flashbots.



Bloxroute, for example, offers both a “Regulated” and a “Max Profit” stream. The regulated blocks will omit transactions from sanctioned addresses, but the Max Profit option simply selects the most valuable block construction.



<blockquote class="wp-block-quote">“Validators should be making these decisions, and I’m giving them options,” Bloxroute CEO Uri Klarman told Blockworks in an interview.</blockquote>



“There is currently a lack of regulatory clarity in terms of which participants of the Ethereum blockchain need to comply with OFAC’s decisions and in what way,” director of research firm Edison Group Milosz Papst told Blockworks in an email. He said that lack of clarity was spilling over to block builders.



But Bloxroute’s legal team has concluded that playing the role of a neutral middleman and providing optionality to the validators is sufficient to fulfill regulatory requirements.



In contrast, CommodityStream Inc., a replay provider under the Manifold brand, has taken the position that packaging of transactions in a certain way is not a legal necessity at all.



“CommodityStream views government or civil requests to block content at the [Remote Procedure Call] level as ineffective, inefficient, and overboard,” <a href="https://kb.manifoldfinance.com/docs/Block-Construction/blockconstruction-policies" target="_blank" rel="noreferrer noopener">according to</a> Manifold’s documentation. The company “would pursue its legal remedies before complying with such a request.”



Ethereum’s core developers are generally not concerned — at least not yet. In a pre-Merge developer call on Aug. 18, the issue was discussed at length and the consensus was that the current MEV designs could be improved, to enhance, so-called proposer / builder separation (PBS), but were unlikely to result in censorship.



French developer Mamy André-Ratsimbazafy said uncensoring relays should give the most rewards to validators, providing a natural incentive not to censor. That’s the logic behind Bloxroute’s Max Profit service.



Flashbots itself has open-sourced its software, which will make it easier for alternative relay providers to crop up.



“If we have any open relay, then I think that censoring will fall flat on its face,” André-Ratsimbazafy <a href="https://youtu.be/jJaCaS0WbIw?t=2112" target="_blank" rel="noreferrer noopener">said on the call</a>.



At worst, the use of relayers censoring transactions from OFAC-regulated addresses would merely delay those transactions from being processed, according to Ethereum co-founder Vitalik Buterin. 



Speaking on the Aug. 18 call he noted that even if 80% of validators were running censoring software, the other transactions would still be included into the blockchain, after 5 blocks (known as &#8220;slots&#8221; in proof-of-stake Ethereum), or about a minute, on average.



“The network will not censor [transactions] as long as some proposers don’t run censorship software — the network as a whole is not censoring,” reiterated Ansgar Dietrichs, an Ethereum Foundation researcher.



It will be up to the global Ethereum community, and all its stakeholders, to ensure that this remains true in the future, as the regulatory landscape evolves.



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