This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. ASSA Annual Meeting
  3. 2025
  4. Program
  5. Crypto-Market Microstructure
« Back to Results

Crypto-Market Microstructure

Paper Session

Saturday, Jan. 4, 2025 8:00 AM - 10:00 AM (PST)

San Francisco Marriott Marquis, Foothill C
Hosted By: Association of Financial Economists & American Economic Association
  • Chair: Itay Goldstein, University of Pennsylvania

Who Wins Ethereum Block Building Auctions and Why?

Burak Öz
,
Technical University of Munich
Danning Sui
,
Flashbots
Thomas Thiery
,
Ethereum Foundation

Abstract

The block auction on Ethereum, MEV-Boost, has been dominated by three builder entities, accounting for roughly 80% of all blocks produced between October 2023 and March 2024. While this raises concerns about builder market centralization, there is a lack of empirical evidence and comprehensive analysis explaining why these builders are so successful in winning block auctions. Moreover, the builders’ profitability, which we show is not necessarily correlated with their market share, is currently poorly understood. In this paper, we highlight the significant factors contributing to the market share and profitability of the builders through a correlation analysis. To that extent, we develop an MEV-Boost decomposition framework that utilizes a dataset we curate that labels the order flow composition of the builders in historical blocks, summarizing their bidding behavior, and identifying the strategies they employ, including subsidizing, strategic bidding, block packing, and exclusive order flow acquisition. Overall, this work thoroughly examines the factors driving builder success in the MEV-Boost block building auction and offers valuable insights when designing further iterations of Ethereum block auctions.

An Economic Model of a Decentralized Exchange with Concentrated Liquidity

Joel Hasbrouck
,
New York University-Stern
Thomas Rivera
,
McGill University
Fahad Saleh
,
University of Florida

Abstract

We develop an economic model of an important decentralized exchange specification (i.e., Uniswap V3). We focus particularly on the economics associated with liquidity provision. We demonstrate that providing liquidity for a risky/risk-free asset swap is comparable to investing in a covered call except that the call therein is sold at intrinsic value rather than market value. Investors internalize this loss, which is equal to the time premium of the call option. In turn, we demonstrate that equilibrium liquidity provision decreases in the call time premium. We provide an expression for equilibrium liquidity provision which is useful for empirical work

Proposer-Builder Separation, Payment for Order Flows, and Centralization in Blockchain

Agostino Capponi
,
Columbia University
Ruizhe Jia
,
Columbia University
Sveinn Olafsso
,
Stevens Institute of Technology

Abstract

Existing consensus protocols on blockchain, where validators propose and build blocks, exhibit centralization phenomena as larger validators often secure disproportionate rewards. The proposer-builder-separation (PBS) framework proposed by Ethereum introduces a mechanism that decouples block proposing from block building, establishing a competitive market for block construction. Builders create blocks and bid fees they are willing to pay validators for including their blocks into the blockchain. We argue that PBS offers validators an outside option to accept blocks built by the highest-bidding builders, regardless of their size. This helps reduce and even eliminate centralization among validators, particularly in a highly competitive builders’ market. Despite its potential to reduce validator centralization, our analysis uncovers an emergent centralization trend within the builders’ market itself. This new form of centralization arises from certain builders possessing advanced internal search capabilities, which enhance their bargaining power with order flow providers and secure order flows at lower costs. This advantage increases their chances of dominating the block building market. We identify this dynamic as leading to a "Proof-Of-MEV" (Maximal Extractable Value) paradigm, where the capacity to efficiently capture and utilize extractable value becomes a leading factor in the construction of valuable blocks.

Discussant(s)
Tao Li
,
University of Florida
Matthieu Bouvard
,
Toulouse School of Economics
Davide Crapis
,
Ethereum Foundation
JEL Classifications
  • G2 - Financial Institutions and Services
  • G1 - General Financial Markets