Decentralizing Monopolistic Power in DeFi

Abstract

While many applaud the transparency the blockchain technology provides, there is a movement on Ethereum toward private orderflow, where some transactions are kept hidden until they are executed. This approach helps prevent others from seeing and exploiting these transactions, reduces the impact on market prices, and provides more privacy. This is especially appealing to traders who don't want their strategies exposed before they've landed their trades, or traders who want to protect their orderflow from frontrunning and sandwich attacks by skipping the public mempool and sending transactions directly to builders. In this paper we distinguish between private orderflow and exclusive orderflow. While both are private in the sense that the orderflow bypasses the mempool, in the case of exclusive orderflow, the transactions are sent (privately) to a single builder. Our analysis focuses on the negative effect of exclusive orderflow on validator rewards and suggests an alternative solution to maximize validators’ rewards. In addition, we look at the effect of exclusive partnerships between builders and originators of transactions on builders’ ability to keep a larger share of the block's value.

Keywords: Blockchain, vertical relationship, monopolistic power

JEL Classification: J1