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Private mempools on Ethereum (ETH) raise concerns for frontrunning advantages

source-logo  cryptopolitan.com 10 July 2024 16:59, UTC

A bigger percentage of Ethereum (ETH) blocks are specifically built to contain selected transactions. The rise of private mempools and block builders is raising questions about frontrunning advantages and the fairness of decentralized trading.

Ethereum (ETH) is showing a bigger share of custom-built blocks, where transactions are specially selected. The practice of rearranging transactions has affected multiple networks, especially Solana. There is also data on Bitcoin having its own form of front-running transactions. The emergence of Ordinals and Bitcoin-based tokens has invited tools to front-run or block transactions, which may also result in private mempools.

The trend of Ethereum private mempools accelerated with the 2024 bull market and a return to decentralized trading. The peak of sandwich attacks came in 2021, when DEX trading was still relatively new. Now, there are more tools to ensure the right transaction order and prevent losses.

in the past 6 months, Ethereum onchain transactions from private mempool quickly grew to over 30% now.

it was 5% in Jan 2023; 15% in Dec 2023.

data from mempool-dumpster: https://t.co/vThj56cngc
(s/o to @William33203632 for calling out the trend!) pic.twitter.com/Hg5BF6HCXK

— danning.eth⚡️🤖 (@sui414) July 3, 2024

The benign explanation for those mempools are optimizations and tools to save on fees. In early July, the so-called private transactions, or privately selected blocks, made up to 30% of all Ethereum traffic.

While hand-picking transactions may be crucial for some apps, this undermines the basic understanding of a public blockchain. Additionally, Ethereum’s gas economy relies on free competition based on priority fees. In the current case, the culprit may be DEX and a new technology of smart transactions to avoid congestion.

Also Read: Solana removes several validators for sharing mempool data

The presence of private mempools and block builders is causing concerns that a previously free network had to rely on trusted, centralized entities. Block builders are those special entities that order the transactions to avoid attacks, as well as optimize for gas.

Why do Ethereum users reach out to private mempools?

On the positive side, the ability to compose transactions into blocks may be viable for high-traffic apps that are unrelated to trading.

Another benefit of private transactions is that they may be a way to prevent MEV attacks and trade frontrunning. Transactions in privately composed blocks can in fact avoid the scrutiny from bots, solving the problem of DEX trade frontrunning.

Also Read: Solana Foundation expels 30+ validators for sandwich attacks

Ethereum, unlike Solana, still has a publicly visible mempool of waiting transactions. In the past, only selected miners or pools could inject their own transactions for specific purposes, such as high-profile ICOs or NFT mints.

In some cases, miners also paid themselves extremely high fees, as a tool to launder ETH and hide the origin of tokens. But in the past couple of years, selective transactions started to turn into the norm.

Some block builders specifically advertise their ability to protect user transactions from sandwich bots.

Why is it recommended to use private mempool (a.k.a. private transactions) in Ethereum network?

Because we have Jared the sandwich maker.

Now he holds tokens from his sandwiches, at least part of it, and if someone sells via public mempool and leaves room for attack, Jared will… pic.twitter.com/0CZjLDiSO9

— Slice (@77Slice) July 10, 2024

Other private pools or block-builders include CoWSwap and UniswapX, which can lead to improved settlement on DEX swaps. The rise of Uniswap as the busiest DEX in 2024 is also helping the private mempool trend. Ensuring that DEX trading is more fair and less prone to MEV attacks is also increasing the usage of private pools and block-building.

In the past few years, private mempools expanded gradually, from a 5-10% share of transactions to the current peak at above 30%. Since the start of 2024, a form of transaction optimization is also available through MetaMask.

Transaction routing is yet another way to include transfers into specially created blocks. Researchers have noted that most private transactions are targeting DeFi and DEX protocols, including Uniswap, Aave, and Balancer.

Block builders compete for order flows

Over the past few months, the prevalence of private mempools led to competition among block builders. When bots are excluded, the share of personal DEX trade orders is even more dependent on private pools.

Also Read: U.S. Indicts Brothers for Attack on Ethereum Trading Bots

The rise in private mempool usage created clear winners among block builders. Beaverbuild is the leader, creating 41.3% of selective blocks. Titan and Rsync Builder make up another 42% of private block production.

Block builders also serve regular trading bots, while avoiding the scrutiny of MEV bots. Bots have also directed traffic to multiple builders, unlike personal traders. Apps also have different approaches to distribute their flow among block builders.

Cryptopolitan reporting by Hristina Vasileva