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Ethereum: Ethereum overhaul risks creating a new class of crypto pivots

Ethereum: Ethereum overhaul risks creating a new class of crypto pivots
The long-awaited upgrade from Ethereum will create new participants called builders in the blockchain ecosystem, a move that risks changing the power structure of what is arguably the most commercially important cryptocurrency network.

In the current system, networks of computers known as miners extract transactions from a special data pool and organize them into blocks that are added to the blockchain. The miners are eliminated as part of a plan to reduce energy consumption. After the planned upgrade in September known as the merge, builders will gather transactions into blocks, which they will then send to validators. Validators will sign the order of blocks that will form the updated blockchain.

This seemingly geeky change, part of a part of the software upgrade called MEV-Boost, could potentially make Ethereum more centralized, at least initially. While there are already over 416,000 validators lined up for order transactions, there are only a handful of participants committed to serving as builders. The biggest is Flashbotswhich makes open-source software used by trading bots.

Flashbots are already the dominant way for miners to collect fees from merchants by letting their transactions go first and bypassing others. Other participants consider becoming builders due to concerns about Flashbots or similar entities having too much control.

“It kills decentralization,” said Uri Klarman, chief executive of BloXroute Labs, which has a network of servers that allow merchants to send transactions to miners faster. About 40% of all transaction volume from decentralized finance apps, which allow people to trade, lend and borrow coins, is routed through the network, he said.

One of the risks is that a powerful digital wallet like MetaMask, which gives users the ability to buy, sell and receive cryptocurrency, could become a “kingmaker,” Klarman said. Metamask is the most popular non-custodial wallet, with 30 million users.

A wallet service could favor one builder over all others and even decide to act as the builder, controlling the flow of transactions, Klarman said.

MetaMask is owned by the New York company ConsenSys, which was founded by Ethereum co-founder Joseph Lubin. The software company dismisses the worry.

“We will never send all MetaMask transactions to a specific manufacturer or vendor,” said Taylor Monahan, global product manager at MetaMask. “MetaMask’s value stems from being a gateway to an exciting, dynamic, diverse and equitable ecosystem. For this reason, MetaMask will always strive to make decisions that promote a healthy and decentralized Ethereum.

The split of builder-validator roles was originally designed as a way to increase Ethereum’s decentralization and take power away from validators.

Still, having too few builders on the upgraded Ethereum chain raises potential issues. They could prevent transactions from being included in blocks. Earlier this month, Flashbots blacklisted wallets associated with Tornado Cash, after the mixing protocol was sanctioned by the US Treasury Department.

If there are very few builders, they may also charge higher fees, with validators earning less. This could, in turn, lead to fewer validators choosing to get involved in supporting the network. To date, miners have earned around $240 million from the transaction reorganization service, called MEV, according to Flashbots. Fees are also expected to contribute significantly to validator revenue.

Builders can also capitalize on their users’ order flow. If a builder knows that many users are placing orders for a particular token, for example, they could buy a long position there.

It’s like “Robinhood, making money from order flow,” said Nathan Worsley, referring to the commission-free trading firm. Worsley and his partners, who make money from transactions rearranging liquidations and various complex trades, are considering becoming a builder, he said.

Worsley isn’t alone in considering a shift in focus due to the potential risks of centralization and shifting power.

“We will monitor the situation. If it moves closer to a centralized builder world, we will take action,” said Jonas Pfannschmidt of Blockdaemon, which runs validator nodes for customers.


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