Ethereum Proof of Stake and Censorship Resistance

Validator compliance is profitable. Post-Merge, validators face direct financial incentives to comply with OFAC sanctions by censoring transactions, as non-compliance risks slashing or exclusion from dominant pools like Lido and Coinbase.

Proposer-Builder Separation (PBS) externalizes this pressure. Builders like Flashbots and bloXroute compete to create the most profitable block, which often means including sanctioned transactions to maximize MEV, while the proposer remains plausibly deniable.

The threat is credible but not absolute. The Tornado Cash sanctions established a precedent, but network-level censorship requires a supermajority cartel, which the inactivity leak mechanism is designed to economically punish by devaluing their stake.

Evidence: Over 45% of post-Merge blocks were built by OFAC-compliant entities at the peak, demonstrating the economic gravity of the issue, though this figure has since declined with PBS adoption.

MEV-Boost's architectural flaw was the decoupling of block building from block proposing. This created a new, dominant market for professional block builders like Flashbots, Titan, and bloXroute. Validators outsourced construction to these entities to capture maximal extractable value (MEV), trading sovereignty for profit.

Builder centralization creates censorship points. A few builders control the majority of blockspace. If a dominant builder like Flashbots complies with OFAC sanctions, censored transactions face systemic exclusion from the canonical chain. The proposer's role is reduced to selecting the highest-paying header.

The protocol's economic incentives failed. Validators are rational profit-maximizers. The MEV-Boost auction makes it economically irrational for a solo validator to build its own, uncensored block when a censored, builder-produced block pays more. The system optimizes for extractable value, not liveness.

Evidence: At its peak, the top three MEV-Boost builders consistently produced over 80% of Ethereum blocks. This concentration created a single point of failure for transaction inclusion, directly contradicting the network's foundational promise of permissionlessness.

The OFAC compliance rate for Ethereum blocks is high, but the network's decentralized block builder market ensures non-censored blocks are still produced. Flashbots' SUAVE and other PBS designs will further decentralize this critical layer.

Users can bypass censorship by routing transactions through private RPCs like Flashbots Protect or Taichi Network. These tools submit transactions directly to block builders, sidestepping compliant validators.

The ultimate backstop is forking. If censorship becomes systemic, the social layer will activate a user-activated soft fork (UASF) to slash non-compliant validators. This credible threat deters maximalist compliance.

Evidence: Over 99% of Ethereum blocks are OFAC-compliant, yet 100% of transactions, including sanctioned ones, are still included on-chain. The system is resilient by design.

Enshrined Proposer-Builder Separation (PBS) is a non-optional upgrade to neutralize MEV-driven censorship. The current PBS model via MEV-Boost outsources block building to a competitive market, but validators can still censor transactions. Enshrined PBS moves this function into the protocol, making transaction inclusion a verifiable, enforceable rule rather than a market preference.

Single-Slot Finality (SSF) eliminates the 15-minute wait for economic certainty. Today's 32-slot finalization is a security-complexity trade-off from early PoS design. SSF uses cryptographic aggregation techniques, like BLS signature schemes, to finalize blocks immediately. This transforms user experience and enables synchronous cross-chain composability without relying on probabilistic bridges like LayerZero.

The builder market consolidates ahead of enshrinement. Entities like Flashbots and bloXroute are building vertically integrated stacks (SUAVE, mev-commit) to capture value before protocol-level PBS commoditizes pure block building. The endgame is a protocol-managed auction where builders compete on execution, not their relationships with validators.

Evidence: Post-Merge, over 90% of Ethereum blocks are built via MEV-Boost relays. However, OFAC-compliant relays like Flashbots and BloXroute have built over 70% of these blocks, demonstrating the centralized censorship vector that enshrined PBS must solve.