Block Building Strategy

In Proof-of-Work (PoW) and Proof-of-Stake (PoS) systems, the entity that creates the next block—a miner or validator—has significant discretion over its composition. A block building strategy is the algorithm or set of heuristics this entity employs to construct the most profitable or otherwise optimal block from the mempool, the pool of pending transactions. The primary goal is typically to maximize the total value extracted (TVE), which includes standard transaction fees and, in systems like Ethereum, Maximal Extractable Value (MEV) opportunities such as arbitrage and liquidations.

The core technical challenge involves solving a complex optimization problem under constraints like block gas limits (Ethereum) or block weight (Bitcoin). Advanced strategies use sophisticated algorithms to evaluate millions of potential transaction bundles and orderings. This has led to the rise of specialized block builders, often operated by searchers or MEV relays, who compete to produce the most valuable block for validators. Validators then often choose the most profitable block header proposed to them, a process central to proposer-builder separation (PBS).

Common strategy types include fee-prioritization (simple sorting by fee rate), MEV extraction (bundling profitable decentralized finance trades), and time-based or privacy-focused ordering. The chosen strategy has profound implications for network efficiency, transaction censorship resistance, and user experience. For example, a strategy that exclusively targets high-value MEV can lead to network congestion for regular users, while a first-in-first-out (FIFO) strategy promotes fairness but may reduce validator revenue and overall chain security incentives.

The evolution of block building is a key theme in blockchain scalability and decentralization. Ethereum's move to PBS explicitly formalizes the role of the block builder, aiming to democratize access to MEV profits and reduce the computational advantage of large validators. Meanwhile, ongoing research into encrypted mempools and fair ordering protocols seeks to mitigate the negative externalities of competitive, profit-maximizing strategies, shaping the next generation of blockchain protocol design.

At its core, a block building strategy is the decision-making process a block producer (validator or miner) employs after receiving a mempool of pending transactions. The goal is to construct the most profitable or otherwise optimal block possible within the network's constraints. This involves solving a complex optimization problem, often called the Maximum Extractable Value (MEV) problem, where the builder must consider transaction fees, potential MEV opportunities like arbitrage or liquidations, and the block's gas limit. The chosen strategy directly impacts the builder's revenue and the network's overall efficiency and fairness.

Strategies vary in sophistication. A simple greedy algorithm might involve including transactions in descending order of fee-per-gas until the block is full. More advanced strategies utilize block building software like MEV-Boost relays on Ethereum, which outsource construction to specialized builders. These builders run complex algorithms to simulate transaction bundles, reorder them to capture MEV, and submit the most valuable block to the validator. This creates a competitive market for block space, where builders bid for the right to have their block proposal signed and published by the validator.

The chosen strategy has significant implications. Permissionless block building promotes competition but can lead to centralization around the most sophisticated operators. Strategies that prioritize fee revenue alone can cause network congestion and high costs for users. Furthermore, predatory MEV extraction strategies can harm ordinary users through practices like frontrunning or sandwich attacks. Consequently, research into proposer-builder separation (PBS) and encrypted mempools aims to mitigate these negative externalities by altering the strategic landscape for builders.

In practice, a validator's client software (e.g., Prysm, Lighthouse) integrates with a block building engine. The engine continuously scans for opportunities, constructs candidate blocks, and evaluates them based on the validator's configured strategy—whether it's maximizing immediate profit, promoting network health, or censoring certain transactions. The final output is a complete block header and body, which the validator then signs and propagates to the network, finalizing the strategy's outcome in the canonical chain.

In early blockchain designs like Bitcoin, block building was a relatively straightforward, sequential process: a miner selected pending transactions from their local mempool, ordered them, and attempted to solve a Proof-of-Work puzzle. The primary goal was to include as many fee-paying transactions as possible to maximize revenue, with little strategic consideration beyond basic fee prioritization. This model treated the mempool as a simple, global queue.

The introduction of DeFi and complex transaction types, such as those involving MEV (Maximal Extractable Value), transformed block building into a high-stakes optimization puzzle. Builders began reordering, including, and excluding transactions to capture value from arbitrage, liquidations, and sandwich attacks. This led to the professionalization of block building, with specialized actors using sophisticated algorithms to construct the most profitable block possible, often in private mempools or dark pools.

This evolution precipitated a structural shift with the rise of the proposer-builder separation (PBS) model, most notably implemented in Ethereum's post-merge design. PBS explicitly separates the roles: specialized block builders compete in a sealed-bid auction to create the most valuable block, while block proposers (validators) simply choose the highest-paying bid. This design aims to democratize MEV profits, reduce validator centralization risks, and improve network efficiency by outsourcing complex building to a competitive market.

Today, advanced block building strategies involve real-time analysis of pending transaction flow, simulation of state changes, and the construction of bundles of interdependent transactions. Builders employ techniques like backrunning and frontrunning within legal protocol bounds, and the competition occurs in dedicated marketplaces. The evolution continues with research into inclusion lists, encrypted mempools, and other mechanisms to further refine the balance between efficiency, profitability, and network fairness.