How to Structure Incentives for Proposer-Builder Separation

Proposer-Builder Separation (PBS) is a critical architectural upgrade for Ethereum's proof-of-stake consensus. It decouples the role of the block proposer (a validator) from the block builder (a specialized entity). The proposer's job is to select the most valuable block from a competitive market of builders. This separation is designed to mitigate centralization risks in MEV (Maximal Extractable Value) extraction and improve network efficiency. The core challenge of PBS is designing an incentive-compatible system where all participants—proposers, builders, and users—act honestly without requiring excessive trust.

In a PBS model, builders compete in a sealed-bid auction. They construct blocks by ordering transactions to maximize their profits from MEV, which includes arbitrage, liquidations, and frontrunning opportunities. The builder submits a block header and a bid to the proposer. The proposer's incentive is straightforward: select the block with the highest bid, as this bid is paid directly to them. This creates a clear, profit-driven mechanism for block selection. However, this simple model introduces risks, such as builders withholding blocks or proposers engaging in censorship.

To ensure the system's security and liveness, PBS designs often incorporate a commit-reveal scheme or a cr-list (censorship resistance list). In a commit-reveal scheme, builders commit to a block hash and bid without revealing the full block content until after selection, preventing proposers from stealing their MEV strategies. The cr-list is a set of transactions the proposer can force the winning builder to include, providing a backstop against transaction censorship. These components align builder and proposer incentives with network health.

From a protocol design perspective, PBS can be implemented in-protocol (e.g., via enshrined PBS or ePBS) or out-of-protocol (relying on relayers and mev-boost). The out-of-protocol model, currently used with mev-boost, demonstrates the incentive structure in practice: relays attest to block validity, builders submit bids, and proposers trust the relay's attestation. The economic security relies on the relay's reputation. An in-protocol design would bake these rules and slashing conditions directly into the consensus client, reducing trust assumptions.

Effective incentive design must also consider the validator's economic rationale. A validator acting as a proposer must weigh the immediate bid payment against the long-term value of their staked ETH. If accepting a high bid requires including a malicious transaction that could lead to slashing, the rational choice is to reject it. Therefore, PBS mechanisms must make honest participation (selecting the highest valid bid) the dominant strategy, ensuring it is always more profitable than any deviant behavior.

Proposer-Builder Separation (PBS) decouples the role of the block proposer (a validator) from the block builder (a specialized entity). The proposer's job is to select the best block from a competitive market of builders. The primary incentive for a proposer is to maximize their profit by choosing the block with the highest bid, which includes transaction fees and MEV (Maximal Extractable Value). This creates a transparent, auction-based market for block space. For builders, the incentive is to construct the most profitable block possible to win the auction and have their block included in the chain, recouping their bid and securing a profit.

Structuring these incentives requires careful protocol design to prevent manipulation. A key mechanism is the commit-reveal scheme. Builders submit encrypted bids and block bodies. The proposer sees only the bid amounts, selects the highest, and commits to it. The winning builder then reveals their block. This prevents proposers from stealing a builder's profitable block design after seeing its contents. Protocols like Ethereum implement this via MEV-Boost, an out-of-protocol PBS system that uses a trusted relay to facilitate these sealed-bid auctions between builders and proposers.

The economic security of PBS hinges on the builder's bond or surety. Builders often must post collateral to participate in auctions, which is slashed if they fail to reveal a valid block after winning. This disincentivizes builders from bidding frivolously or attempting to waste the proposer's slot. Conversely, proposers are incentivized to honor the winning bid; failure to do so typically results in missing their block proposal opportunity and the associated rewards, a significant opportunity cost enforced by the underlying consensus protocol.

Long-term, the goal is to enshrine PBS within the protocol itself (enshrined PBS). This would move the auction and slashing logic on-chain, removing reliance on external relays and enhancing censorship resistance. Enshrined PBS designs, such as those proposed for Ethereum, often feature a builder payment to the proposer from a fee market and a separate consensus layer reward. This clean separation ensures validators are compensated for their security role while builders compete on economic efficiency, aligning individual incentives with network health and decentralization.

Proposer-Builder Separation (PBS) fundamentally changes how blocks are produced in Ethereum and other proof-of-stake chains. Instead of a single validator creating a block, the role splits: a block builder assembles transactions and a block proposer (a validator) simply selects the best block. The core economic challenge is designing a reward distribution mechanism that aligns incentives for both parties, ensuring builders are compensated for their work while proposers are incentivized to select the most valuable, honest block. A poorly designed mechanism can lead to centralization, reduced network security, or proposers ignoring the PBS system entirely.

The primary mechanism for reward distribution is the auction. Builders compete by submitting sealed bids to proposers. Each bid contains a block payload (transactions) and a bid amount (the payment to the proposer). The proposer's role is simplified to selecting the highest bid. This creates a clear, market-driven price for block space. The winning builder's transactions are included, and the proposer receives the bid payment, typically in the native chain token (e.g., ETH). This auction model is the foundation for systems like mev-boost on Ethereum, where relays facilitate communication between proposers and a competitive builder marketplace.

Beyond simple auctions, more sophisticated mechanisms can address specific goals. MEV smoothing or redistribution schemes aim to mitigate the "winner-take-all" nature of MEV extraction by distributing a portion of builder profits back to the broader validator set or the protocol treasury. This can be implemented via a protocol-level tax on high-value blocks or through a commit-reveal scheme where builders commit to sharing future revenue. Another design is the proposer payment floor, which guarantees a minimum reward to the proposer regardless of the auction outcome, protecting validators during periods of low MEV activity and ensuring PBS participation remains attractive.

Implementing these mechanisms requires careful smart contract design. A basic auction contract for a permissionless builder marketplace might involve a commitBid function where builders submit a hash of their block and bid, followed by a revealBid function. The proposer would call a selectBid function to choose the highest valid revealed bid. Security is paramount; contracts must prevent front-running, censorship, and ensure credible commitment where builders cannot back out of a winning bid. Audited templates from established protocols like the Flashbots mev-boost relay software or the EigenLayer eigenlayer documentation provide essential reference implementations.

The long-term sustainability of PBS incentives depends on avoiding centralization risks. If reward distribution overly favors large, sophisticated builders, it can create barriers to entry and reduce censorship resistance. Mechanisms that incorporate proposer voting on builder reputation, or that allocate a portion of block space to a neutral public mempool, can help maintain a healthy ecosystem. Furthermore, integrating with restaking platforms like EigenLayer allows for the creation of cryptoeconomic security layers that can slash malicious builders, adding a trust-minimized enforcement mechanism to complement financial incentives.

Proposer-Builder Separation (PBS) decouples the roles of block proposal and block construction to mitigate MEV centralization risks. However, this creates a new coordination problem: a proposer and builder could collude off-chain to split excess profits or censor transactions, undermining the system's neutrality. The core challenge is to design on-chain incentives that make such collusion economically irrational or detectable, ensuring the separation is enforced in practice, not just in theory. This requires mechanisms for verifiable commitments and credible slashing threats.

A foundational anti-collusion design is the commit-reveal scheme with an on-chain auction. The builder submits a cryptographically committed bid (commit(bid_hash, builder_address)). The proposer, acting as a relay, only sees the commitment. After the proposer selects a bid and publishes the block, the builder must reveal the bid details. If the revealed bid doesn't match the commitment or the builder fails to reveal, their stake is slashed. This prevents the proposer from seeing the exact bid value before selection, reducing the surface for negotiation. Implementations like Ethereum's mev-boost use this pattern.

For slashing to be credible, builders must post a significant bond (stake) that can be destroyed for malicious acts. Slashing conditions must be objectively verifiable on-chain. Key slashable offenses include: - Bid non-compliance: Delivering a block whose attributes (transactions, ordering) differ from the committed bid. - Censorship: Systematically excluding transactions from a specific address or protocol over multiple blocks, provable via merkle proofs. - Withholding: Failing to reveal a winning bid or publish the block header. The slashing penalty must exceed the potential profit from cheating, following the principle of credible punishment.

Incentives must also align for the proposer. The dominant strategy should be to select the highest valid bid. To prevent proposers from extracting value via side-deals, the protocol can enforce that the proposer's payment is exactly the value of the revealed bid, sent atomically with the block. Any off-chain payment would then be an additional, non-enforceable cost for the builder, making collusion less efficient. Research into proposer commitments (e.g., EIP-7251) explores having proposers cryptographically commit to a builder selection rule, making deviation slashable.

Real-world implementation requires a trusted relay or a decentralized alternative like SUAVE. The relay facilitates the commit-reveal flow and attests to bid validity. To prevent relay manipulation, its role should be minimal and verifiable. Future designs aim for enshrined PBS where these auction and slashing rules are baked directly into the consensus layer client code, removing third-party trust. Until then, careful monitoring of builder market share and censorship metrics is essential for early detection of incentive failures.

Proposer-Builder Separation (PBS) decouples the roles of block proposal (validators) and block construction (builders) to combat MEV centralization and improve censorship resistance. A core challenge is designing incentive mechanisms that ensure both parties act honestly. For builders, the primary incentive is winning the auction to have their block included, earning transaction fees and MEV. For proposers (validators), the incentive is to select the most valuable block from the auction to maximize their reward. The system must be structured so that the proposer's profit-maximizing action—choosing the highest bid—also serves the network's health by promoting competitive, efficient block building.

Token-based slashing is a critical tool for enforcing proposer compliance. A common design requires proposers to stake a bond (in the network's native token) that can be slashed for malicious behavior, such as withholding blocks (censorship) or attempting to steal MEV from the winning builder. The Ethereum PBS roadmap includes proposer commitments, where the proposer signs a promise to release the block builder's payload. If they renege, their stake is slashed. This creates a strong cryptographic and economic guarantee for builders, encouraging them to participate in the auction without fear of being cheated after winning.

To prevent proposers from simply always choosing the top bid—which could lead to builder monopolies—mechanisms can incorporate builder reputation or quality-adjusted bids. For example, a protocol might implement a scoring function that weighs a builder's bid amount against their historical reliability and inclusion of certain transactions (like those from the public mempool). This can be encoded in smart contracts on the settlement layer. Builder deposits can also be slashed for consistently poor performance, creating a two-sided accountability system. The goal is to reward long-term, honest participation over short-term profit extraction.

Implementation often involves a series of on-chain and off-chain components. A typical flow: 1) Builders construct blocks and submit sealed bids (block hash + bid amount) to a relay. 2) The relay forwards the highest valid bid to the proposer. 3) The proposer commits to the block header and receives the full block body post-commitment. Smart contracts on the execution layer (e.g., Ethereum's BlockBuilderRegistry) can manage builder registration, stake deposits, and slashing logic. Code snippets for such a registry would include functions for registerBuilder(uint256 stake), submitBid(bytes32 blockHash, uint256 bid), and slashBuilder(address builder, bytes32 proof) to penalize malfeasance.

Real-world analysis from networks like Ethereum post-Merge shows that effective PBS requires continuous parameter tuning. Key metrics to monitor include builder market concentration (HHI index), bid spread between top bids, and censorship rates. If one builder consistently wins over 50% of slots, incentive parameters like minimum stake or reputation decay rates may need adjustment. The system should be designed for upgradeability via governance to respond to such dynamics. The ultimate success of PBS incentives is measured not just by MEV extraction efficiency, but by the resilience and decentralization of the block building market itself.

Proposer-Builder Separation (PBS) decouples the roles of block proposal and block construction to mitigate centralization risks in Ethereum's consensus layer. The core challenge is designing an incentive structure that ensures builders compete fairly on block quality while proposers remain honest relayers. This requires a commit-reveal scheme where builders submit encrypted bids containing the block and a fee, and the proposer selects the highest bid without seeing the block's contents. The primary economic lever is the builder payment to the proposer, which must be high enough to discourage proposers from bypassing the system ("censorship") or building their own blocks ("insider advantage").

A robust implementation starts with a trusted relay. The relay acts as a neutral intermediary, receiving encrypted bids from builders and passing only the header and fee to the proposer. The proposer commits to the header with the highest fee. Upon inclusion, the relay reveals the full block body. The smart contract logic must handle two key flows: the bid submission and escrow from builders, and the payment distribution upon successful block inclusion. Builders must escrow their bid amount plus the block's expected transaction fees, which are slashed if they fail to reveal a valid block.

Here is a simplified Solidity contract structure outlining the core auction logic. The submitBid function accepts an encrypted payload, while commitHeader allows the proposer to select a winner. The revealBlock function is callable only by the winning builder to finalize the process.

solidityCopy
contract PBSAuction {
    struct Bid {
        address builder;
        bytes32 bidHash; // hash(encryptedBlock, fee)
        uint256 fee;
        bool revealed;
    }
    
    mapping(bytes32 => Bid) public bids;
    bytes32 public committedHeader;
    
    function submitBid(bytes32 _bidHash, uint256 _fee) external payable {
        require(msg.value >= _fee, "Insufficient escrow");
        bids[_bidHash] = Bid(msg.sender, _bidHash, _fee, false);
    }
    
    function commitHeader(bytes32 _header, bytes32 _bidHash) external {
        require(committedHeader == bytes32(0), "Header already committed");
        committedHeader = _header;
        // Logic to verify header corresponds to bidHash
    }
    
    function revealBlock(bytes calldata _encryptedBlock, bytes32 _bidHash) external {
        Bid storage bid = bids[_bidHash];
        require(bid.builder == msg.sender, "Not the builder");
        require(!bid.revealed, "Already revealed");
        require(keccak256(abi.encodePacked(_encryptedBlock, bid.fee)) == _bidHash, "Invalid reveal");
        
        bid.revealed = true;
        // Transfer fee to proposer, return escrow remainder to builder
    }
}

To prevent MEV extraction by proposers, the system must guarantee the proposer cannot decrypt the block before commitment. This is achieved using threshold encryption schemes, like that proposed by the Flashbots SUAVE initiative, where decryption requires a committee's consensus. Furthermore, credible commitment is enforced through slashing. If a proposer commits to a header but includes a different block, their stake is slashed. Conversely, builders are slashed for non-revelation or invalid blocks. These penalties must be calibrated to exceed the potential profit from deviating, a concept known as economic finality.

In practice, integration with an Ethereum Execution Client like Geth requires modifying the block production pipeline. The builder's software (e.g., mev-boost relay) constructs a block using a local transaction pool and private orderflow, generates the encrypted bid, and submits it. The proposer's validator client connects to multiple relays, receives the header bids, and signs the most profitable one. Post-merge, this is facilitated by the Engine API through the engine_forkchoiceUpdatedV3 and engine_getPayloadV3 endpoints, which handle payload attribution and fee recipient specification. Monitoring tools like Ethereum Execution Client Diversity Dashboard are essential to ensure relay decentralization.

The long-term goal is enshrined PBS, where auction logic moves into the protocol itself. Current research focuses on two-slot PBS designs, where slot N is for bidding and commitment, and slot N+1 for revelation and execution. This eliminates reliance on off-chain relays. When structuring incentives, continuously model scenarios: - Builder collusion: Could builders form a cartel to suppress fees? - Proposer collusion: Could a majority of proposers agree to censor certain transactions? - Time-bandit attacks: Could a proposer discard a committed block for a more profitable reorg? Iterative simulation and adversarial testing are required to harden the economic design before mainnet deployment.

To build a functional Proposer-Builder Separation (PBS) system, you need to implement the core components in a test environment. Start by setting up a builder client that can construct blocks. This involves integrating with an execution client (like Geth or Nethermind) to fetch the transaction pool, running an MEV-boost relay to receive external blocks, and implementing a local block-building algorithm. Your builder must sign and submit its block headers to the relay. For testing, you can use a local development network or a public testnet like Holesky.

Next, configure a validator client to act as the proposer. You will modify its configuration to outsource block building by connecting to a trusted relay. In a practical setup using mev-boost, this involves setting the --builder and --relay flags. The proposer will receive signed block headers from the builder via the relay and select the one with the highest bid. Crucially, the proposer never sees the block's contents, only the header and the associated fee, which is paid directly to the validator's fee recipient address specified in the execution payload.

The most critical component is designing and implementing the incentive and slashing logic. This is where the concepts of credible commitment and conditional payments become code. You must write and deploy smart contracts (likely on the execution layer) that handle the payment escrow. A builder commits funds to this contract when submitting a bid. The contract's logic must release payment to the proposer only upon a verifiable, on-chain proof of the builder's header being included in the canonical chain. This can be verified through a light client proof or by monitoring the beacon chain's ExecutionPayloadHeader.

For advanced implementations, consider incorporating partial block auctions or MEV smoothing. A partial auction allows builders to bid for specific, high-value transactions (like arbitrage) while the proposer fills the rest of the block. MEV smoothing involves a protocol-level contract that redistributes a portion of builder profits to all validators over time, mitigating centralization pressures. Research the Ethereum Research forums and the flashbots GitHub repository for ongoing proposals and reference implementations of these complex economic mechanisms.

Finally, rigorously test your system's economic security. Simulate adversarial scenarios: a builder attempting to withhold blocks, a proposer attempting to steal MEV by reconstructing a block from a header, or collusion between relay operators and builders. Use formal verification tools for critical smart contracts and consider implementing circuit breakers that can disable outsourcing if relay uptime falls below a threshold. The goal is a system where defection is economically irrational, ensuring the credible commitment between proposer and builder holds under real-world conditions.