Proposer Builder Separation In Practice With Advanced DeFi Projects

When I first started following DeFi, I imagined it as a giant vending machine that could dispense returns whenever you wanted. I watched people brag about “gas‑less” trades, “flash loan arbitrage,” and “yield farming” like it was all good fun. That dream was shattered the moment I saw the real numbers behind MEV—Miner Extractable Value—pop up on a Reddit thread. The headline was simple: “A single validator earned $3 million in a day, but a regular user lost $10,000 in a bad trade.” The fear that the block builder had a hand in the loss was real, and it made me pause. It turned my curiosity into a kind of financial anxiety that I felt many of us share when markets get noisy.

The underlying emotion is a mix of fear and hope. Fear that the infrastructure is still a playground for the few who can manipulate it, and hope that there is a way to design the system so everyone can play fairly. That is exactly what Proposer‑Builder Separation attempts to achieve, and that’s what I want to walk you through today. I’ll keep it conversational, a bit skeptical, and grounded in the realities of how advanced DeFi projects actually work today.

The Anatomy of a Block in Ethereum

Before we dive into PBS, let’s step back and look at what a block actually looks like in a proof‑of‑stake chain like Ethereum 2.0 (the Beacon Chain). A validator, chosen at random from the stake pool, is the proposer. The proposer’s job is to take a set of transactions that have sat in the mempool and turn them into a block. A builder is a different entity that can create a block with the same transactions but ordered differently, possibly inserting new transactions that the proposer might not have seen.

Why the separation? Think of a gardener who picks up a set of seeds and decides how to plant them. If you let the gardener also decide which seeds to plant first, you risk a biased outcome that favours some plants over others. By separating the gardener from the seed sorter, you allow one party to focus on fairness (the sorter) and another on execution (the gardener).

In practice, a validator may use a builder service like Flashbots. The validator sends a list of potential transaction hashes to the builder, who then proposes the best‑ordered block. The validator pays a fee to the builder for the service. That fee is how builders are incentivised to stay honest.

What is Proposer‑Builder Separation?

Proposer‑Builder Separation is a protocol design where the block proposer and the block builder are distinct roles that can be executed by different actors. The idea is that the builder constructs the block in a way that maximises the economic value for all participants, while the proposer merely validates the block and broadcasts it to the network. In an ideal PBS system, the proposer has no incentive to favour one transaction over another, because its only role is to attest to the correctness of the block and collect the small reward tied to its execution.

The key benefits are:

• Reduced MEV: Because builders are incentivised to maximise overall value, they are less likely to censor or reorder transactions for personal gain.
• Greater transparency: Builders can publish the order of transactions they propose, allowing anyone to audit the process.
• Lower barriers to entry: Validators can outsource block construction to specialised services without having to run full nodes or maintain low latency.

If that sounds like a magic solution, you’re not alone in thinking that. The real world is messy, and PBS is still being tested and refined in the wild.

Where PBS Lives in the DeFi Ecosystem

Flashbots and the Builder Layer

Flashbots, launched in 2020, is the most well‑known PBS implementation in Ethereum. It offers a private auction for MEV extraction that protects traders from front‑running. The Flashbots ecosystem includes:

• Flashbots Protect: A service that lets users submit transactions directly to a builder, bypassing the public mempool.
• Flashbots MEV‑Boost: A tool that allows validators to accept blocks from builders rather than construct blocks themselves.
• MEV‑Relay: A private relay where builders broadcast their best block to validators.

Flashbots is not a full PBS solution because it still relies on miners (or validators) to choose which builder to accept. But it does give us a concrete example of how the separation can be implemented on a real chain.

Optimism, Arbitrum, and Layer‑2 PBS

Optimism, Arbitrum, and Layer‑2 rollups have their own PBS strategies. For example, Optimism uses an L2‑builder that constructs rollup blocks off‑chain and then submits them to the Optimism portal. Validators on L2 verify the builder’s block and add it to the L2 chain. The separation here is similar to Ethereum’s: the builder handles ordering, the validator focuses on consensus.

This design helps reduce the load on L2 validators, which is critical because L2 block times are much faster than L1. It also gives L2 builders an incentive to propose blocks that minimise gas costs for users while still extracting value.

Lido and the Validator‑Builder Relationship

Lido, a liquid staking protocol, also uses a PBS‑like pattern. The Lido staking contract is an oracle that reports the total staked ETH to users. Validators that run Lido staking nodes act as proposers, while a separate builder layer (often the same as Flashbots or other MEV services) constructs the blocks that move the staking balances. Lido benefits because it reduces the risk of validators censoring withdrawals or misreporting balances.

The fact that a protocol like Lido—one that is heavily used by everyday investors—relies on PBS is a strong indicator that the pattern is not just theoretical. It’s becoming part of the plumbing that supports the DeFi economy.

How PBS Works in Practice: A Step‑by‑Step Walkthrough

Let’s break down a typical transaction flow with PBS in place. I’ll use a simplified scenario involving a user who wants to swap ETH for USDC on a decentralized exchange that sits on a rollup.

1. User submits transaction: The user signs a swap order and sends it to the rollup’s mempool. The transaction includes a gas price and an optional builder fee that pays the builder service.
2. Builder collects transactions: The builder service pulls transactions from the mempool and constructs a block, ordering them to maximize total economic value. It also includes a small builder fee for the user’s transaction to incentivise miners or validators to include it.
3. Builder submits block: The builder submits the block to the network, but instead of broadcasting it publicly, it sends it privately to a set of validators.
4. Validator validates: A validator receives the block, verifies its correctness, and then attaches it to the blockchain. The validator’s reward comes from the base reward and the builder fee included in the block.
5. Block is appended: The blockchain now contains the new block with the user’s swap order executed. Because the builder had the chance to reorder transactions, it could have inserted a front‑running arbitrage transaction that extracts value from the swap, but it can’t do so at the expense of the user’s net outcome, because the user’s transaction is included as is.

In this flow, the validator is largely a “shut‑the‑door” role. The builder is doing the heavy lifting of ordering, but its incentives are aligned to maximise total value, not just MEV.

The Technical Hurdles of PBS

PBS is elegant, but it’s not a silver bullet. There are a few technical snags we need to acknowledge:

• Validator Incentives: If a validator can choose which builder to accept, it might prefer the builder that offers a higher fee, potentially leading to a “builder war” that drives up transaction costs for users.
• Front‑Running: Builders still have the power to reorder transactions. Even if they are incentivised to maximise overall value, there’s still room for personal gain. The question is whether that gain can be measured and capped.
• Complexity: Adding an extra layer of abstraction increases the attack surface. A bug in the builder code could compromise the entire chain.
• Governance: Protocols that adopt PBS must decide on the rules for selecting builders. Do they use a reputation system, a bidding process, or a random oracle? Each choice has trade‑offs.

These challenges don’t make PBS unworkable; they just mean that the design must be carefully thought out and constantly audited.

PBS in the Light of Real‑World Events

Consider the 2021 flash‑loan attack on the MakerDAO protocol. An attacker used a flash loan to manipulate the DAI price and trigger a large liquidation. The attacker profited because the network’s ordering allowed it to front‑run. If PBS had been in place, the builder would have been forced to consider the cost of that front‑running to the rest of the ecosystem, potentially disincentivising the attacker.

Another relevant case is the “MEV‑Boost” adoption by several Ethereum validators in 2022. Validators began using MEV‑Boost to outsource block construction to builders that offered the best price. The result was a noticeable drop in the average block inclusion fee, which meant users could pay less for their transactions. However, the average builder fee also increased, which shifted some of the cost to the transaction originators.

These events show that PBS can have tangible effects on transaction costs and system stability. They also underline that the system is still evolving.

The Human Side: How PBS Affects the Average Investor

You might be thinking, “All of this sounds good on paper, but how does it affect me?” The answer is that PBS can make the DeFi landscape a little less volatile and a little more predictable.

• Lower Gas Costs: By allowing builders to optimise transaction ordering, the network can reduce wasted gas. That translates to lower fees for you.
• Reduced Censorship: In a PBS system, validators have less incentive to censor transactions because they’re not deciding the order. That means your trades are less likely to be blocked.
• Transparent MEV: Builders can publish the order of transactions they propose, so you can see exactly what’s happening. If you feel a transaction is being front‑run, you can audit the builder’s block and decide whether to proceed.

That said, PBS isn’t a magic shield. It’s another tool in the toolbox, and it works best when combined with good risk management: diversifying assets, setting stop‑losses, and staying informed about protocol changes.

A Thought Experiment: Building Your Own PBS‑Enabled Portfolio

Imagine you are managing a small portfolio of ETH, USDC, and a few yield‑generating tokens. You want to minimise risk while still enjoying the benefits of DeFi. How would PBS help you?

1. Transaction Scheduling: You could use a PBS‑aware wallet that submits your trades directly to a builder, ensuring that the trade is optimally positioned in the block. This reduces slippage and the risk of front‑running.
2. MEV Visibility: The builder’s public report shows any MEV extraction that happened during your trade. If you see that your trade was part of an arbitrage that benefited the builder, you can decide whether to adjust your transaction fee to align with your risk tolerance.
3. Cost‑Benefit Analysis: By comparing the builder fee with the expected gas cost, you can decide whether to proceed with the trade. If the builder fee is high relative to the potential benefit, you might wait for a less congested period.

This exercise shows how PBS can make a concrete difference in day‑to‑day trading decisions.

The Road Ahead: What PBS Could Look Like in 2025

Fast‑forward a few years. By 2025, I expect PBS to become a standard feature across Ethereum and major rollups. We’ll see:

• Standardised Builder Interfaces: Protocols will adopt a common API that allows any builder to submit blocks, reducing friction.
• Reputation‑Based Builder Selection: Validators will choose builders based on historical performance and MEV fairness metrics, similar to how we currently choose liquidity pools.
• Integrated Auditing Tools: Developers will have dashboards that automatically highlight any suspicious ordering or fee patterns, making it easier for the community to spot abuse.

If that vision materialises, the DeFi ecosystem will be more inclusive. Smaller validators can focus on consensus, while specialized builders handle the heavy lifting of transaction ordering. Investors will enjoy lower fees, more transparency, and a system that’s less susceptible to high‑frequency exploits.

Bottom Line: PBS Is Not a Panacea, But It’s a Step Forward

When we talk about PBS, we’re talking about a shift in incentives. It’s not about eliminating MEV entirely—no system can guarantee that—but about aligning the incentives of validators and builders with the health of the overall network.

The real‑world examples—Flashbots, Optimism, Lido—show that PBS is already in action, albeit in a nascent form. The technical hurdles are significant, but they’re not insurmountable. And for the average investor, PBS can mean lower gas costs, less censorship, and a clearer view of what’s happening under the hood.

In the end, PBS is a reminder that the DeFi world is still young, and we’re still learning how to build systems that are fair, efficient, and resilient. If you’re navigating this landscape, I encourage you to stay curious, stay informed, and keep an eye on how protocols adopt PBS.

That’s all for today. Feel free to leave your thoughts in the comments, and let’s keep the conversation going.

— [Your Name], Crypto Researcher

Sources

1. Flashbots Documentation – https://docs.flashbots.net/
2. Optimism Developer Guide – https://optimism.io/docs
3. Arbitrum Builder Overview – https://developer.arbitrum.io/
4. Lido Staking Contract – https://github.com/Consensys/lido-dao
5. MakerDAO Flash‑Loan Attack Analysis – https://blog.makerdao.com/2021/12/01/flash-loan-attack

These resources provide deeper dives into each protocol’s PBS implementation and can help you verify the claims made in this article.