Flashbots

Flashbots Auction is a permissionless, transparent, and fair ecosystem for efficient MEV extraction and frontrunning protection which preserves the ideals of Ethereum. Flashbots Auction provides a private communication channel between Ethereum users and validators for efficiently communicating preferred transaction order within a block.

Flashbots Auction started with mev-geth, a patch on top of the go-ethereum client, along with the mev-relay, a transaction bundle relayer.

In PoS Ethereum, the Flashbots Auction is built on mev-boost, an implementation of proposer-builder separation for Ethereum.

How does it work?

Flashbots Auction provides a private transaction pool and a sealed bid blockspace auction mechanism. This enables block proposers (validators; previously “miners” in PoW) to trustlessly outsource the task of finding the optimal block construction.

In the standard Ethereum transaction pool, users broadcast transactions to the public peer-to-peer network, specifying a gas price that represents their willingness to pay for each unit of computation on the Ethereum chain. Block builders receive these transactions, sort them by gas price, and employ a greedy algorithm to construct a block that aims to maximize the value derived from transaction fees. This mechanism is a hybrid of an English auction and an all-pay auction, where bids for blockspace are made openly, the highest bidder secures the opportunity, and all participants bear a cost.

Here are the key issues with this mechanism:

1. The open nature of the regular transaction pool leads to bidding wars for blockspace. This results in unnecessary network load and gas price volatility. It also puts less sophisticated network participants at a disadvantage, as they may lack access to advanced bidding strategies.
2. The all-pay nature of the auction results in failed bids reverting on-chain, unnecessarily consuming blockspace. This leads bidders to underprice their bids due to the risk of execution failure, creating artificial blockspace scarcity and reducing validator (previously “miner”) revenues.
3. The dependency on gasPrice restricts bidders from expressing detailed ordering preferences, as they are limited to bidding for the top position in the block. This limitation encourages alternative strategies such as spamming to increase the chances of winning, thereby exacerbating the deadweight loss.

Instead, the Flashbots Auction infrastructure uses a first-price sealed-bid auction which allows users to privately communicate their bid and granular transaction order preference without paying for failed bids. This mechanism maximizes validator payoffs, while providing an efficient venue for price discovery on the value of a given MEV opportunity. Crucially, this mechanism eliminates frontrunning vulnerabilities.