Private Transaction Observability Challenges: A Practical Case Study on Order Flow Auctions

Blocknative Ethereum Web3

The prevalence of private transactions has seen a remarkable uptick, soaring from less than 5% to over 15% since the merge (view the real-time percentage of private vs public transactions per block here).

When users send transactions privately, they rely on the RPC providers to manage their transactions to safeguard the privacy of their transaction information. This privacy, however, leaves users with no way of verifying what is happening with their transactions. The lack of observability into these trust relationships, especially in the communication between order flow auctions and block-builders, presents a significant challenge in ensuring that trust relationships are maintained.

To confront these challenges, Blocknative developed Transaction Boost, a free private RPC endpoint aggregator that provides visibility into what happens with your private transaction after you press “send” while maintaining your transaction’s privacy. This enhanced visibility and monitoring of trust relationships allows one to research and verify that actors are indeed acting by the agreements. In this case study, we will walk you through a real-life scenario where the Transaction Boost infrastructure was able to uncover discrepancies in refund transactions, revealing potential issues with a specific block-builder.

Scenario:

A user engaged with Blocknative's Transaction Boost over 30 days, executing approximately 5,000 transactions through the platform. The user connected their Transaction Boost setup to two RPCs: MEV-Share and MEV-Blocker. Both MEV-Share and MEV-Blocker send to multiple block-builders.

After sending 5,000 transactions, the user approached Blocknative with a specific question regarding their order flow: despite engaging with five different builders through the parameters they set, they noticed a peculiar pattern in the refund transactions received:

  • Of the five builders that landed their transactions on-chain, only four of them consistently provided refunds.
  • The fifth builder, despite winning 20% of the 5,000 transactions, showed zero instances of issuing refunds. 

This discrepancy raised immediate concerns and prompted further investigation.

Investigation:

To unravel the mystery behind the fifth builder's absence of refunds, Blocknative's team initiated an audit. Leveraging Hindsight library, a tool designed to retrospectively analyze transactions for potential Maximum Extractable Value (MEV), the team inspected ~1,000 transactions associated with the fifth builder.

The inspection revealed that within the 1,000 transactions, a block-back-running auction consistently exploited MEV opportunities that should have resulted in a rebate for our user. The block-builder was instead capturing all of the MEV through their auction and ignoring the MEV rebate bundles. 

Crucially, the block back-running auction's success was attributed to an information advantage it gained from the vertically integrated structure. In other words, access to the user's private order flow was crucial to the auction's success. Despite the user's intention to maintain transaction privacy and receive a rebate when one was generated, the integrated auction ignored the rebate bundles and violated the user's privacy preferences.

Analysis of the 1,000 transactions revealed that the block back-running auction had generated approximately 16 ETH in profits. While not substantial in terms of overall value, the implications were significant as they highlighted a potential information advantage enjoyed by vertically integrated block-builders, challenging the privacy assurances.

Once this was discovered, Blocknative contacted the block-builder and worked with them to fix the issue. The builder issued a refund for the missed rebates and modified the operation of their auction to prevent this from happening again in the future. 

Conclusion and Observability Enhancements:

This case study serves as a tangible illustration of the complexities and potential pitfalls in the evolving landscape of private transactions. It urges continuous improvements in observability platforms to empower users and enhance transparency in blockchain interactions.

If you’d like to integrate Transaction Boost into your dapp or wallet please reach out to  Blockntive in our Discord. See the original X/Twitter thread here.

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