Currently, over 90% of Ethereum blocks are built using MEV-Boost, an auction
that allows validators to sell their block-building power to builders who
compete in an open English auction in each slot. Shortly after the merge, when
MEV-Boost was in its infancy, most block builders were neutral, meaning they
did not trade themselves but rather aggregated transactions from other traders.
Over time, integrated builders, operated by trading firms, began to overtake
many of the neutral builders. Outside of the integrated builder teams, little
is known about which advantages integration confers beyond latency and how
latency advantages distort on-chain trading.
This paper explores these poorly understood advantages. We make two
contributions. First, we point out that integrated builders are able to bid
truthfully in their own bundle merge and then decide how much profit to take
later in the final stages of the PBS auction when more information is
available, making the auction for them look closer to a second-price auction
while independent searchers are stuck in a first-price auction. Second, we find
that latency disadvantages convey a winner's curse on slow bidders when
underlying values depend on a stochastic price process that change as bids are
submitted