The Rise of Private Transactions on Ethereum: Implications for Transparency and Centralization

Emerging Trends in Private Transactions on Ethereum

A growing segment of advanced Ethereum users is increasingly opting for private transactions on the blockchain, utilizing so-called dark pools to shield their trades from trading bots designed to front-run their transactions. This shift raises concerns about undermining the fundamental principles of openness and transparency that are intended to characterize decentralized public networks.

This insight comes from recent research conducted by Blocknative, a firm specializing in mitigating the effects of MEV, or “maximal extractable value.” MEV refers to the potential profits that can be extracted by agile software bots that swiftly enter trades, capitalizing on opportunities to skim profits from transactions queued in the network’s public mempool, awaiting processing.

Private transactions, which are directed straight to validators or block proposers rather than the public mempools, now constitute approximately half of Ethereum’s total gas usage. This metric reflects the computational resources required for processing transactions. Notably, this percentage has surged from a mere 7% in September 2022, following Ethereum’s transition to a proof-of-stake network, to around 15% at the start of 2024, indicating a significant upward trend.

One notable consequence of this trend is that “private transaction order flow is only accessible to permissioned network participants,” which poses a risk of centralization. A limited number of sophisticated players could disproportionately benefit from these transactions, as highlighted in a blog post by Blocknative discussing these findings. Blocknative’s CEO, Matt Cutler, elaborated in an interview, stating, “You have a small number of actors who can see the private flow. Certain individuals have access to information that others do not, creating opportunities and advantages.”

For industry professionals, the data may appear unusual when compared to previously observed statistics. Traditionally, the prevalence of private transactions is measured by transaction count, which currently stands at approximately 30%. Notably, this figure was closer to 4.5% as recently as 2022.

However, it’s essential to note that private transactions are typically more intricate and, consequently, more “gas intensive,” according to Blocknative. The firm emphasizes that “by shifting focus to the amount of gas used by private transactions, we attain a more precise understanding of network dynamics.”

Users engaging in public transactions often face disadvantages, such as fluctuating fee rates that can be both volatile and unpredictable, as noted by Cutler. He remarked, “Only certain actors, like block builders, can see what’s occurring in the network. They possess exclusive access to particular information, which provides them with a competitive edge. This reality is a significant aspect of the current landscape.”