[Nethermind] From Wallet to Chain. A Bridge of Two Worlds on an Ethereum Transaction

Introduction & Core Insights:
The decentralized nature of blockchain often conflicts with traditional financial regulation. However, innovations on public chains like Ethereum can align with regulatory objectives through technical and economic mechanisms that ensure market safety and stability.

Dissecting the Ethereum Transaction Process:

• Transaction Creation: Transactions are built and signed within wallets and sent through RPC endpoints, which can be public or private.
• Mempool & MEV: Users compete for block space by setting priority fees, giving rise to MEV (Miner/Maximal Extractable Value). This opens the door to risks like front-running and sandwich attacks, which can be mitigated through fair ordering protocols.
• Node Processing: There are three transaction paths — public order flow (with and without PBS) and private order flow (with PBS) — each involving different actors and procedures.
• Consensus & Finality: Ethereum uses validator voting to confirm transactions and achieve finality, currently around 13 minutes. The upcoming Orbit SSF upgrade aims to reduce this to 12 seconds.

Centralization and Censorship Concerns:

• Impact of PBS: While PBS (Proposer-Builder Separation) offers benefits, it may lead to centralization and censorship risks, affecting user access and network neutrality.
• Existing Solutions: Decentralized block building via Trusted Execution Environments (TEEs) can enhance MEV protection and censorship resistance, though technical challenges remain.
• Future Directions: Open-source building algorithms and permissionless builder participation are being explored to foster decentralization in block construction.

Layer 2 Issues:
Layer 2 solutions improve transaction throughput via centralized sequencers, but this introduces censorship risks. Current forced-inclusion mechanisms provide partial relief but often involve long waiting periods.

Functional Outcomes vs. Regulatory Objectives:
Different types of blockchains have various strengths and weaknesses. Ethereum’s innovations — such as PBS and encrypted mempools — can replicate the functional outcomes sought by financial regulators, promoting market security and stability.

Conclusion & Outlook:
Public blockchains are a viable foundation for digital asset infrastructure. The Layer 1-2 architecture provides clear advantages. Collaboration between the financial industry and regulators is essential to develop standards based on blockchain’s functional capabilities, balancing innovation with risk to drive digital finance forward.