Private Ethereum Transactions Surge, Dark Pools Dominate – by One Metric

A rising cohort of sophisticated Ethereum users are opting for private transactions on the blockchain, utilizing dark pools to evade trading bots set up to front-run transactions. However, this shift towards privacy may compromise the transparency and openness that are core tenets of decentralized public networks.

Recent research by Blocknative, a company specializing in mitigating MEV (maximal extractable value), highlights the prevalence of private transactions on Ethereum. MEV refers to the profits that fast-moving software bots can extract by preempting trades in the public queue awaiting processing.

Private transactions, which are directed straight to validators or block proposers rather than public mempools, now constitute approximately half of Ethereum’s total gas usage. This surge in private transactions, up from 7% in September 2022 during Ethereum’s transition to a proof-of-stake network, has spiked to around 15% since the beginning of 2024.

A consequence of this trend is the restricted access to private transaction order flow, limited to permission network participants. This exclusivity could potentially centralize rewards among a select group of sophisticated actors, as noted by Blocknative in a blog post discussing their findings.

Matt Cutler, CEO of Blocknative, emphasized the implications of this shift, stating, “You have a small number of actors who can see the private flow. Certain people can see stuff, and certain people can’t, and that creates opportunity and advantage.”

The data on private transactions may diverge from conventional metrics observed by industry experts. While transaction counts currently stand at around 30%, a notable increase from approximately 4.5% in 2022, private transactions are inherently more intricate and gas-intensive, according to Blocknative.

Blocknative underscores the importance of considering gas usage to gain a more precise understanding of network dynamics. One downside for users engaging in public transactions is the volatility and unpredictability of fee rates, influenced by network demand fluctuations.

Cutler highlighted the informational advantage held by block builders, stating, “Only certain actors like the block builders can see what’s going on in the network. They have exclusive access to certain information. That gives you an edge. It’s a big fact of life.”

In conclusion, the growing prevalence of private transactions on Ethereum signifies a shift towards heightened privacy and complexity, raising pertinent questions about transparency and fairness within the decentralized ecosystem.