Why Does Programmable Block Construction Matter for Custom Execution in L2s?

Transcript

Hello everyone. Um I'm Will. I'm a co-founder of Syndicate and I'm going to talk to you about why block construction and customization and programmability of it matters on L2s and um it's going to go through a bunch of history of how we got to where we are today and then talk about what I think will be coming next over the coming years. So, some background on me is that I've been involved in crypto since 2013. Um I've been involved in Ethereum since the pre-sale. I put my $10 Coinbase sign-up bonus in. If I'd put $100 in, I could have bought a house with it, but you know, hindsight's 2020. Um I've been working on Syndicate for the last 5 years. We focused on developer tooling for um rollups, for transaction

broadcasting, everyone ranging from crypto startups to Fortune 100 companies. Um so, we've seen a lot of the cycles of the space and um that's part of what I'm here to talk about today. So, the first thing that I want to make clear is that deep block-level customization is already happening. So, custom chains, custom rollups are here today. They're not a future-facing thing. Um they already exist. And what type of customization is this? It can really be broken down into two categories. The first category is around transaction inclusion and ordering. So, who is able to participate in a chain, who can send transactions to a chain and

once I've sent those transactions, what order are those transactions placed in? So, that's the first level of customization. And you see that in, for example, World, which has built out a rollup where they place humans in blocks ahead of bots. So, the idea is that humans have an edge on the bots, humans can get their transactions in first, humans are less vulnerable to front-running and other attacks. So, that's one spin on it. Another spin on it is what Base is doing. So, Base launched um integration with Flashbots called Flashblocks. And with Flashblocks, what they effectively do is they build these mini blocks within a broader block and then these mini blocks get ordered in proper order.

So, um instead of having one big block, you have a bunch of little blocks that you can see in real time. Um and uh that changes transaction inclusion and ordering because you get ordered based on the smaller block you're in, not based on the large uh single block that Base produces for um Optimism and Ethereum mainnet. The other type of customization is customization of transaction types. So, you're seeing custom transaction data being included. So, Tempo, for example, is chain-made for stablecoins. They enshrine stablecoins into the execution client layer. So, they enshrine stablecoins not in smart contracts, but

into the actual nodes themselves. And they have things like a custom memo field for denoting stablecoins um and why you've made a certain transfer. Um Hyperliquid, of course, um is also a chain where they are essentially a completely custom chain from the ground up for Perp. And if you look at these examples, like we're talking about Base, we're talking about Hyperliquid, we're talking about World, we're talking about Tempo. This is the vast majority of usage in crypto today is happening on custom chains. People aren't framing it that way, people aren't talking about it that way, but it is um already one of the most adopted chains in the space.

So, we are really seeing an unprecedented rise in this adoption, but this didn't come out of nowhere. What I do want to talk about is how we got here. Why Why did these custom chains only emerge now? Why didn't they emerge 5 to 10 years ago? And where do we think it will be going forward? So, the that's the that's one of the key questions is why now? Why didn't people do this earlier? And the answer is if you look at the history, the feasibility of this was actually very recent. So, from all the way from Bitcoin's launch in 2009, all the way to around 2017, um everyone was actually self-hosting their own nodes.

So, when you booted up a Bitcoin um wallet, this is an example of a screenshot for of a node from 2011, you would um have to sync your node. Um so, your wallet um would be syncing and if you opened your wallet before it synced, you'd just see a bunch of zeros on your balance, which obviously is not a great new user experience. And this sync would take hours, days, now even weeks. So, just to use the chain, you think that, you know, having to um save your seed phrase is bad, imagine having to launch your software, sync tens of gigabytes, wait hours or days, and then you can finally transact. Um this um could sometimes take a long time. Here's

one screenshot I pulled where um it's 18 hours left to sync and they're at 99% um for a Bitcoin node. Um so, uh every every user who wanted to transact had to do this. And this was true for Ethereum, too. One of the very first Ethereum wallets was a wallet known as Mist um and every time you launched it, you'd have to sync all the blocks. Um and you'd get a user experience after syncing that looks kind of like this. You could directly input all your smart contract data to make transactions. It was not um the best user experience in the world. We have improved a lot since then. But, the key thing to understand here is that in the early days, wallets were nodes. They were one in the same.

Um and that meant that customization would require upgrades to every wallet app and you really, really did want did not want to trigger resyncs because every single user, if you broke syncing or you made some kind of breaking change, would have to then resync over hours, days, or weeks. So, the iteration cycle was very, very slow. Imagine every time you relaunch your wallet, you have to wait hours before it's usable again. That's what things were like it would be only, you know, under 10 years ago.

And the thing that we saw was that um this shifted. So, 2017 to 2021 is broadly what I'd call the mempool era. So, Ethereum had increased a lot in usage. You can see 2017 is right around where that giant spike is on the chart. And after that point, everyone running their own nodes was not really viable. Um syncs moved from hours to days to weeks and you couldn't expect every single user to wait for that process to complete before they could do anything on chain. So, you saw the emergence of professional RPC providers in 2017 and 2018 like Infura, Alchemy, and QuickNode.

And you also saw the emergence of wallets that were not nodes. MetaMask, Coinbase Wallet, Trust Wallet. And this was actually very new. The idea that you could install a browser extension or download a mobile app and start using it immediately and not hours later was actually quite novel. And the professionalization of node hosting was also novel. It meant that instead of having to coordinate upgrades with every single user's wallet software, you would coordinate upgrades to nodes with a small number of professional node providers. And um the network still had transparency and still had some level of uh of verifiability to it because if you sent

a transaction from your wallet, it would be pending in the mempool. So, you could go inspect the state of what nodes had. You could see that your transaction was there and you wouldn't know when it would be processed. You might be waiting a while, but you would know that it was in this pending state. Um from there, the vast majority of transactions through 2021 were visible. So, you could inspect it yourself. It was public on the network and only a small portion were private. Some people did use private transactions via Flashbots, but it was it was unusual. Um most transactions were landing in the mempool.

But, then the merge changed all of this, which is why the mempool era ends in 2021 is because in proof of work, miners who had the next block were not known in in advance because in proof of work, everyone is racing to basically find the same data, find, you know, the uh the best way to uh to to to essentially find the corresponding hash for a block. Everyone's racing for this at the same time and you don't know who's going to win. So, you wouldn't know who's next, which made these MEV supply chains relatively difficult. You wouldn't know um who was who to send your transactions to um because you didn't know who would have the next block.

But, with proof of stake, validators are actually known 32, they're called slots, but basically blocks, in advance. Um and that means that you can look and you can see, okay, the next validator, I can send my transactions to them and then the next block, I can send my transactions to this validator, all the way forward um for about 6 and 1/2 minutes. You can know exactly which validator um will be handling a block, which means that if you want to um take part in the MEV supply chain, you know who to talk to. In proof of work, you didn't because you didn't know who would have the next block.

In proof of stake, you do. Um and this led to the builder era, which I'd probably define as 2022 to 2025. Some would argue it's still ongoing. Um And what is the builder era? So, the builder era essentially refers to uh block builders. So, you saw the emergence of professional uh people who were running software that were just dedicated to transaction ordering and transaction inclusion. That's all they did. Um note that when we say builder here, as much as I would love for the builder era to be one of developers, different definition of builder. Um, we're talking about block builders in this case. And, um, proof of stake led to the emergence of what's

known as proposer builder separation. Which, in short, means that validators who are proposing the next block. So, the proposers have one job, which is to get a block submitted, and the builders have one job, which is to build the most profitable block possible. Um, there's a good research post on this. Um, you can deep dive into this if you would like, but uh, there's also a key thing, which is that validators, when they're submitting the block, they do not know the content of the block until they pick it. So, the block builders are actually basically saying, "This block is this profitable. What it contains, we know.

You don't." And, um, because the validators are selecting the most profitable block, and the builders aren't saying what's in the block, you see the death of the mempool. So, the mempool, most transactions in 2021 went into the mempool. Only a very small portion did not. Now, that dynamic is flipped. When you send a transaction, most of the time, it's not going to the mempool. It's actually going to these private builder networks. And the reason why is because more private order flow equals more profitable blocks. So, a bunch of apps have relationships with these block builders. With these block builders pay them for their transaction flow. So, the major DEXes do this. Basically, every

major trading app you can think of does this. Um, some of the people I know who work on this, they bristle a little when I call it like payment for order flow, um, like in the traditional stock world, where basically people are paying to trade the other side of you. Um, they bristle a bit. I think that it's, you know, an accurate description. Um, but what they're essentially saying is these builders are paying for private order flow so that they can trade, um, based on it. Sometimes that's things that are good for users. So, for example, if they see that someone's making a massive, massive swap, um, they might go in and provision liquidity ahead of that swap so that there's

enough liquidity to to absorb it. Um, uh, some some DEXes, for example, protect against this. So, like cowswap is MEV resistant. You might have seen that Ave like 50 million swap led to like someone getting whatever it was, like 200k back, um, recently. Um, it uses uh basically, it's meant to protect against the MEV supply chain, which is a good thing in some cases. Some of these bots basically cost you a lot of money, but sometimes it's a bad thing. Um, arbitrage bots could have come in and could have provisioned a bunch of liquidity in advance of that in advance of that swap. So, this private order flow and MEV is, I want to emphasize, is not necessarily a bad thing. It can be a

bad thing. It can say, "You're willing to take up to 2% price movement. Okay, I'm going to charge you 2%." But, it can be a good thing. It can say, "You submitted a trade that's way too large. We're going to add some liquidity for you. Um, we're going to arbitrage this so that this price is in line with other exchanges." Um, not all MEV is bad. Some MEV is bad. But, what you see, because this order flow is private, is that you have this, um, concentration of builders. So, this was a slightly cherry-picked, but not terribly cherry-picked, screenshot I took of Etherscan, where you can see there's a builder, Titan Builder, who handles most this. What this means is that Titan Builder, in all these blocks in a row, is producing the most profitable blocks.

How are they doing that? Likely via private order flow that they're getting from apps. Um, this used to be extremely concentrated. There used to be basically two builders, Titan and Beaver. Now, um, Beaver's less prominent, and there's a bunch of others, but Titan is still the largest builder by far. So, Titan has struck a bunch of with a bunch of apps to be paid a bunch of money, and they are selling that order flow and using it for trading. In some ways that's good for you. Some ways that's bad for you. It depends on how they use it. Um, but they're out there to make money, so I assume they do both. Um, and this consolidation is very interesting because, um, this is this this supply chain is very

professionalized on L1. This is a huge, huge business on L1. But, you might be wondering, "What about rollups? What is happening to the block building dynamics on rollups?" Well, one thing to note is that rollups have no public mempool. So, rollups never had the mempool era. They technically can enable a public mempool, but because you have a centralized sequencer, there's like massive front-running issues in doing it. So, most, um, most rollups disable the public mempool. They only have a private mempool. Um, and these kinds of MEV supply chains are starting to emerge on L2. So, we talked before about this example of Base with flash blocks.

All of these mini blocks, these are all opportunities for MEV. These are opportunities for arbitrage. These are opportunities for sandwiching. These are opportunities for, um, you know, like all kinds of trading activity because each little unit, the top of the block, is very valuable, and the back of the block is very valuable. So, the more blocks you have, the more you can likely charge. And, uh, the thing that's also interesting is that rollup revenue is very concentrated, too. This giant blue line on the chart, that's Base, the dark blue one. The light blue one, um, is, uh, the the the lighter blue one, not the light fully light blue one, that one's Arbitrum. And the vast, vast majority of rollup profit is going to Base right

now. Um, Base also introduced flash blocks. And the thing that's interesting is that you look at if you look at Base's 60, 70 million plus in on-chain profit, um, this doesn't account for the cost of running the nodes and hiring engineers, but it does account for the gas that they take in versus the gas they pay. The vast majority of their gas fees are not coming from the gas fees paid by users. That's only around 10%. 90% is coming from MEV, coming from trading activity, coming from people paying Base to be at the top of the block. Um, and, uh, that's where most of the profit for rollups is coming from. So, when you start to think about this, and

you see that this customization era is coming, it really portrays it all in a different light when you realize that these supply chains have gotten more and more professionalized, and value is shifting from builders on L1 to the chains themselves on L2, you then wonder, "What's happening in the customization era?" Well, one insight, when you look at the revenue graph I just showed you, it's very dominant in a small number of L2s. It's not enough to be the next EVM chain. So, if you want to launch a chain, you need to do something different. Um, Hyperliquid has Hypercore, which is, um, you know, basically it's architecture built specifically for perps. Um, we talked about World with priority block

space to add some resistance to this MEV supply chain. Um, we ourselves at Syndicate have done custom sequencers with things like randomness injection for games. Um, and this solidity is very simple and very cool. I'm happy to chat about that after. Um, and Tempo has these custom transaction types that we talked about. All of these are ways to differentiate because you cannot just be a standard EVM chain anymore. Um, that is that's already that game is likely won. I always hesitate to make predictions, but it's likely that Base has won for generalized EVM L2s. So, what do you do instead? Well, you do customizability. Customizability unlocks

new capabilities. Customizability opens up more opportunities for your um, chain to capture more value. It gives you, um, some more value flowing to your app and less value flowing to this MEV supply chain. But, you might be wondering, "What if you don't need customizability? What if you, in fact, are just well-suited for being the next L2 because maybe you have some unique advantage, like Robinhood, for example, is issuing a bunch of RWAs on their chain. That differentiated asset base might be enough." The proposal, um, led by the Ethereum Foundation right now is native rollups.

Um, so, Justin Drake has this post where, basically, um, it talks about how uh, you can get a totally 100% Ethereum equivalent rollup with basically very little effort, um, by using ZK and all this new tech. Um, and as a result, you don't get strong customization, but you get rock-solid security. And that is essentially what these choices are looking like. You can choose, do you want custom rollups in the future? That's one direction where the space is going. Or, do you want native rollups in the future, where you go for security rather than customizability? That's where I think the trend is going. That's what you see over the next few years, and, um, something I'm happy to chat about if

anyone would like to talk about it. >> [applause] >> I don't know if we have time for questions. Um, if we do, feel free to ask me. Now, if we don't, um, feel free to reach out to me on X or Telegram at willpeppr, um, or email. Um, I'm happy to chat. >> it's it's our it's time. Maybe you can ask it outside or after. Yeah. Cuz we are short on time, so I'll be available after the talk. Thanks so much.

>> [applause] >> Yeah.