The Evolution of Blockchain : From Public to Private Mempools

We study the economic incentives behind the adoption of private pools. Validators may choose to not monitor private pools to preserve rents extracted from arbitrageurs, hence creating execution risk for users. Private pools neither eliminate frontrunning risk nor reduce transaction fees. The welfare of validators increases, but the welfare of arbitrageurs goes down. A private pool leads to higher aggregate welfare compared to a public pool only blockchain. Empirically, we find that Flashbots private pools increase arbitrageurs' cost-to-revenue ratio by a third