The Inevitable Failure of Naive MEV Auction Designs

MEV auctions centralize by design. They outsource block construction to the highest bidder, which is a single entity like Flashbots' SUAVE or a dominant builder. This creates a winner-take-all market where the most capital-efficient searcher controls the chain's transaction ordering.

The naive assumption fails. The belief that competitive bidding ensures decentralization ignores capital concentration. In practice, builders like bloXroute and beaverbuild form cartels to share order flow and dominate the PBS (Proposer-Builder Separation) market, replicating the centralization of traditional finance.

Evidence is in the data. On Ethereum post-merge, over 90% of blocks are built by just three entities. This is not a bug of specific implementations like mev-boost; it is the logical endpoint of any auction where profit maximization is the sole selection criterion.

Naive auctions centralize block production. First-price sealed-bid auctions, like early Flashbots designs, create a winner-takes-all dynamic. This incentivizes massive investment in private mempools and latency optimization, shifting power to a few specialized searchers and builders.

The optimal strategy is collusion. Rational actors bypass the auction to form off-chain cartels like builder-of-builders. This mirrors the centralization seen in traditional finance's dark pools, negating the auction's intended transparency and fairness.

Latency determines winners, not efficiency. In a pure speed race, the builder with the lowest network latency to validators wins. This creates a physical moat, favoring entities with proprietary infrastructure and geographic positioning, not the best economic outcome.

Evidence: The rise of OFAs. The market corrected this with Order Flow Auctions (OFAs) like those by CowSwap and UniswapX. These move competition upstream to the point of intent expression, before the block is built, mitigating the latency arms race.

PBS separates roles to mitigate validator centralization. Builders compete to create the most profitable block, while proposers simply select the highest-bid header. This prevents validators from needing sophisticated MEV extraction infrastructure.

The builder market centralizes into a few dominant players like Flashbots and bloXroute. Their scale and private order flow access create an insurmountable competitive moat for new entrants.

Builder collusion is inevitable. A dominant builder cartel can censor transactions or enforce minimum bid thresholds, replicating the extractive dynamics PBS aimed to solve.

Evidence: Ethereum's post-merge PBS landscape shows >80% of blocks built by three entities. This is not a free market; it is an oligopoly with extra steps.

Naive auctions create fragmentation. Isolated MEV auctions on each rollup force searchers to bid separately, increasing capital inefficiency and latency for cross-domain arbitrage.

The winning design is integrated. MEV must be a native protocol primitive, like in Espresso Systems or Astria, where sequencing rights are a core part of the chain's security model.

Shared sequencing is the vector. A shared sequencer network (e.g., Espresso, Astria, Radius) amortizes security costs and creates a unified liquidity layer for cross-rollup MEV.

Evidence: Isolated auctions fail the atomicity test. A cross-rollup arb on Arbitrum and Optimism requires winning two independent auctions—a near-impossible coordination problem that shared sequencing solves.