Why MEV Auctions on L2s Centralize Power Instead of Distributing It

MEV auctions centralize block building. The highest bidder wins the exclusive right to build a block, creating a winner-take-all market. This economic model inherently favors the largest, most sophisticated capital like Jump Crypto or Wintermute.

Sequencer-Builder fusion creates a cartel. On networks like Arbitrum or Optimism, the entity controlling the sequencer often also operates the dominant builder. This vertical integration replicates the miner-extractable value problems of Ethereum's PBS.

Proof-of-Stake L2s double the stake. Validators in networks like Polygon zkEVM or zkSync Era must stake to propose blocks, but MEV auctions create a secondary, capital-intensive competition. This stake concentration creates systemic risk.

Evidence: On Arbitrum, a single builder, often the sequencer operator, wins over 90% of blocks during peak MEV periods. This is a higher centralization metric than Ethereum's post-merge proposer-builder separation aims to solve.

MEV auctions centralize sequencer power. They replace a protocol's native, permissionless proposer-builder separation (PBS) with a winner-take-all auction for a centralized sequencer role. This consolidates the right to order and censor transactions into a single entity's hands for a fixed period.

The winning bidder internalizes all MEV. Unlike Ethereum's PBS, where builders and proposers compete, an L2 auction winner captures the full value of transaction ordering. This creates a massive financial moat, making it prohibitively expensive for smaller players to compete and reinforcing a single-sequencer monopoly.

Real-world evidence is stark. On Arbitrum, the single sequencer role is held by Offchain Labs. On Optimism, the initial 'sequencer governance' proposal functionally auctions sequencing rights to a cartel. This is a power transfer from users and builders to a new centralized rent-extractor.

The result is systemic fragility. A single point of failure for ordering creates liveness and censorship risks. It also stifles the competitive builder ecosystem seen on Ethereum with Flashbots, bloXroute, and others, which drives innovation and efficiency in MEV extraction.

MEV auctions centralize sequencer power. They replace a permissionless, open market for block production with a winner-take-all auction. The highest bidder for the sequencer role captures all MEV for a period, creating a predictable revenue stream that attracts institutional capital.

This creates a capital moat. Permissionless sequencing, like on Ethereum, allows any validator to propose a block. An auction model favors entities like Jump Crypto or GSR who can front the capital to win the auction, pricing out smaller, independent operators.

The result is vertical integration. A winning auction bidder controls the entire transaction ordering pipeline. They can front-run, censor, and extract value without competition, replicating the extractive dynamics of centralized exchanges on-chain.

Evidence: On Arbitrum Nova, a single entity, Offchain Labs, runs the sole sequencer. While not yet auction-based, the proposed shift to a permissioned set of sequencers with a potential auction model illustrates the path from decentralization to a pay-to-play cartel.

Capital always wins auctions. A sealed-bid MEV auction on Arbitrum or Optimism is a pure capital efficiency game. The highest bidder wins the right to reorder transactions, creating a winner-takes-most dynamic that excludes smaller validators and sequencers.

Auction revenue centralizes sequencer selection. The entity that wins the auction, often a specialized firm like Flashbots or bloXroute, captures the MEV. This revenue funds future bids, creating a self-reinforcing feedback loop that entrenches the largest players.

Information asymmetry creates insiders. The auctioneer possesses superior knowledge of pending transactions and network state. This allows them to extract maximal value before the auction even begins, a dynamic seen in early Ethereum PBS proposals.

Evidence: On Arbitrum, a single sequencer, Offchain Labs, processes all transactions. Introducing an auction for MEV rights on this stack simply shifts centralized sequencing into centralized MEV extraction, without distributing the underlying power.

Auction winners centralize power. The highest bidder for the right to sequence blocks gains a privileged position. This winner can now extract value and censor transactions, replicating the miner extractable value (MEV) problems of L1s but with a single, predictable actor.

Transparency is a red herring. An open auction process is transparent, but the outcome is a centralized sequencer. This is the centralization-performance tradeoff; L2s sacrifice decentralization for speed, and auctions formalize this power structure.

Compare to PBS on Ethereum. Proposer-Builder Separation (PBS) on Ethereum distributes roles between builders and proposers via a credible commitment mechanism. L2 auctions often lack this separation, granting the winner both roles.

Evidence: In an auction model like early Arbitrum designs, a single sequencer wins a time-bound slot. This creates a predictable monopoly for MEV extraction, unlike the competitive, permissionless builder market enabled by Flashbots' SUAVE.

Sequencer-as-Gatekeeper is the flaw. The L2 sequencer, like those run by Offchain Labs (Arbitrum) or OP Labs (Optimism), controls transaction ordering. An MEV auction for this right creates a single, high-value choke point. This centralizes power instead of distributing it across a network of builders and proposers.

Auction revenue consolidates power. The winning bidder in a sequencer auction, often a large entity like Jump Crypto or a specialized MEV firm, captures the entire block's MEV. This creates a winner-take-all market that excludes smaller, permissionless participants, directly contradicting decentralization goals.

Compare to Ethereum's PBS. Ethereum's Proposer-Builder Separation (PBS) via mev-boost distributes power: many builders (e.g., Flashbots, bloXroute) compete, and many validators choose. An L2 sequencer auction collapses this into a single, privileged role, replicating the miner centralization problems PBS was designed to solve.

Evidence: The proposer payment metric. On Ethereum, the top 3 mev-boost relays service ~80% of blocks, but hundreds of independent validators still choose among them. In a sequencer auction model, a single entity pays the sequencer and captures 100% of the block's value, creating a far steeper power law.