MEV Turns Ethereum Into a Transaction Auction

Proposer-Builder Separation (PBS) formalized the auction. Validators outsource block construction to specialized builders like Flashbots, bloXroute, and Titan, who compete to create the most profitable block. The winning builder pays the validator for the right to include their block.

MEV is the commodity. Builders extract value by frontrunning, arbitrage, and liquidations. This creates a zero-sum game between users and builders, where user slippage and failed transactions are the primary revenue source.

The auction is inefficient. Private order flow from Coinbase and Binance bypasses the public mempool, creating a two-tiered system. Retail traders on public RPCs face worse execution and higher costs.

Evidence: Flashbots' dominant builder, 'builder0x69', captured over 30% of Ethereum blocks post-Merge. The total extracted MEV exceeds $1.2 billion annually, a direct tax on user transactions.

MEV is a natural auction. The right to order transactions in a block has inherent financial value, creating a market where builders compete to pay proposers for this right.

Pre-PBS was a dark forest. Without PBS, validators executed this auction opaquely, often using private mempools and MEV-Boost relays, centralizing power and obscuring revenue.

PBS creates a public market. It formally separates the role of the block proposer from the block builder, forcing price discovery into an open, on-chain auction via a commit-reveal scheme.

Builders become specialized firms. Entities like Flashbots and Titan Builder now compete on technical sophistication, not just capital, to extract and bundle MEV for profit.

Evidence: Post-merge, over 90% of Ethereum blocks are built via MEV-Boost, proving the demand for this formalized market structure.

The Auction Begins with Searchers. Independent bots called searchers scan the public mempool for profitable transaction bundles, primarily arbitrage and liquidations. They use sophisticated tools like Flashbots MEV-Boost to privately submit these bundles to block builders, bypassing the public mempool to prevent frontrunning.

Builders Aggregate and Optimize. Professional builders like Titan Builder and rsync receive private bundles from searchers and public transactions. Their core function is block space optimization, ordering transactions to maximize the total value of the block for the proposer, which includes both standard fees and extracted MEV.

Proposers (Validators) Outsource. Most Ethereum validators do not build blocks. They use MEV-Boost middleware to receive complete, pre-built blocks from a competitive builder marketplace. The validator simply selects the block with the highest bid, collecting the proposer payment.

Finality is the Payoff. Once a validator proposes the winning block, the network reaches consensus. The execution payload is irreversibly settled, and the extracted value—split between searcher, builder, and proposer—is realized. This entire pipeline, from mempool to chain, completes in ~12 seconds.

Price discovery is efficient. MEV auctions allocate block space to the highest-value transactions. This creates a liquid market for priority, ensuring users who value speed or execution certainty pay for it.

Builders subsidize users. The competition between professional block builders like Flashbots and bloXroute drives them to return value to users via higher priority fees or direct payments, as seen with MEV-share.

The alternative is worse. Without this auction, centralized sequencers or first-come-first-served ordering would dominate, creating hidden inefficiencies and rent extraction that are harder to measure and police.

Evidence: Flashbots' dominant PBS share and the billions in MEV extracted annually prove the market's scale and liquidity. Protocols like CowSwap and UniswapX now route through this system for optimal execution.

Commit-Reveal schemes obfuscate transaction content. Users submit encrypted transactions that are only revealed after block inclusion, preventing frontrunning. This shifts the auction dynamic from content-based to commitment-based.

Threshold Encryption requires a decentralized committee to decrypt transactions. This prevents builders from seeing plaintext data, but introduces a trusted setup and potential latency bottlenecks, as seen in early Flashbots SUAVE designs.

Fully Homomorphic Encryption (FHE) allows computation on encrypted data. Validators can order and execute transactions without ever seeing the plaintext, eliminating information asymmetry. This is the endgame for privacy but remains computationally prohibitive today.

Evidence: Ethereum's PBS roadmap explicitly prioritizes cryptographic research, with Verkle trees and zk-SNARKs for state proofs laying the groundwork for these more complex privacy-preserving systems.