MEV, builders and censorship

Wonder

1. Why does the sequence of transactions determine profit and loss in a decentralized ledger?
2. How can external regulatory pressure influence which blocks are included on a global network?
3. What happens to decentralization when specialized companies assemble most of the chain’s history?

Explore

1. Maximal extractable value, or MEV, arises because the order of transactions affects outcomes. A searcher monitors the mempool for opportunities, such as arbitrage between exchanges or liquidations in lending protocols. These actors construct bundles of transactions that guarantee profit if placed at specific positions within a block. The value extracted comes from the difference between prices before and after execution, capturing what would otherwise be lost to market inefficiencies. This dynamic turns block production into an optimization problem where timing and order are paramount.
2. Since Ethereum’s transition to proof-of-stake in September 2022, most blocks are not built directly by validators. Instead, specialized builders aggregate transactions from searchers and assemble complete blocks. Validators, acting as proposers, select the block offering the highest bid through a sealed auction mechanism. This separation of roles, known as proposer-builder separation or PBS, allows for complex optimization without requiring every validator to run heavy computation software. The ecosystem has stratified into distinct layers: searchers find value, builders organize it, and relays deliver it.
3. Flashbots’ MEV-Boost client mediates this supply chain by connecting validators to multiple builders simultaneously. A relay validates the block’s integrity before passing it to the proposer, protecting against spam or invalid data. It also introduced a new point of failure: the relays themselves. Because these entities filter and forward blocks, they hold significant influence over which transactions enter the chain. The concentration of this power in a few commercial operators creates a dependency that differs from Bitcoin’s more distributed mining pool structure.
4. The tension between decentralization and compliance became visible after the US Office of Foreign Assets Control sanctioned Tornado Cash in August 2022. Several major relays began filtering transactions associated with the protocol to avoid legal liability. For a period, a majority of Ethereum blocks were built by OFAC-compliant relays, effectively censoring specific types of activity at the infrastructure level. This demonstrated that when block building concentrates in corporate entities subject to national law, external rules can penetrate the protocol’s internal logic, bending the chain’s behavior without changing its code.
5. Bitcoin faces similar concentration risks through mining pools, though the mechanism differs. In bitcoin, pools usually build the block template and miners only hash, though Stratum V2 lets miners choose their own transactions (lesson 3.2.5). On Ethereum, block assembly has moved to a handful of specialised builders. This distinction matters because a centralized builder can implement business logic or compliance filters that are invisible to the protocol layer. The trade-off is clear: specialized builders increase efficiency and block rewards for validators but introduce trust dependencies on third-party operators who control the ordering of economic activity.
6. Open a block explorer like Etherscan and inspect any recent block’s metadata. Look for fields indicating the builder or proposer identity, if available in the client implementation. Observe that while the validator proposes the block, the internal transaction ordering reflects complex optimization by an external entity. This concrete check reveals the mechanical reality: the chain’s history is assembled by a supply chain of specialized actors, each with their own incentives and constraints, rather than by a monolithic protocol engine.

Key facts

Exercise nine, six, three, one

Fact check

Dates, figures and claims checked against the published sources listed below.

• Flashbots, 'MEV-Boost Documentation'
• US Department of the Treasury, Office of Foreign Assets Control, 'Press Release: OFAC Sanctions Tornado Cash Smart Contracts' (8 Aug 2022)
• ethereum.org, 'Proposer-builder separation'