The MEV Dilemma and the Case for Builder Oversight
Maximal extractable value, or MEV, has changed the economics of public blockchains. Transactions are no longer processed solely according to arrival time or gas price. Specialized actors search for profitable ordering opportunities, assemble transaction bundles, and compete to influence which trades, liquidations, and arbitrage operations enter a block.
This market has produced useful efficiencies. Arbitrage can bring decentralized exchange prices closer together, while liquidation bots can help lending protocols remain solvent. Yet the same infrastructure can enable sandwich attacks, hidden priority deals, and information advantages that ordinary users cannot realistically match.
The central policy question is becoming harder to avoid: should block builders be regulated as market makers? The answer depends on what builders actually do, how much discretion they exercise, and whether existing financial rules can address conduct that occurs inside a cryptographic transaction pipeline.
Why block builders matter
In proposer-builder separation systems, validators or staking participants may choose a completed block supplied by a specialized builder. The builder gathers transactions, evaluates private order flow, selects MEV opportunities, and constructs the block expected to generate the highest value. A relay or auction mechanism may sit between the builder and proposer, adding another layer to the process.
This role gives builders substantial influence over execution quality. They can determine transaction ordering, decide which bundles compete for inclusion, and sometimes receive privileged data from wallets, exchanges, or decentralized applications. Although they do not always trade for their own balance sheet, their actions can materially affect prices and execution outcomes.
Builders are not conventional market makers
Traditional market makers typically quote buy and sell prices, provide liquidity, and manage inventory risk. Their business is visible through order books or liquidity pools, and securities law may apply when their activities involve regulated instruments. Block builders operate differently: they optimize ordering and inclusion within a block, often earning fees, rebates, or auction payments rather than a bid-ask spread.
The distinction matters because a builder may create market impact without maintaining inventory. A builder that inserts an arbitrage trade, delays a competing transaction, or uses a private order-flow advantage can influence market conditions while describing itself as infrastructure. That classification should not automatically trigger broker-dealer treatment, but it should prevent regulatory analysis from relying on labels alone.
The harms regulators would need to address
The clearest concern is user exploitation. In a sandwich attack, a searcher places trades before and after a victim’s transaction, increasing the victim’s execution cost. A builder that knowingly facilitates or prioritizes such activity may be participating in an unfair trading environment, particularly when it controls access to private transaction flows.
Concentration creates a second risk. If a small number of builders win most block auctions, they may gain the ability to censor transactions, coordinate bidding, favor affiliated searchers, or extract excessive rents. This can weaken chain neutrality even when the underlying consensus mechanism remains technically decentralized.
Regulators should also distinguish harmful conduct from beneficial MEV. Cross-venue arbitrage, backrunning, and protocol liquidations can improve price discovery and protect users. A broad ban on transaction ordering would likely push activity into less transparent channels rather than eliminate it.
A workable regulatory framework
The most practical approach would regulate conduct and market access instead of assigning every builder a single legal category. Builders handling customer order flow could face obligations involving disclosure, conflict management, recordkeeping, and fair access. Those operating purely as competitive infrastructure providers might face lighter requirements.
Transparency would be an important starting point. Builders and relays could publish information about auction rules, transaction inclusion policies, rejected bundles, affiliated searchers, and fee arrangements. Cryptographic commitments and delayed disclosure could protect sensitive strategies while allowing independent auditors to identify systematic abuse.
Rules could also prohibit specific practices, including trading against confidential user orders, fabricating bids, coordinating to exclude competitors, and misrepresenting execution priority. Enforcement would require technical expertise, since evidence may span mempools, private relays, smart contracts, and validator payments.
How different approaches compare
No single policy resolves the tension between user protection and permissionless innovation. Each option creates trade-offs involving enforcement, privacy, decentralization, and the migration of MEV activity across jurisdictions.
| Regulatory approach | Potential benefit | Main weakness | Best application |
|---|---|---|---|
| Treat builders as market makers | Clear conduct standards and oversight | Misfits builders that do not quote liquidity | Builders controlling customer order flow |
| Mandatory disclosure | Improves accountability and research | Sensitive strategies may become exploitable | Auction rules, affiliations, and fee policies |
| Anti-manipulation rules | Targets sandwiching and abusive coordination | Difficult to prove intent on-chain | Repeated, measurable patterns of abuse |
| Licensing or registration | Creates identifiable responsible entities | May exclude small or decentralized operators | Large commercial builders and relays |
| Protocol-level protections | Reduces harmful MEV by design | Can shift activity elsewhere | Encrypted mempools, batch auctions, fair ordering |
A registration regime could be proportionate if it focused on identifiable companies that operate relays, custody order flow, or market infrastructure. It would be less suitable for anonymous participants contributing software or competing from multiple jurisdictions.
The role of protocol design
Regulation cannot carry the entire burden. Encrypted mempools can hide transactions until ordering decisions are committed, reducing some forms of front-running. Frequent batch auctions can group trades and limit the advantage of microsecond-level sequencing. Fair sequencing services may also make inclusion rules more predictable.
These tools introduce costs. Encryption can complicate censorship detection, batch execution may reduce composability, and alternative ordering systems can create new governance risks. Protocol developers should therefore measure user outcomes, validator incentives, latency, and concentration rather than presenting any design as a complete cure.
Independent research is equally important. Investigative reporting can connect technical evidence with commercial relationships that are difficult to see from blockchain data alone. Readers who value coverage of emerging market infrastructure can support independent reporting and help sustain scrutiny of powerful intermediaries.
What responsible oversight could look like
A balanced regime should focus on verifiable behavior and preserve room for experimentation. Policymakers, protocols, and industry participants could prioritize:
- Requiring clear disclosures when builders receive or monetize private transaction flow.
- Prohibiting deceptive auctions, undisclosed self-dealing, and coordinated exclusion of competitors.
- Creating technical audit standards for relays, builders, and high-volume searchers.
- Protecting whistleblowers and researchers who document systematic execution abuse.
- Using sandboxed rules that can be revised as blockchain market structure evolves.
The objective should be fairer execution, not the elimination of every profitable ordering strategy. MEV is partly a symptom of fragmented liquidity, transparent state, and latency-sensitive trading. If regulation pushes activity away from visible infrastructure without reducing user harm, it will have failed.
The MEV dilemma is ultimately a question of power. Builders may be infrastructure providers, trading firms, auction operators, or several of these at once. Regulators should examine their economic function rather than accept a convenient classification. Projects and companies operating in this space should begin documenting their order-flow relationships, governance controls, and execution policies now. Clear records and credible disclosures will be valuable whether formal regulation arrives through securities agencies, commodities authorities, or new digital-asset legislation.