The Hidden Mechanics of Ethereum's Builder Market: From Technical Arms Race to Order Flow Empire

Industry Leaders Revelation on the Inside of the Black Box.

Dec 23, 2024

The builder market's evolution tells a story of unexpected transformations. What started as a technical competition has become far more complex: a world of hidden rebates, exclusive deals, and strategic market positioning. In our latest MEV Space, industry leaders unveiled the layers of this transformation, revealing insights that challenge common assumptions about Ethereum's path to decentralization.

Co-host: Blair Marshall, MEV Solution Architect of Fastlane.

Speakers:

Luis Bezzenberger, founder of Shutter Network.
David Phillips, Order Flow expert.
Yuki Yuminaga, Founding Research and Growth of Sorella Labs, Research Partner of Fenbushi Capital.

The most striking revelation of this event? The real mechanics of the builder market remain deliberately obscured. As David Phillips notes,

Anyone who really knows how the rebates work off chain is not allowed to talk about it and incentivized not to talk about it because if you know about it, you're making money from it.

This opacity isn't just about privacy – it's a fundamental feature of how value is captured and distributed.

The infrastructure costs tell another story. Running a competitive builder now requires "at least 200k a month on AWS bills," up from 50k, creating an ever-rising barrier to entry. Yet some, like Yuki, provocatively suggest that pushing toward complete centralization might be what finally forces systematic change:

If 90% of the blocks are being built by a single entity... the prospect of the Ethereum transaction supply chain being more decentralized becomes super skewed.I wonder what kind of stuff is going to spew out of the EF at that point.

From market structure to regulatory implications, from technical solutions to incentive design, our speakers explored five crucial dimensions of this evolving landscape.

MEV Market Structure: Hidden Rebates & Market Dominance

David Phillips on Market Rebates:

Anyone who really knows how the rebates work off chain is not allowed to talk about it and incentivized not to talk about it because if you know about it, you're making money from it... There's edge or margin to be had at each of those. And so it's inevitable that we converge. If you have an arb or if you have a bundle, you can make more money by controlling where it's oriented within the block... The only way you really win on the block building side is having transactions that other builders don't have.

Yuki on Order Flow Leverage:

I think the best we can do is to first understand what is the kind of leverage on play. Imagine if you're like a traders who have your own alpha that not many people knows and you go to two builders that we have today, Titan and Beaver guys and be like, 'hey, I'm interested in working with you guys but I want to pick whichever ones that gives me the best offer.' From this kind of setup you can clearly see who is in the vantage point here to decide and pick which one they want to work with and provide exclusive flow to.

David Phillips & Yuki’s interaction about Market Participants:

Now Yuki, do you see there being an increase in the number of participants given the current system or is the compressing factor too strong? Because what we see was Winter Mutant Rsync basically giving up because when the market converged around buying flow or gathering up private flow, Wintermute and Rsync just basically gave up and stepped out of the market.

Frankly, I don't think that we are quite there to the point that we're going to have a lot of different compressing factors coming in that's going to kick Beaver or Titan out of the game. I don't believe that's the case."

On the Single Builder Scenario, Yuki suggested:

I'm actually kind of interested in seeing a world where we actually only have one builder because right now I feel like a lot of the EF people, while they are very much aware of the centralization factor, they don't really consider this as a sort of urgent matter... But if that tips over at some point and becomes like one builder, then I feel like a lot of the community response to this builder market will become very different because now if 90% of the blocks are being built by single entity, then the prospect of Ethereum transaction supply chain being more decentralized becomes super skewed.

David Phillips & Luis discussed TradFi Parallels:

It's just like in traditional finance, right? We have brokers and this general broker sort of ecosystem having just more information, more order flow and they can ultimately provide better prices and can enable something like very low fee, give it back to the customers. Right? Give the fees back to the customers and have ultra low fees. Yeah, so I mean that's a positive. Right? Just like having, because we have that system that we have this higher market efficiency around centralization then is ultimately giving back value.

About Flow Value, David Phillips said:

There's clear demand to capture the value of your own flow. For applications like Blink Labs, a searcher network, I guess search or auction network has probably as close to 20% of all flow in Ethereum right now. And it's not very known, not very talked about, but they do. And so what that tells us is there's strong demand to make money when you produce flow as an application builder or for your users.

An audience asked whether searcher teams are institutional, and Yuki replied:

I find it a little bit hard to discern what is to what extent an institution and what is not. Like if you consider a five man dev shop trying to do some searching strategy as an institution or you know like is a single person searcher is non institutional... even like the wintermute guys doing their searching stuff, like it's wintermute, but it's maybe just like a couple people in the wintermute team that is really running the strategy.

While market dynamics have led to a concentrated builder landscape, the technical infrastructure underlying these systems holds challenges and potential solutions for democratizing MEV. Let's examine the technical barriers and innovations that could reshape this ecosystem

Technical Infrastructure & Solutions: How (Hard) to Break the Barrier

When talking about Infrastructure Costs, David Phillips suggested:

To run a competitive builder, you're spending at least 200k a month on AWS bills. Now it used to be 50k, then it was 100k, and now it's pushing up and up because the latency games that you have to play to be competitive bidder in the block auction are really difficult and super high bandwidth and you have to be geographically distributed around the world to be closest to every relay or every set of proposers.

Luis commented on Multiple Proposal Solutions:

And then I guess multiple proposals would also mitigate some of this by decentralizing more. So I think in general those things are things we can do on the protocol level. Yeah could be a force for again shifting the power a little bit and then again chambers plug the sort of encrypted mempool. Where you have encrypted currently how we would do it right now one would be via proposal commitment scheme. Right? So you would leverage some of for example chain bound proposal commitment architecture."

David Phillips talked about Sealed Auctions:

Ultimately, where the world needs to go is more towards a sealed price second bid auction at the relay level. And I think that'll be really exciting to see verifiable relays at some point because the burden that the builders bear, like the huge bandwidth burden that they bear, is mostly a byproduct of having open auctions at the relay level for the block auction. So building can get much more decentralized when the barrier to entry actually becomes very low and the last look and latency games are diminished.

Yuki & David Phillips also discussed Relay Innovation:

Yuki:

But the problem with the verifiable relay is that I don't think the idea itself is any problem. It's just that I don't know if there are incentives for relays to innovate.

David:

I've talked to some of them and they're very interested in having lower costs because that's ultimately what this would do for them. Right. Running a relation. Ideally we have more of them and they're cheaper. So relay builders aren't really making money. They're mostly public goods operator public goods people funded by grants.

David Phillips also mentioned TEE & Encryption

And if TEEs get to a point where they can be resilient to griefing attacks, then, you know, that could very well be the case. There's a good chance we see a new wave of tropical encryption, and its research takes space by storm, and you know, we decide to sail in a different direction than trust maxing on TEEs.

Technical infrastructure challenges drive innovation in block building, but implementing these solutions must navigate an evolving regulatory landscape. Recent developments in both areas show how technical capabilities and compliance requirements increasingly shape each other.

Regulatory Thaw: MEV Censorship in 2024

Yuki shared his observation on the censorship shift of builders:

Looking at the censorship pick, Beaver Build and Titan stopped censoring. They found legal grounds to stop censoring. It's regulatory-wise more plausible now to not censor and defend against OFAC claims….Court cases in 2024 revolving around searchers and court language provided hints for builders to takea regulatory stance on censorship. That's why they feel more comfortable not censoring transactions, given these precedents.

Luis also talked about Privacy & Regulatory Implications:

If transactions were more private, maybe the trade would be public, but maybe the addresses would always be anonymous. Would that be an argument for plausible deniability for builders, relays, or validators to say that we don't know what's interesting? That kind of like WhatsApp can argue because that's end-to-end encrypted.

As regulatory clarity emerges around censorship and privacy, attention turns to BuilderNet's attempt to reshape MEV dynamics through decentralized infrastructure.

The Nuanced BuilderNet

Blair Marshall, the co-host of this MEV Space, talked about BuilderNet's Flywheel Effect:

The flywheel effect that they need to get is going to be slow... the hope is that this decentralized block building will lead to new novel strategies... the Venn diagram of private order flow is larger for this decentralized builder and, therefore, can have new novel strategies that create new value that the other ones cannot create.

BuilderNet represents a complex intersection of idealism and practical challenges in decentralizing block building. Yuki sees promise in its shared flow model and democratized participation while proposing token-based incentives for bootstrap adoption.

Luis reinforces Yuki’s vision through technical architecture, advocating for encrypted mempools and multiple proposal mechanisms as foundational elements to redistribute power in the MEV ecosystem.

However, David Phillips grounds these aspirations in economic reality, emphasizing that BuilderNet's success hinges on technical innovation and creating compelling economic incentives that can compete with established builders' immediate profitability. Together, their perspectives highlight BuilderNet's potential to reshape MEV dynamics while acknowledging the significant technical, economic, and adoption challenges ahead.

These are the highlights of our 2nd MEV Space: An Offer Builders Can't Refuse - The Searcher Integration Saga. You can listen to the full episode via our YouTube:

Stay tuned for our next MEV Space, which brings together the sharpest minds in crypto to dissect the evolving MEV landscape.

Click this link or open https://bit.ly/hfdefi to download the free ebook Head First DeFi, Decoding the DNA of Crypto Transactions & Strategies.

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