Ethereum's block-building system was designed to distribute value fairly, but new research suggests financial incentives may push builders toward stealing profitable trading strategies from the searchers who submit them. A paper titled "Builders' Defection and Incentive Compatibility" examines whether reputation can truly prevent misconduct when the potential payoff is enormous and detection is unlikely.

What Is Ethereum's Builder-Searcher Problem?

To understand the issue, it helps to know how Ethereum's transaction pipeline works. After the Merge in 2022, Ethereum introduced a system called proposer-builder separation (PBS). In this setup, specialized builders assemble blocks of transactions, while searchers identify profitable opportunities like arbitrage trades or liquidations. Searchers submit bundles of transactions to builders along with a payment bid, hoping the builder will include them in the next block.

The problem is structural: when a builder receives a searcher's bundle, it sees two valuable pieces of information simultaneously. First, it learns how much the searcher is willing to pay for inclusion. Second, it observes the exact transaction strategy that generates profit. Nothing in Ethereum's protocol technically prevents the builder from copying that strategy, replacing the searcher's transactions with its own, and keeping the full profit instead of the searcher's payment.

This creates what researchers call an "information asymmetry." The builder is not just an infrastructure provider; it becomes a privileged observer with early access to valuable private information and unilateral control over how that information is used.

How Much Money Could Builders Actually Steal?

The research team analyzed historical data from September 2024 to August 2025 using the libmev dataset, which tracks maximal extractable value (MEV) opportunities across Ethereum. MEV refers to the profit that can be captured by including, excluding, or reordering transactions in a block. The findings are striking.

Non-trusted execution environment (TEE) builders, meaning those without special cryptographic protections, had an estimated $26 million in what researchers call "counterfactual defection exposure." This represents opportunities where a builder could have profitably copied a searcher's strategy instead of including the searcher's bundle. Once BuilderNet's technically neutralized exposure is included, the total reaches approximately $49 million.

To put this in perspective, researchers measured the temptation as a "months-equivalent" figure. A months-equivalent value of four means the one-time opportunity equals roughly four months of a builder's normal honest revenue. At that scale, a builder would need to place exceptional value on long-term reputation to reject the immediate gain.

Why Reputation May Not Be Enough to Stop Defection?

The traditional defense against builder misconduct is reputation. If searchers discover that a builder copied their strategy, they can stop sending bundles to that builder, cutting off its future revenue. In theory, the threat of losing business should discourage dishonesty. But the research suggests this mechanism has a critical weakness: detection.

When a searcher's bundle is not included in a block, the searcher may not know why. It could have lost to a competing bid, failed during execution, arrived too late, or been deliberately copied. A builder-generated transaction that replicates a searcher's strategy can look identical to an independently discovered opportunity. Multiple searchers often compete for the same arbitrage or liquidation, making reliable attribution nearly impossible.

The researchers modeled different detection scenarios. At a 100 percent detection probability, where searchers always catch defection, reputation can discipline most established builders. But when detection probability falls to between 1 and 10 percent, the incentive to remain honest weakens considerably. At a 1 percent detection rate, every major non-TEE builder in the dataset would need to place exceptionally high value on long-term revenue for honesty to remain economically preferable.

How Builders Could Selectively Defect Without Getting Caught?

A rational builder would not need to copy every bundle. Instead, it could engage in selective defection, copying only the most profitable or easily replicable strategies while accepting ordinary bundles honestly. This makes the problem even harder to detect.

The research identifies three factors that determine whether a builder would find defection economically rational:

• Size of Opportunity: The larger the one-time profit from copying a strategy, the more tempting defection becomes relative to honest operation.
• Detection Probability: If searchers are unlikely to prove that their bundle was copied rather than lost to competition, the expected cost of defection drops dramatically.
• Value of Future Revenue: A builder that places high value on maintaining long-term searcher relationships has stronger incentive to stay honest, but this calculation changes if the immediate opportunity is large enough.

Searchers may also respond to this risk by submitting larger bids to make honest inclusion more profitable than replication. This "deterrence premium" means searchers are paying not only to defeat competing searchers but also to discourage the auction operator from replacing them.

What Does This Mean for Ethereum's Future?

Importantly, the research does not claim that any builder has actually engaged in malicious behavior. Instead, it identifies an architectural condition under which defection could become economically rational. The concern is not that every builder is dishonest, but that the system may ask builders to remain honest even when their financial incentives point in the opposite direction.

This finding highlights a broader tension in Ethereum's design. The proposer-builder separation was created to develop a more competitive and specialized block-production market, distributing MEV opportunities beyond individual validators. But specialization has also created structural vulnerabilities that reputation alone may not be able to address.

The $49 million figure represents not a confirmed theft, but a measure of how much temptation the system currently places on builders. As Ethereum continues to evolve, addressing this incentive misalignment may require technical solutions beyond reputation, such as cryptographic commitments or protocol-level changes that make defection technically impossible rather than merely economically discouraged.