What Institutions Should Know About Blockspace

A recent opinion piece by Don Wilson in the Financial Times argued that regulators need to combat what the crypto industry calls MEV, or Maximal Extractable Value. MEV refers to the value that arises from how transactions are selected and ordered within a block. It's a structural feature of how blockchains process competing transactions, yet Wilson equates it with front-running and recommends that institutions choose blockchains designed to prevent it.

He is not alone. IOSCO has described the ability to control transaction ordering as conduct that would be considered manipulative in traditional markets. ESMA has flagged certain MEV practices as potential market abuse under MiCA. The SEC has cautioned that altered sequencing of transactions may be abused. An opinion is forming across regulators and institutional commentators that transaction ordering on blockchains is a problem to be eliminated.

This concern is understandable. As trillions of dollars in capital markets activity begins moving on-chain, asking whether that infrastructure protects investors is exactly the right question. But the answer taking shape gets the mechanics wrong.

What critics describe as manipulation is a fair and open auction for transaction ordering. The alternative is not a market without ordering, but ordering decided by a latency race or by an operator you cannot see. If this misunderstanding finds its way into regulation, it will hurt the institutions it is trying to protect.

The truth is, public chains already offer the tools to address all the concerns critics raise, from private order flow to encrypted mempools to trusted execution environments. The question is whether institutions choose to use them.

This article explains why the current view of transaction ordering is mistaken, how blockspace markets work, and why any rules must accept that blockspace, with its ordinal nature, is a brand-new kind of market with its own unique infrastructure needs.

Blockspace is a new kind of commodity

Every blockchain produces a finite resource: the capacity to execute and settle transactions within a block. This resource, also known as “blockspace”, is produced on a fixed schedule.

On Ethereum, a new block is produced every 12 seconds. On Solana, roughly every 400 milliseconds. Users and applications compete to consume it. The more activity on the network, the more valuable that capacity becomes.

In many ways, blockspace behaves like a commodity. It has scheduled production, finite supply per production cycle, and supply-demand pricing. Blockspace is moved from producers to consumers through a supply chain of intermediaries, much like oil moves from wells to refineries to distribution networks in physical commodity markets.

Yet blockspace possesses a unique characteristic that distinguishes it from any physical commodity: the order in which transactions execute determines their value.A trader whose transaction lands first captures an arbitrage opportunity. The same trader, executing the identical transaction one position later, may find the opportunity gone. Despite consuming the same network capacity within the same block, the results can be fundamentally different.

This makes blockspace something genuinely new: it is an ordinal commodity, where value is a function of both the quantity consumed and the position within a production batch.

Why this matters for institutions

The ordinal structure of blockspace is the exact feature that makes on-chain markets work, not something to be eliminated or constrained. Liquidations that keep lending markets solvent, oracle updates that keep pricing accurate, arbitrage that keeps prices aligned across venues: all of these depend on executing at a specific position within a block. On-chain sequencing turns the competition for that position into an auction for access to a specific blockchain state.

The industry’s current term for all sequencing-dependent activity is MEV or Maximal Extractable Value. The name itself is part of the misunderstanding. It sounds like a measure of how much value can be taken from users.

In reality, the majority of MEV are maximizing market efficiency. Only a smaller and shrinking share involves value-maximizing strategies, like sandwich attacks, that extract value at users’ expense. The term lumps both together and invites regulators to treat the entire category as predatory.

Wilson acknowledges that some MEV reflects legitimate activity, but he draws the line at “profits that depend on controlling transaction order”. The problem is that on-chain finance activities are profitable precisely because of where they execute in a sequence. It is the ordinal nature of blockspace at work.

Critics are currently viewing blockspace through the assumptions of traditional financial markets, where the order of execution is determined by speed and priority is fixed once established. The auction mechanism that determines position in blockspace markets may look like a defect from that perspective. In practice, it is the more effective design.

When participants compete through an auction, the value they create flows back to the network and its users. When they compete on speed, value leaks externally in the form of the cost of latency infrastructure required to be fast.

The degree to which this value flows back to the network depends on how much of the ordering decision is resolved by explicit auction. Ethereum's discrete blocks and competitive builder auction resolve nearly all of it. Solana's continuous slots resolve a growing share through priority fees and tip auctions, with some residual competition on latency. But even a partial auction changes the game: where a pure speed race is winner-take-all, an auction distributes value more broadly.

Yet even as on-chain markets demonstrate this advantage, much of the institutional commentary still defaults to traditional market assumptions. A common comparison frames high-frequency trading as the virtuous version of speed competition. Firms compete within fixed rules, spreads tighten, and everyone benefits. But competing to be first is itself a competition over sequence. And it is a rather expensive one.

Firms spend fortunes on microwave links and co-location to win by microseconds. The edge they gain is the ability to act on a price just before it updates, and the cost of that edge is paid by whoever is on the other, slower side of the trade. There is a well-known result in market microstructure research (Budish, Cramton, and Shim) that this latency race is a pure social cost, and that running the market as a frequent batch auction would be the better design.

Blockspace markets work exactly this way.

Two markets, one allocation problem

There are two fundamentally different markets operating inside every block.

The first is the inclusion market. This determines whether your transaction makes it into the block at all. It’s a pure supply and demand function for a finite resource. When the network is busy, inclusion is expensive. When it is quiet, inclusion is cheap. This dimension is familiar to traditional markets. It works much like capacity pricing in any infrastructure market.

The second is the position market. This determines where in the block your transaction executes, and therefore which version of shared state it interacts with. This is the ordinal dimension, and it is where both value-creating and value-extractive activity has the potential to occur.

The critical distinction is between the infrastructure that manages sequencing (block building) and the specific strategies that some actors deploy within it (MEV bots). The current understanding treats these as the same thing, but they are fundamentally different.

Block builders serve an allocation function. They take competing claims for blockspace and assemble them into an efficient, ordered sequence. This is a resource allocation problem, the same function that every commodity market needs: someone must decide how competing demands for a finite resource are resolved.

As described above, that resolution happens through a competitive auction that returns the majority of the value to the network. Builders are the infrastructure. The actors who execute sandwich attacks are searchers, or independent participants who submit strategies to be included in blocks.

A builder that includes a harmful strategy is analogous to an exchange that processes a trade submitted by a manipulative participant. The exchange and the manipulator are different entities. The infrastructure and the abuse are different things.

This distinction matters enormously for regulation. And as we will see, the market has already developed effective mechanisms to filter out the abuse.

The problems the market has (almost) solved

Two concerns run through much of the regulatory commentary: front-running and information leakage. Both are real, and both deserve to be taken seriously. But both also deserve more precision than the current institutional view gives them.

On front-running: In traditional markets, front-running is a betrayal of fiduciary duty: a broker trading ahead of a client using the client's own order. On a public blockchain, the picture is different. There is no broker-client relationship and the concern is broader than builders alone. Anyone with the ability to observe pending transactions and exploit sequencing discretion can cause harm, whether that actor is a searcher, a validator, or a vertically integrated operation. There is no question that toxic MEV should be eliminated, but this is a market design challenge, not a fiduciary breach.

And the market has already developed significant defenses. The dominant block builders on Ethereum, representing roughly 90% of all blocks, are all neutral. They have no proprietary trading operations and no conflict of interest with the transactions they process. The vast majority of economically sensitive transactions already route through private mempools and are forwarded only to builders that provide guarantees around how they handle them.

Any builder that violates these ordering guarantees stops receiving private transaction flow. The transparency of public blockchains makes this policing possible. Participants can verify on-chain whether their transactions were handled as promised.

The harmful front-running that still occurs is concentrated among the small fraction of transactions that route through the public mempool, typically because the wallet or a service sending their transactions to the blockchain has yet to adopt private routing. That is an education and adoption gap at the application layer. It is a different problem from the systemic infrastructure flaw the current regulatory framing implies, and it is closing fast.

‍On information leakage: transparency has a cost, and the critics are right to raise it. But opacity has a cost too, and it is the one traditional markets have always lived with. The same value that gets extracted from transaction flow on-chain gets extracted in traditional venues through payment for order flow, through internalisation, through last-look practices in foreign exchange.

The difference is that on-chain, you can see it. The only reason anyone can put a number on extraction at all is that the data is public. A market you can audit is a safer place to put institutional capital than one you cannot.

That said, institutions do need control over pre-trade visibility, and the infrastructure for this already exists, too. Private mempools, encrypted transaction flow, and trusted execution environments all give participants the ability to manage who sees their orders and when. The same public blockchain supports both fully private institutional transaction routing and open retail access, in the same way the internet supports both highly encrypted interbank settlement and password-based social media. The level of protection is a choice, not a constraint of the infrastructure.

UBS and Nethermind recently demonstrated exactly this: a bank enforcing its own compliance rules and routing approved transactions through relays to builders of its choosing, all on Ethereum's existing infrastructure with no protocol changes required. Institutions do not need to wait for a new chain or a new protocol. The tools are available today.

The risk of getting this wrong

Major institutions moving on-chain is a massive shift for capital markets. Which blockchains host that activity, and what rules govern them, will determine how trillions of dollars in assets are managed, priced, and settled.

If regulators treat transaction sequencing as inherently exploitative, they will push institutional activity toward chains that claim to suppress the ordinal dimension of blockspace. But the ordinal dimension is a structural consequence of sequential execution against shared state. You cannot remove it. You can only change who performs the ordering function, and how transparently.

Consider where this logic leads. A single permissioned sequencer removes the open auction, but the sequencer still orders transactions, and the value of that ordering still exists. It is simply captured by one entity, opaquely, with no competitive pressure to return it to the network users. FCFS (first-come, first served) ordering replaces the auction with a latency race, the exact dynamic the academic literature identifies as a pure social cost. Encrypted mempools reduce some forms of value-maximizing activity, but whoever sequences the decrypted transactions retains the same ordering discretion – just without the competitive checks an open auction provides.

In each case, the value in controlling sequence does not disappear. It moves to the chain's operator, out of sight. A quantifiable market exposure becomes counterparty risk to a single intermediary whose conduct cannot be audited. And a chain whose ordering you cannot verify defeats the reason institutions are moving on-chain at all.

A better approach is to accept that blockspace, with its ordinal nature, is a brand-new kind of market with its own unique infrastructure needs. This is not an argument against regulation. It is an argument for regulation that is precise enough to target the actual abuses, without dismantling the auction mechanisms and market functions that make on-chain settlement work. The difference matters: broad rules that treat all transaction sequencing as suspect will push activity toward less transparent infrastructure, while targeted rules can protect investors and strengthen the markets they participate in.

The critics are right about one thing: blockchain selection is a market structure decision. But the criteria they propose are the wrong ones. The question for institutions is not whether a chain has eliminated transaction ordering. Every chain orders transactions. The question is whether that ordering happens through a competitive, auditable process or through a single operator whose decisions you cannot see.

Institutions should choose chains where they can verify how their transactions are handled, where builders can compete to offer better execution, and where the data to hold everyone accountable is public by default.