diff --git a/crates/relay/src/api/proposer/get_payload.rs b/crates/relay/src/api/proposer/get_payload.rs
index 7a2cda4e..522c30c7 100644
--- a/crates/relay/src/api/proposer/get_payload.rs
+++ b/crates/relay/src/api/proposer/get_payload.rs
@@ -21,8 +21,8 @@ use tracing::{Instrument, error, info, warn};
 use super::ProposerApi;
 use crate::{
     api::{Api, proposer::error::ProposerApiError},
-    auctioneer::{GetPayloadResultData, PayloadBidData},
-    beacon::types::BroadcastValidation,
+    auctioneer::{Event, GetPayloadResultData, PayloadBidData},
+    beacon::{error::BeaconClientError, types::BroadcastValidation},
     database::SavePayloadParams,
     gossip::{BroadcastGetPayloadParams, BroadcastPayloadParams},
 };
@@ -337,6 +337,25 @@ impl<A: Api> ProposerApi<A> {
                 )
                 .await
             {
+                if matches!(err, BeaconClientError::BlockValidationFailed(..)) {
+                    let builder_pubkey = bid.builder_pubkey;
+                    let reason = format!("Block validation failed: {err}");
+
+                    let _ = self_clone.auctioneer_handle.send_event(Event::BuilderDemotion {
+                        slot,
+                        builder_pubkey,
+                        block_hash,
+                        reason,
+                    });
+
+                    warn!(
+                        %builder_pubkey,
+                        %block_hash,
+                        slot = %slot,
+                        "BuilderDemotion event sent due to BlockValidationFailed"
+                    );
+                }
+
                 error!(%err, "error publishing block");
                 failed_publishing = true;
             };
diff --git a/crates/relay/src/auctioneer/context.rs b/crates/relay/src/auctioneer/context.rs
index 98362934..3922d618 100644
--- a/crates/relay/src/auctioneer/context.rs
+++ b/crates/relay/src/auctioneer/context.rs
@@ -210,6 +210,38 @@ impl Context {
         };
         self.payloads.insert(block_hash, payload);
     }
+
+    pub fn handle_builder_demotion(
+        &mut self,
+        slot: Slot,
+        builder_pubkey: BlsPublicKeyBytes,
+        block_hash: B256,
+        reason: String,
+    ) {
+        if self.cache.demote_builder(&builder_pubkey) {
+            warn!(%builder_pubkey, %block_hash, "builder demoted due to block validation failure");
+
+            let db = self.db.clone();
+            let failsafe = self.sim_manager.failsafe_triggered.clone();
+            let slot_u64 = slot.as_u64();
+
+            spawn_tracked!(async move {
+                if let Err(err) =
+                    db.db_demote_builder(slot_u64, &builder_pubkey, &block_hash, reason).await
+                {
+                    failsafe.store(true, Ordering::Relaxed);
+                    error!(
+                        %builder_pubkey,
+                        %err,
+                        %block_hash,
+                        "failed to persist builder demotion in DB — pausing optimistic submissions"
+                    );
+                }
+            });
+        } else {
+            warn!(%reason, %builder_pubkey, %block_hash, "builder already demoted, skipping demotion");
+        }
+    }
 }
 
 impl Deref for Context {
diff --git a/crates/relay/src/auctioneer/handle.rs b/crates/relay/src/auctioneer/handle.rs
index 49c5925a..3e5ffd3e 100644
--- a/crates/relay/src/auctioneer/handle.rs
+++ b/crates/relay/src/auctioneer/handle.rs
@@ -84,6 +84,11 @@ impl AuctioneerHandle {
         trace!("sending to worker");
         self.auctioneer.try_send(Event::GossipPayload(req)).map_err(|_| ChannelFull)
     }
+
+    pub fn send_event(&self, event: Event) -> Result<(), ChannelFull> {
+        trace!("sending event to auctioneer: {:?}", event.as_str());
+        self.auctioneer.try_send(event).map_err(|_| ChannelFull)
+    }
 }
 
 pub struct ChannelFull;
diff --git a/crates/relay/src/auctioneer/mod.rs b/crates/relay/src/auctioneer/mod.rs
index fd45dd9f..5fffeb9b 100644
--- a/crates/relay/src/auctioneer/mod.rs
+++ b/crates/relay/src/auctioneer/mod.rs
@@ -535,6 +535,14 @@ impl State {
                     warn!(curr =% bid_slot, gossip_slot = payload.slot, "received early or late gossip payload");
                 }
             }
+
+            // Builder demotion event
+            (
+                State::Slot { .. } | State::Sorting(_) | State::Broadcasting { .. },
+                Event::BuilderDemotion { slot, builder_pubkey, block_hash, reason },
+            ) => {
+                ctx.handle_builder_demotion(slot, builder_pubkey, block_hash, reason);
+            }
         }
     }
 
diff --git a/crates/relay/src/auctioneer/types.rs b/crates/relay/src/auctioneer/types.rs
index 7158f24c..93e39e0a 100644
--- a/crates/relay/src/auctioneer/types.rs
+++ b/crates/relay/src/auctioneer/types.rs
@@ -291,6 +291,12 @@ pub enum Event {
         is_synced: bool,
     },
     MergeResult(BlockMergeResult),
+    BuilderDemotion {
+        slot: Slot,
+        builder_pubkey: BlsPublicKeyBytes,
+        block_hash: B256,
+        reason: String,
+    },
 }
 
 impl Event {
@@ -304,6 +310,7 @@ impl Event {
             Event::SimResult(_) => "SimResult",
             Event::SimulatorSync { .. } => "SimulatorSync",
             Event::MergeResult(_) => "MergeResult",
+            Event::BuilderDemotion { .. } => "BuilderDemotion",
         }
     }
 }
diff --git a/crates/relay/src/beacon/beacon_client.rs b/crates/relay/src/beacon/beacon_client.rs
index 79172604..290c81da 100644
--- a/crates/relay/src/beacon/beacon_client.rs
+++ b/crates/relay/src/beacon/beacon_client.rs
@@ -170,6 +170,11 @@ impl BeaconClient {
                 if body.contains("duplicate block") {
                     return Ok(200);
                 }
+                if body.contains("ExecutionPayloadError(RejectedByExecutionEngine") &&
+                    (body.contains("block hash mismatch") || body.contains("validation_error"))
+                {
+                    return Err(BeaconClientError::BlockValidationFailed(body));
+                }
                 Ok(code)
             }
             _ => {
diff --git a/crates/relay/src/beacon/error.rs b/crates/relay/src/beacon/error.rs
index 6960ddd6..693321b8 100644
--- a/crates/relay/src/beacon/error.rs
+++ b/crates/relay/src/beacon/error.rs
@@ -29,6 +29,9 @@ pub enum BeaconClientError {
 
     #[error("block integration failed")]
     BlockIntegrationFailed,
+
+    #[error("block validation failed: {0}")]
+    BlockValidationFailed(String),
 }
 
 impl IntoResponse for BeaconClientError {
diff --git a/crates/relay/src/beacon/multi_beacon_client.rs b/crates/relay/src/beacon/multi_beacon_client.rs
index a4ba7a60..43b3dc6a 100644
--- a/crates/relay/src/beacon/multi_beacon_client.rs
+++ b/crates/relay/src/beacon/multi_beacon_client.rs
@@ -233,6 +233,10 @@ impl MultiBeaconClient {
                     return Ok(());
                 }
 
+                Err(BeaconClientError::BlockValidationFailed(details)) => {
+                    last_error = Some(BeaconClientError::BlockValidationFailed(details));
+                }
+
                 Err(err) => {
                     last_error = Some(err);
                 }