The European Securities and Markets Authority (ESMA) has issued a stark warning about a rising phenomenon in the crypto world: the hidden profits made by insiders who manipulate the order of blockchain transactions. In its latest risk analysis, ESMA reveals how this practice—known in technical circles as Maximal Extractable Value (MEV)—is quietly reshaping the landscape of decentralized finance (DeFi) and the broader crypto ecosystem, with significant implications for fairness, transparency, and market stability.
How transaction manipulation works in crypto
Unlike traditional financial markets, where transaction order is strictly regulated, blockchains allow certain actors—miners, validators, and specialized bots—to reorder, insert, or even censor transactions within a block. This ability lets them profit by exploiting price differences, jumping ahead of other users’ trades (front-running), or executing complex strategies like “sandwich” attacks, where a user’s transaction is squeezed between two others for maximum gain.
ESMA’s report explains that these profits are not just theoretical. On Ethereum, the most widely used blockchain for DeFi, MEV-related activities generated over$1.1 billion in profits between September 2022 and June 2024, according to Flashbots data. In some cases, MEV-related trades accounted for nearly half of all trading volume on decentralized exchanges (DEXs).
Who benefits and who pays the price?
While some forms of transaction manipulation, such as arbitrage, can help align prices across different exchanges and improve market efficiency, ESMA warns that most MEV strategies come at the direct expense of ordinary users. For example, in a “sandwich” attack, a user trying to swap tokens on a DEX may find their transaction front-run and back-run by a bot, resulting in worse prices and higher costs.
The report highlights that MEV is a “zero-sum game”: every dollar gained by an MEV extractor is a dollar lost by another user. In many cases, these profits are risk-free for the extractors, making the practice especially lucrative and persistent.
Blockchain technology with abstract background. Blockchain on a dark cube. Blockchain on a network abstract background. 3d rendering.
A widespread and evolving challenge
ESMA finds that transaction manipulation is not limited to Ethereum. It is spreading rapidly to other blockchains, including Binance’s BNB Chain and Solana, where the rise of meme coins and high user activity create fertile ground for MEV bots. On BNB Chain, for example, sandwich attacks have surged, targeting traders who set high slippage tolerances on volatile tokens.
The phenomenon is also evolving. New forms of MEV are emerging on Layer-2 solutions (such as rollups) and across multiple blockchains, making detection and measurement even more challenging. The report notes that available data on MEV is sparse and often incomplete, with most studies focusing only on Ethereum and using different definitions and methodologies.
Risks to market integrity, security, and decentralization
Beyond the direct financial impact on users, ESMA warns that unchecked transaction manipulation threatens the core values of blockchain technology. As MEV strategies become more sophisticated and resource-intensive, power is increasingly concentrated in the hands of a few large players—validators, block builders, and specialized searchers—who can outcompete smaller participants.
This centralization undermines the promise of decentralized networks and can even pose security risks. For example, if the potential profits from MEV exceed the rewards for honest block validation, validators may be tempted to rewrite blockchain history in so-called “time-bandit attacks.” The report also raises concerns about the lack of transparency: most users are unaware of how their transactions are exposed in public “mempools,” making them easy targets for manipulation.
Counter-measures: progress and pitfalls
The crypto industry has begun to respond with technical solutions. Tools like Flashbots’ MEV-Boost aim to separate the roles of block proposers and builders, reducing some risks but introducing new ones, such as centralization at the relay level. Other approaches, like privacy-enhancing protocols and fair-ordering mechanisms, are still in early stages or face adoption hurdles.
ESMA notes that while these innovations are promising, none fully address the negative consequences of MEV. In some cases, counter-measures simply shift the problem or create new vulnerabilities. The report calls for urgent research and development of more effective solutions, with a focus on protecting ordinary users and preserving market integrity.
Regulatory outlook: a call for vigilance
Currently, the EU’s Markets in Crypto-Assets (MiCA) regulation does not directly address transaction manipulation or MEV, as DeFi remains a small segment of the overall market. However, ESMA suggests that future regulatory frameworks may need to consider MEV’s potential for market abuse, conflicts of interest, and its impact on transparency and fairness.
International bodies like IOSCO have echoed these concerns, recommending that regulators evaluate how DeFi platforms identify, disclose, and manage the risks associated with transaction manipulation.
As DeFi and crypto markets continue to expand, ESMA’s report is a wake-up call for developers, investors, and regulators. The hidden world of transaction manipulation is no longer just a technical curiosity—it’s a fundamental challenge to the trust, efficiency, and fairness of the next generation of financial markets. Without effective counter-measures and greater transparency, the promise of decentralized finance could be undermined by the very forces it set out to disrupt.
Sources:
