Dark pools are discreet and anonymous trading platforms that offer investors the ability to execute large-scale crypto trades without disrupting the public market. Where do dark pools come from? How do they work? What are the most used dark pools in Web3?
What is a dark pool?
A dark pool is a private trading platform which allows investors to execute large transactions anonymously, outside of public markets.
Unlike traditional platforms like Binance where order books are visible and accessible to everyone, Dark pools operate in a stealthy manner, without displaying orders before they are executed..
This opacity allows institutional traders to buy or sell large amounts of cryptocurrencies. without causing significant price movements on public markets.
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The origin of dark pools
Dark pools have their origins in the 1980swithin traditional stock markets. At that time, institutional investors were looking for ways to execute large orders without disrupting the market.
Adapted to the cryptocurrency market, dark pools operate on the same principle, allowing anonymous and large-scale transactions.
However, the technological infrastructure of cryptocurrency dark pools differs, as It often relies on decentralized protocols and advanced cryptographic technologiessuch as zero-knowledge proofs.
The adaptation of dark pools to the world of cryptocurrencies has attracted the interest of traders and institutions looking for both liquidity and confidentiality.
When large crypto transactions are made through a dark pool, They are often fragmented into smaller orders to reduce the potential impact on the market..
This fragmentation helps prevent large buying or selling volumes from triggering significant price movements, which could alarm other investors or cause excessive volatility.
By acting discreetly, Dark pools allow institutional traders to conduct large-scale trades without disrupting the market.thus ensuring a certain stability in the trading process.
The technologies used
To ensure the privacy and security of transactions, crypto dark pools use advanced technologies such as THE secure multiparty computation (MPC) and zero-knowledge proofs (ZKP).
MPC allows multiple parties to calculate a function without revealing their respective data.thus ensuring that transaction details remain confidential even between participants.
For their part, ZKPs allow you to prove that a transaction is valid without disclosing sensitive informationsuch as the identity of the parties or the exact amount of the transaction.
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Types of dark pools in crypto
Centralized dark pools
Centralized dark pools operate on trading platforms where a single entity controls and manages the infrastructure.
Notable examples of centralized cryptocurrency dark pools include sFOX.
On this platform, users have the option to direct their orders to a public order book or to a private dark pool.
The advantage of centralized dark pools is the often greater liquidity and speed of execution. orders thanks to a well-established infrastructure.
However, these dark pools remain under the control of a centralized platform that can impose rules and restrictions, such as identity verification (KYC) or access limits for certain types of users.
Decentralized dark pools
Decentralized dark pools, on the other hand, operate without a central authority, relying on decentralized protocols and the use of smart contracts..
An example of a decentralized dark pool is Ren, which uses advanced mechanisms like atomic swaps and zero-knowledge proofs (ZKP) to enable anonymous transactions between different blockchains.
These dark pools are designed to provide greater privacy and eliminate risks associated with centralization, such as manipulation by a single authority.
Additionally, decentralized dark pools offer increased transparency regarding protocol rules, while ensuring user anonymity and transaction security.
The absence of a central entity also allows for resilience against censorship and gives users complete control over their crypto and transactions, making these platforms particularly attractive to traders looking to maximize privacy and security in their operations.
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What do dark pools bring to the Web3 industry?
Reduced impact on the market
Dark pools play an important role in mitigating crypto price fluctuations caused by massive transactions on public markets.
When an institutional trader executes a large order on a public platform, it can result in significant price movements.potentially causing panic or excessive speculation among other investors.
By using a dark pool, these transactions are conducted discreetly, helping to maintain price stability in the public market.
More favorable prices
Dark pools also offer significant pricing advantages for traders.
By facilitating the efficient matching of orders between buyers and sellers, dark pools can improve price conditions for both parties.
Unlike public platforms where large orders can cause price slippage, cryptocurrency trades in dark pools are often executed at more favorable prices because they are not subject to the same market pressures.
A certain degree of anonymity and security
One of the main attractions of dark pools is the anonymity they offer to institutional traders, especially for the decentralized variant.
Dark pools allow participants to protect their trading strategies by executing transactions anonymously.
Additionally, the use of advanced technologies, such as zero-knowledge proofs (ZKP), enhances the security of transactions, ensuring that sensitive information is never exposed.
The controversies of the author of dark pools in crypto
A lack of transparency
Despite their advantages, Dark pools in crypto are criticized for their lack of transparency, which is one of the foundations of the blockchain industry..
The opacity of these platforms raises concerns, particularly about whether crypto transactions are conducted fairly and whether prices accurately reflect market conditions.
For retail traders, this lack of transparency can create doubts about the integrity of the trading process, potentially leaving them exposed to disadvantages of which they are unaware.
Risks of manipulation
The opacity of dark pools also opens the door to risks of market manipulation..
Since trades are executed out of public view, in a parallel market, it is possible that some players could exploit this discretion to manipulate prices or to take advantage of the ignorance of other participants.
This type of manipulation can compromise market fairness, especially in a decentralized environment like Web3, where trust in trading platforms is essential.
An inequality of information
Dark pools create an inequality of access to information between institutional traders and retail traders.
Large institutions often have access to data and resources that allow them to better understand market dynamics, while individual traders may find themselves at a disadvantage.
This information asymmetry can exacerbate risks for less informed participants.exposing them to less favorable trading conditions and less informed decisions.
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Driven by the design of business models in blockchain projects, I put my expertise in tokenomics at the service of the creators of projects that shape the world of tomorrow. My enthusiasm for sharing ideas and exchanging knowledge is guided by the goal of building an innovative and decentralized future, where blockchain technology is synonymous with progress and sustainable innovation.
Mathilde Michels
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