It was only a matter of time. Dark pools, which are notorious for their anonymous transactions, are making their presence felt in cryptocurrency markets.
According to a WSJ report, Republic Protocol, which describes itself as a decentralized dark pool for atomic trading of bitcoin, ether, and ERC20 tokens, has raised 35,000 ether ($33.8 million) from crypto hedge funds to develop a dark pool trading platform. (See also: An Introduction To Dark Pools.)
The number of dark pools in cryptocurrency trading has grown over the years. For example, San Francisco-based cryptocurrency exchange Kraken began offering a dark pool trading facility for an extra fee to customers in 2015.
Bitfinex also offers similar services to customers. Broker-dealer TradeZero launched a dark pool trading facility in partnership with Bitcoin pioneer Jered Kenna in 2016.
Are Crypto Dark Pools Different From Standard Dark Pools?
The primary function of dark pools is to enable large investors to trade with each other outside standard exchanges. This ensures that slippage, which is the cascading effect of a large sell or buy order made public, is avoided. The flip side of dark pools is that large transactions go unreported and can cause flash crashes when they are disclosed.
Within the cryptocurrency ecosystem, dark pools also serve as places for trades between large institutional investors, who would otherwise have to undertake a search for a buyer. In turn, this helps buoy up liquidity at exchanges.
There are two ways in which cryptocurrency dark pools differ from their equities counterparts.
First, they require cross-chain transactions, or transactions between multiple blockchains of digital currencies. Most exchanges offer pairings for dark pool buy and sell orders to enable trading between cryptos. Republic’s whitepaper claims that it will offer cross-chain atomic swaps, meaning direct trades between multiple cryptos on its dark pool.
Second, the execution of dark pool orders, at least in Republic’s case, is different. Instead of a direct matching between buy and sell orders, Republic’s system uses a matching engine that uses the multiparty computation (MPC) protocol. It breaks down a large order into several smaller orders that are then connected to buyers and, subsequently, reconstructed through identifying information.
The fragmentation of orders ensures security and anonymity. According to Republic Protocol’s whitepaper, the total liquidity of the dark pool cannot be “reasonably estimated” by any participant of the pool.
Will Crypto Dark Pools Affect Currency Prices?
Approximately 40 percent of all trading in stocks was away from regulated exchanges in 2016. In December 2017, dark pools accounted for about one-quarter of the 38 percent overall of such trading. But such transactions have had limited effect on stock market movements because there are caps governing the amount and extent of trades that can take place within dark pools.
In the WSJ piece, Taiyang Zhang, Republic Protocol’s 21-year-old founder, said he expects his dark pool to account for $9 billion worth of trading in cryptocurrencies on a monthly basis. For context, bitcoin itself racked up trading volumes of more than $10 billion within the last 24 hours. (See also: Should You Be Afraid Of Dark Pool Liquidity?)
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