What Are Decentralized Dark Pool Trading Platforms?

Decentralized dark pool trading platforms are trading venues for anonymously trading cryptocurrencies. Exchanges such as Kraken had offered dark pools for cryptocurrency trading. Singapore-based Republic Protocol launched the first decentralized platform for dark pool trading in 2018. 

How Decentralized Dark Pool Trading Platforms Work

The advantage of dark pool trading within cryptocurrency markets is that transactions are anonymous and decentralized. This means the exchange occurs directly between two parties, is anonymous in nature, and is not facilitated by a third-party. Not only is the identity of the traders conducting the transaction not revealed, critical information relating to the tradesuch as the price and volume at certain positionsis not divulged.

In trades involving multiple cryptocurrencies, atomic cross-chain swaps are performed between currency pairs supported by the platform.  

Key Takeaways

  • Decentralized dark pool trading platforms are anonymized trading venues for large trades of cryptocurrencies.
  • Decentralized dark pools are used to shield large trades from causing price slippage in mainstream markets.
  • Decentralized dark pools break down a cryptocurrency order into multiple fragments and match them back again using zero-knowledge proofs.

Dark pool trades have had a limited effect on equity markets because there are caps governing the number of such trades. The cryptocurrency ecosystem is still evolving and the dearth of large institutional investors and liquidity in the space means that decentralized dark pool trades have a fairly limited impact on prices and trading in mainstream crypto markets.

How Do Decentralized Dark Pool Trades Work? 

After an order is received by the platform, it is broken down into fragments. The subsequent process is similar to the Bitcoin mining process. Nodes run multiparty computations and compete with each other to match the most orders and are rewarded with a portion of the overall fee for each match. A zero-knowledge proof is used to verify integrity of the transaction. Order fragments that are matched are recorded in the system and a notification is sent to other nodes regarding the match. Unmatched fragments are reused in matching the next set of orders.