Compared to retail investors, institutional investors often impact the market due to the large volume of their trades. In traditional financial markets, to prevent large trades in commodities, stocks, and forex from significantly influencing market prices, institutional investors typically turn to “dark pools” for assistance.
Unlike public trading markets, a “dark pool” is a more private alternative trading system that allows buyers and sellers to anonymously match trades without immediately disclosing transaction details. This model provides numerous advantages for its primary clientele of institutional investors.
With the rise of decentralized finance (DeFi), the concept of dark pools from traditional finance has also been introduced into crypto markets, especially as the demand for privacy protection and liquidity has surged. The on-chain dark pool sector has seen significant growth. This article provides an overview of the development, advantages, core technology, and challenges facing this sector, along with a brief review of notable blockchain-based dark pool projects.
Dark pools originated in the United States in traditional financial markets as early as the 1980s. At that time, the rise of high-frequency trading, facilitated by high-speed computers, led to a situation where excessively frequent trades within short periods disrupted the normal functioning of the market, causing significant price volatility, including sudden spikes or crashes.
Source: stockprices.com
In response, dark pools emerged as alternative trading systems designed for private transactions. They allow institutional investors or affluent traders to execute large-scale trades (valued at no less than $200,000 or over 10,000 shares) while minimizing their impact on market prices. By keeping transactions anonymous and not disclosing trade information in real time, dark pools offer lower transaction costs.
For institutional investors, the primary advantages of dark pools include the following:
Thanks to these benefits, institutional demand for dark pools has grown steadily. Data shows that over 60 dark pools are registered with the U.S. Securities and Exchange Commission (SEC), including those operated by broker-dealers, agency brokers, or exchanges, as well as those provided by independent operators. In terms of trading volume, dark pool transactions now account for 30-50% of stock trading volume.
Over the past few decades, dark pools have experienced significant growth. This expansion has brought about new trends and heightened scrutiny from the market and regulators.
Firstly, an increasing number of countries are supporting dark pool trading.
Dark pools originated in the United States; in 1986, Instinet launched the first dark pool called “After Hours Cross.” Initially, dark pool trading accounted for only a small portion of the market. In 2007, however, the SEC passed the NMS (National Market System) regulation, which allowed investors to bypass public venues for trading.
As more participants entered dark pool trading, dark pools began to dominate securities markets in the U.S. and Europe, spreading to Asia as well. Singapore announced its dark pool plans in 2009, followed by Hong Kong’s first dark pool trading platform in 2010, and Japan and South Korea also began allowing dark pools.
Secondly, dark pools are shifting from large trades to smaller trades.
Originally, dark pools were designed to conceal large trades to reduce market volatility, and some dark pool platforms even filtered out smaller orders. However, in recent years, as institutions increasingly break large orders into smaller trades to improve liquidity, the average trade size in dark pools has gradually declined to under 150 shares.
Although dark pools are legal and regulated by the SEC, their opaque nature constantly attracts skepticism from the market and regulators.
The most controversial aspect of dark pools is their potential to distort price discovery—the process by which market participants determine an asset’s price through trading. Institutional investors, who generally have access to more information and resources, may influence prices more. Dark pools enable these investors to hide specific trade details before execution, and any post-trade disclosure may be delayed or partial, which can easily lead to misleading information and hinder price discovery.
Additionally, as dark pool trading volumes grow, they draw more liquidity away from public exchanges, potentially increasing transaction costs for retail investors and decreasing market efficiency.
Despite traditional dark pools’ emphasis on privacy, information leakage remains a persistent issue, especially when financial incentives are involved. Dark pool operators are often accused of misusing the dark pool data they control for insider trading. According to The Wall Street Journal, securities regulators have collected over $340 million from dark pool operators since 2011 to resolve various legal charges.
The opacity of dark pools is a “double-edged sword”—it is both their signature feature and the source of significant controversy. Lack of transparency raises concerns among retail investors and complicates regulatory oversight. In 2022, the SEC proposed a regulation requiring dark pool operators to execute market orders in the public secondary market instead of in private markets, except where the dark pool offers a clear price advantage.
Crypto dark pools are similar to dark pools in traditional financial markets; they also match buyers and sellers for large orders while maintaining confidentiality by not making order books public, thus minimizing market impact.
More importantly, crypto dark pools benefit from blockchain’s decentralization. Through smart contract interactions, buyers and sellers can trade without intermediaries, effectively addressing the trust issues in traditional dark pools. For example, decentralized exchanges (DEXs) like Uniswap use automated market maker (AMM) mechanisms to facilitate and match token trades for users.
As the scale of cryptocurrencies continues to expand and more mainstream institutions enter the market, the growing demand for crypto liquidity has significantly driven the development of over-the-counter (OTC) markets, including dark pools.
On the other hand, blockchain’s inherent transparency presents new challenges to maintaining privacy in dark pool transactions.
In the crypto world, users can easily use tools like blockchain explorers to access detailed transaction information. Addresses associated with institutions and large holders (“whales”) are often tagged and tracked, allowing others to attempt trade replication or even engage in MEV (maximal extractable value) attacks, front-running transactions for potential profit.
To address the above challenges, crypto dark pools adopt privacy-enhancing technologies (PETs) such as zero-knowledge proofs (ZKP), secure multi-party computation (MPC), and fully homomorphic encryption (FHE) to build their core technology framework.
Zero-knowledge proofs allow one party (the prover) to prove to another party (the verifier) that a statement is true without revealing any additional information about that statement. In trading scenarios, ZKP can be used to verify that a trader has sufficient balance to complete a transaction without disclosing the exact balance or transaction amount.
Beyond trading, zero-knowledge proofs are widely used in infrastructure, L1/L2 protocols, and various decentralized applications.
Source: Coinbase
Blockchain dark pools, as an emerging trading solution, show great potential in privacy protection and censorship resistance. However, they are not without challenges, such as the lack of clear regulatory frameworks, potential misconduct by mining pool operators and block producers, and balancing blockchain transparency with privacy protection.
With the advancement of decentralized technology, more innovative solutions have emerged, continuously developing and enhancing on-chain dark pool functionality. Here is an introduction to some blockchain dark pool projects for reference.
Source: Delphi Digital
Source: Renegade
Unlike other exchanges, Renegade’s core distinction lies in its state management. All Renegade states are maintained by individual traders rather than having balances and orders kept on a central server or across thousands of distributed servers. This means only users can access their balances or transaction details, effectively safeguarding transaction privacy while minimizing MEV risk.
Founded in 2022, Renegade raised $3.4 million in seed funding in February 2023, led by Dragonfly and Naval Ravikant, with participation from Balaji Srinivasan, Lily Liu, Tarun Chitra, Marc Bhargava, and Lev Livnev.
As an alternative solution, dark pools hold significant importance in traditional financial markets and cryptocurrency. Their existence offers numerous benefits to institutional investors, including privacy protection, reduced market impact, minimized manipulation risks, and lower transaction costs.
Although dark pools face notable challenges, such as regulatory risks and technical complexity, the continued development and refinement of decentralized solutions are expected to provide more privacy options for crypto users and institutional investors while also driving value growth in the entire decentralized finance sector.
References
[1]https://reports.tiger-research.com/p/onchain-darkpool-eng?r=aaog1&utm_campaign=post&utm_medium=email&triedRedirect=true
[2] https://en.wikipedia.org/wiki/Dark_pool
[3] https://foresightnews.pro/article/detail/46245
[4] https://docs.renegade.fi
Compared to retail investors, institutional investors often impact the market due to the large volume of their trades. In traditional financial markets, to prevent large trades in commodities, stocks, and forex from significantly influencing market prices, institutional investors typically turn to “dark pools” for assistance.
Unlike public trading markets, a “dark pool” is a more private alternative trading system that allows buyers and sellers to anonymously match trades without immediately disclosing transaction details. This model provides numerous advantages for its primary clientele of institutional investors.
With the rise of decentralized finance (DeFi), the concept of dark pools from traditional finance has also been introduced into crypto markets, especially as the demand for privacy protection and liquidity has surged. The on-chain dark pool sector has seen significant growth. This article provides an overview of the development, advantages, core technology, and challenges facing this sector, along with a brief review of notable blockchain-based dark pool projects.
Dark pools originated in the United States in traditional financial markets as early as the 1980s. At that time, the rise of high-frequency trading, facilitated by high-speed computers, led to a situation where excessively frequent trades within short periods disrupted the normal functioning of the market, causing significant price volatility, including sudden spikes or crashes.
Source: stockprices.com
In response, dark pools emerged as alternative trading systems designed for private transactions. They allow institutional investors or affluent traders to execute large-scale trades (valued at no less than $200,000 or over 10,000 shares) while minimizing their impact on market prices. By keeping transactions anonymous and not disclosing trade information in real time, dark pools offer lower transaction costs.
For institutional investors, the primary advantages of dark pools include the following:
Thanks to these benefits, institutional demand for dark pools has grown steadily. Data shows that over 60 dark pools are registered with the U.S. Securities and Exchange Commission (SEC), including those operated by broker-dealers, agency brokers, or exchanges, as well as those provided by independent operators. In terms of trading volume, dark pool transactions now account for 30-50% of stock trading volume.
Over the past few decades, dark pools have experienced significant growth. This expansion has brought about new trends and heightened scrutiny from the market and regulators.
Firstly, an increasing number of countries are supporting dark pool trading.
Dark pools originated in the United States; in 1986, Instinet launched the first dark pool called “After Hours Cross.” Initially, dark pool trading accounted for only a small portion of the market. In 2007, however, the SEC passed the NMS (National Market System) regulation, which allowed investors to bypass public venues for trading.
As more participants entered dark pool trading, dark pools began to dominate securities markets in the U.S. and Europe, spreading to Asia as well. Singapore announced its dark pool plans in 2009, followed by Hong Kong’s first dark pool trading platform in 2010, and Japan and South Korea also began allowing dark pools.
Secondly, dark pools are shifting from large trades to smaller trades.
Originally, dark pools were designed to conceal large trades to reduce market volatility, and some dark pool platforms even filtered out smaller orders. However, in recent years, as institutions increasingly break large orders into smaller trades to improve liquidity, the average trade size in dark pools has gradually declined to under 150 shares.
Although dark pools are legal and regulated by the SEC, their opaque nature constantly attracts skepticism from the market and regulators.
The most controversial aspect of dark pools is their potential to distort price discovery—the process by which market participants determine an asset’s price through trading. Institutional investors, who generally have access to more information and resources, may influence prices more. Dark pools enable these investors to hide specific trade details before execution, and any post-trade disclosure may be delayed or partial, which can easily lead to misleading information and hinder price discovery.
Additionally, as dark pool trading volumes grow, they draw more liquidity away from public exchanges, potentially increasing transaction costs for retail investors and decreasing market efficiency.
Despite traditional dark pools’ emphasis on privacy, information leakage remains a persistent issue, especially when financial incentives are involved. Dark pool operators are often accused of misusing the dark pool data they control for insider trading. According to The Wall Street Journal, securities regulators have collected over $340 million from dark pool operators since 2011 to resolve various legal charges.
The opacity of dark pools is a “double-edged sword”—it is both their signature feature and the source of significant controversy. Lack of transparency raises concerns among retail investors and complicates regulatory oversight. In 2022, the SEC proposed a regulation requiring dark pool operators to execute market orders in the public secondary market instead of in private markets, except where the dark pool offers a clear price advantage.
Crypto dark pools are similar to dark pools in traditional financial markets; they also match buyers and sellers for large orders while maintaining confidentiality by not making order books public, thus minimizing market impact.
More importantly, crypto dark pools benefit from blockchain’s decentralization. Through smart contract interactions, buyers and sellers can trade without intermediaries, effectively addressing the trust issues in traditional dark pools. For example, decentralized exchanges (DEXs) like Uniswap use automated market maker (AMM) mechanisms to facilitate and match token trades for users.
As the scale of cryptocurrencies continues to expand and more mainstream institutions enter the market, the growing demand for crypto liquidity has significantly driven the development of over-the-counter (OTC) markets, including dark pools.
On the other hand, blockchain’s inherent transparency presents new challenges to maintaining privacy in dark pool transactions.
In the crypto world, users can easily use tools like blockchain explorers to access detailed transaction information. Addresses associated with institutions and large holders (“whales”) are often tagged and tracked, allowing others to attempt trade replication or even engage in MEV (maximal extractable value) attacks, front-running transactions for potential profit.
To address the above challenges, crypto dark pools adopt privacy-enhancing technologies (PETs) such as zero-knowledge proofs (ZKP), secure multi-party computation (MPC), and fully homomorphic encryption (FHE) to build their core technology framework.
Zero-knowledge proofs allow one party (the prover) to prove to another party (the verifier) that a statement is true without revealing any additional information about that statement. In trading scenarios, ZKP can be used to verify that a trader has sufficient balance to complete a transaction without disclosing the exact balance or transaction amount.
Beyond trading, zero-knowledge proofs are widely used in infrastructure, L1/L2 protocols, and various decentralized applications.
Source: Coinbase
Blockchain dark pools, as an emerging trading solution, show great potential in privacy protection and censorship resistance. However, they are not without challenges, such as the lack of clear regulatory frameworks, potential misconduct by mining pool operators and block producers, and balancing blockchain transparency with privacy protection.
With the advancement of decentralized technology, more innovative solutions have emerged, continuously developing and enhancing on-chain dark pool functionality. Here is an introduction to some blockchain dark pool projects for reference.
Source: Delphi Digital
Source: Renegade
Unlike other exchanges, Renegade’s core distinction lies in its state management. All Renegade states are maintained by individual traders rather than having balances and orders kept on a central server or across thousands of distributed servers. This means only users can access their balances or transaction details, effectively safeguarding transaction privacy while minimizing MEV risk.
Founded in 2022, Renegade raised $3.4 million in seed funding in February 2023, led by Dragonfly and Naval Ravikant, with participation from Balaji Srinivasan, Lily Liu, Tarun Chitra, Marc Bhargava, and Lev Livnev.
As an alternative solution, dark pools hold significant importance in traditional financial markets and cryptocurrency. Their existence offers numerous benefits to institutional investors, including privacy protection, reduced market impact, minimized manipulation risks, and lower transaction costs.
Although dark pools face notable challenges, such as regulatory risks and technical complexity, the continued development and refinement of decentralized solutions are expected to provide more privacy options for crypto users and institutional investors while also driving value growth in the entire decentralized finance sector.
References
[1]https://reports.tiger-research.com/p/onchain-darkpool-eng?r=aaog1&utm_campaign=post&utm_medium=email&triedRedirect=true
[2] https://en.wikipedia.org/wiki/Dark_pool
[3] https://foresightnews.pro/article/detail/46245
[4] https://docs.renegade.fi