Original Title: : : [Issue] Darker than Black: Web3 Needs Dark Pools
Original Author: @SiwonHuh, Four Pillars
Original Translation: AzumaOdaily Planet Daily
On June 1, CZ posted a tweet about dark pools on X, proposing the establishment of a "dark pool perpetual contract DEX," and pointed out that the transparency of real-time public orders on DEX may actually harm the interests of traders. CZ's topic quickly sparked discussions in the market regarding the privacy and efficiency of cryptocurrency trading, especially the concept of dark pools, which has generated immense interest in the market. In this article, we will systematically analyze the definition of dark pools and their significance in the Web3 space.
What is a Dark Pool?
Dark Pools in Traditional Finance
Although CZ's statement may lead to the misunderstanding that "dark pools are a unique product of Web3," dark pools have actually been private trading platforms that have existed in financial markets for a long time.
The history of dark pools can be traced back to 1979 when the U.S. Securities and Exchange Commission (SEC) allowed certain securities listed on specific trading platforms to be traded on other platforms through Rule 19c-3. Subsequently, the rise of electronic trading and high-frequency trading (HFT) in the 1980s led to a broader exposure of order book information, which created a demand among institutional investors for private trading venues to conduct large trades without public disclosure.
Typically, we encounter public trading platforms like the New York Stock Exchange (NYSE) and NASDAQ, but establishing large buy and sell positions in these public markets can significantly impact market prices and potentially cause unexpected losses for ordinary traders. Dark pools refer to independent trading systems that allow institutions or large investment banks to execute such large trades privately.
In traditional trading platforms, all buy and sell orders are publicly displayed on the order book, while dark pools do not disclose order prices or quantities before execution. With this feature, large institutional investors can hide their trading intentions while minimizing market impact. As of 2025, 51.8% of U.S. stock trading volume is completed through dark pools, indicating that they have evolved from a supplementary trading method to a mainstream trading approach.
This dark pool trading differs from over-the-counter (OTC) trading in cryptocurrencies. Dark pool operators accumulate stocks through short selling and deliver the purchase amount to buyers. Since they need to disclose short selling transaction details to financial regulatory bodies like FINRA, the details and scale of dark pool transactions are actually disclosed, with the distinction being that the identity of the institution initiating the trade is not revealed. Currently, dark pool trading volume is disclosed in the form of the DIX index, and traders typically use this to infer institutional fund flows.
Controversies of Traditional Dark Pools
However, traditional financial market dark pools have long been criticized—because traditional dark pools are managed by centralized operators, they are easily abused when corrupt profits far exceed the costs of penalties, and there have been multiple cases of dark pool crimes in reality.
In 2016, several financial institutions were fined over $150 million for violating federal laws related to dark pool operations, with Barclays and Credit Suisse being sued by the SEC for violating dark pool regulations. The allegations included making false representations to clients about the composition of dark pool participants or providing preferential conditions to high-frequency trading firms without transparent disclosure.
In 2018, Citigroup was fined $12 million by the SEC for misleading investors about dark pool operations. The group leaked confidential order information to high-frequency trading firms, allowing these firms to execute over $9 billion in trades against Citigroup's clients and profit from it. The root of these issues lies in the reliance on trust in centralized operators and conflicts of interest, which is precisely the core pain point that Web3 decentralized dark pool solutions can address.
Innovations of Dark Pools in Web3
The concept of dark pools has also gained attention in the Web3 space, implemented in a more sophisticated and transparent manner than traditional financial market dark pools. Leveraging the fully public nature of blockchain transaction data, Web3 dark pools can utilize cryptographic technologies such as zero-knowledge proofs (ZKP) and secure multi-party computation (MPC) to ensure transaction privacy.
The core advantage of Web3 dark pools is that they can avoid operational risks compared to traditional Web2 dark pools. Since transactions are executed automatically through smart contracts without intermediaries, traders always have complete control over their assets. Additionally, there is no risk of traditional dark pool operators abusing client information, as all transaction processes can be cryptographically verified.
Web3 dark pools also introduce a new paradigm of Programmable Privacy. Developers can independently decide which parts of the application should remain private and which need to be public. For example, they can keep transaction order details private while only disclosing the final transaction results to specific regulatory bodies. This technology, which cannot be achieved by traditional software, has significant advantages in terms of flexibility and verifiability in implementing programmable privacy protocols in Web3.
The Necessity of "Dark Pool Perpetual Contract DEX"
When CZ proposed the need for a "dark pool perpetual contract DEX," he emphasized several issues arising from the transparency of existing DEX. His core arguments and supporting background are as follows.
Preventing MEV Attacks
The transparency of DEX is one of the main incentives for MEV attacks. When DEX orders are made public in the blockchain memory pool, MEV bots can detect and implement frontrunning, backrunning, or sandwich attacks. This leads to traders' final execution prices deviating from expectations, and the slippage of large orders can significantly increase. CZ also cited an example stating, "If you want to execute an order of $1 billion, you would definitely want to complete the trade before the market notices," advocating that dark pools are a necessary solution to such problems.
Growth Potential
CZ pointed out that dark pools have been widely used in traditional financial markets and emphasized that their liquidity can exceed that of public trading platforms by more than ten times. He believes that the cryptocurrency market also needs similar solutions, especially in high-leverage products like perpetual contracts, where protecting traders' privacy is even more critical.
In addition to CZ's arguments, the recent demand for dark pools in the Web3 market has also significantly increased. Research by Blocknative shows that private memory pool transactions on Ethereum accounted for only 4.5% of the total in 2022, but now they account for over 50% of gas fee consumption. Although the Solana network does not have a memory pool mechanism, various trading bots and wallet solutions have made MEV protection features standard, indicating that users' awareness of MEV has significantly increased. This clearly confirms that the Web3 community has realized the impact of trading transparency on outcomes and has developed a proactive demand to avoid it.
Potential Dangers of DEX Transparency
CZ particularly emphasized that the characteristic of "DEX publicly displaying all orders in real-time" can cause serious problems in perpetual contract trading. In perpetual contract DEX, traders' positions and liquidation prices are exposed on-chain, allowing malicious participants to potentially manipulate the market using this information. For example, when other traders identify the liquidation price of a whale, they may deliberately push the market price to trigger forced liquidations. CZ linked this phenomenon to "recent events," seemingly referring to the Hyperliquid HLP liquidation event or James Wynn's large position liquidation case.
A more specific explanation than CZ's tweet can be found in a recent article written by Hashed founder Simon Kim. The article points out that while Web3 promises decentralization and privacy protection, it has actually constructed the most transparent monitoring system in history—where all transactions are permanently recorded, made public to everyone, and subject to AI analysis.
The article specifically illustrates the case of MicroStrategy (now Strategy), stating that even enterprises cannot escape tracking. Despite Michael Saylor's repeated warnings about the risks of publicly disclosing wallet addresses, the blockchain analysis platform Arkham Intelligence has gradually succeeded in tracking 87.5% of the company's Bitcoin holdings.
The article also focuses on James Wynn's over $100 million liquidation event on Hyperliquid, directly pointing to the enormous demand for dark pools. Wynn had built a $1.25 billion long position in Bitcoin with 40x leverage, but because his liquidation price was publicly visible, it attracted targeted attacks from market participants. In fact, one trader continuously took opposite positions against Wynn's position, profiting $17 million within a week. This event not only proves the backlash effect of DEX transparency in perpetual contracts but also indicates a substantial market demand for trading environments that do not expose position information.
Different Implementations of On-Chain Dark Pools
Although many people may have encountered the concept of dark pools for the first time through CZ's tweet, several projects are already advancing the construction of dark pools. Due to the existence of various technical paths to achieve the core goal of "trading privacy," different projects have adopted different cryptographic solutions. Below are the main implementation methods and representative projects.
Renegade
Renegade is currently one of the most关注的 on-chain dark pool projects, deployed on the Arbitrum mainnet, aiming to build privacy solutions by combining secure multi-party computation (MPC) and zero-knowledge proofs (ZKP).
In Renegade, all states (balances, order books, etc.) are managed locally by traders, without relying on centralized or distributed servers. Transaction execution requires knowledge of both the new and old wallet states and submitting three pieces of information to the smart contract: commitment, nullifier, and validity proof. This structure is similar to ZK projects like Zcash.
The core feature of Renegade is to ensure complete privacy before and after transactions: hiding order details (price, quantity, direction, etc.) before the transaction, and only the counterparty knowing the asset exchange situation after the transaction. All transactions are executed at Binance's real-time midpoint price, with no slippage or price impact, making this Web2-like experience highly attractive.
In the architecture of Renegade, multiple independent relayers continuously execute MPC through a P2P network. During the MPC process, Renegade proves a special NP proposition called "VALID MATCH MPC," verifying that both parties in the transaction indeed possess valid input orders. Through this collaborative zero-knowledge proof structure, it provides users with complete anonymity, privacy, and security.
Arcium
Arcium is a privacy project in the Solana ecosystem that implements "encrypted shared state" using MPC technology based on additive secret sharing. Developers can use this to store encrypted states on-chain and perform computations without exposing the original data. This solution supports non-interactive local addition operations and single-round communication multiplication operations while maintaining strong security.
Arcium also introduces programmable privacy, allowing developers to specify which states need to be stored encrypted and which functions should perform computations on the encrypted states within Solana programs. The MPC tasks of Arcium are managed by a virtual execution environment called MXE, which is responsible for setting parameters such as data, programs, and computation nodes. This architecture supports large-scale parallel transaction processing similar to Solana. Recently, Arcium successfully deployed a dark pool demonstration version on the Solana testnet, becoming the first confidential trading venue on that chain. Any Solana DeFi team can build a dark pool based on Arcium to provide users with privacy trading services.
Aztec
Aztec is an Ethereum privacy-focused ZK-Rollup solution that completed a $100 million Series B funding round led by a16z crypto in 2022, making it one of the largest projects in the privacy technology field in terms of single investment. Similar to Arcium, Aztec allows developers to annotate private functions—annotated functions execute locally on the user's device and generate proofs, while only public functions execute on the Aztec network. The state values of private functions are stored in UTXO form, and only the owner can decrypt them, ensuring that no one can read them except the user.
Aztec has collaborated with Ren Protocol to develop a privacy exchange protocol based on dark pools, where transactions are conducted using ZK tokens called Aztec Notes, and the order book does not disclose any transaction information. After users deposit, Aztec creates cash-like encrypted vouchers through an off-chain UTXO system, and when transactions are executed, the state tree updates the encrypted message, with only the owner able to view the voucher content, fully protecting the user's identity and balance.
Challenges and Opportunities of Dark Pools
The biggest technical challenge facing Web3 dark pools is scalability and performance issues. Current MPC and ZKP technologies are computationally intensive, and there are still limitations in handling large transaction volumes. Taking Renegade as an example, its P2P network structure can lead to exponentially increasing complexity as the number of participants grows.
Additionally, there is a certain trade-off between the privacy and scalability of dark pools. Aztec co-founder Zac Williamson once pointed out: "Transactions with complete privacy contain more data because everything needs to be encrypted. This consumes more resources, thereby reducing scalability." To overcome these fundamental limitations, more efficient cryptographic algorithm libraries need to be developed.
Network stability is also an important challenge. Recently, when Arcium tested its dark pool demonstration application based on its testnet on Solana Devnet, some nodes crashed due to high traffic, leading to order queue backlogs. This test was intended to verify infrastructure stability and resolve issues before going live on the mainnet, and the faults were quickly fixed. This indicates that implementing dark pools requires precise technology and thorough testing to meet high-load demands.
In the long term, dark pools are expected to become an important component of the cryptocurrency trading ecosystem. Considering that CZ mentioned dark pool trading volume accounting for over 50% in traditional finance, a similar proportion may be reached in the crypto market. As institutional investors accelerate their entry, this trend will become more pronounced.
This does not mean that existing DEXs will be completely replaced; rather, the two are more likely to form a complementary relationship—small transactions important for price discovery will occur on existing DEXs, while large transactions with strong privacy needs will be completed in dark pools. The development of dark pools will also extend beyond the privacy domain. As explored by Arcium, the demand for privacy protection technology is growing in areas such as AI, DePIN, and supply chain management. As the starting point of the privacy revolution, dark pools are expected to develop into a core component of the privacy ecosystem.
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