Original Author: David C, Bankless
Original Title: Demystifying Crypto 'Dark Pools'
Original Translation: Ismay, BlockBeats
Editor's Note: This article explores the seemingly traditional yet increasingly critical trading mechanism of "dark pools," outlining its development status, technological paths, and real-world dilemmas in the crypto space. From Renegade to Penumbra, from CZ's visions to the game of privacy and verifiability, dark pools serve as a shield against on-chain "hunting games" and redefine the boundaries of the crypto spirit. As public chains become more PvP-oriented and institutional funds continue to enter the market, we may have to confront a question: Does true decentralization also require a bit of "invisibility"?
Last week, well-known "degen" player James Wynn faced liquidation on Hyperliquid, suffering losses of up to $100 million.
This loss included 949 bitcoins (approximately $99.3 million) and 9.825 billion kPEPE (approximately $11.6 million), triggered by Bitcoin falling below $105,000, which activated his long position established with 40x leverage. Interestingly, Wynn does not believe this was merely bad luck. He insists he was "targeted."
"One thing is certain: I have exposed the level of corruption in this market," Wynn stated, claiming that someone deliberately created a so-called "liquidation hunt," specifically targeting his large positions visible on-chain, temporarily driving the price down to trigger liquidation, and then quickly pushing it back up.
Whether this accusation is true or not, the incident reveals a significant flaw in decentralized trading: everyone's positions are public. It's like playing poker with all players revealing their hole cards on the table.
After the incident, Binance founder CZ proposed a solution on June 1: to establish a "dark pool perpetual contract DEX."
His logic is simple—if no one can see others' positions, then no one can "hunt." By hiding the order book with zero-knowledge proofs, it can protect large traders from targeted attacks while maintaining decentralization.
Next, we will quickly outline the origins, pros and cons of dark pools, as well as existing dark pool projects or those under development in the crypto space.
The Starting Point of Dark Pools
The term "dark pool" sounds quite mysterious, but it is not a new concept and is not inherently synonymous with "backroom dealings."
As early as the 1980s, dark pools emerged in traditional finance to address a very practical problem: how can institutions complete large stock trades without affecting market prices?
Imagine this: you are a pension fund needing to sell 10 million shares of Apple stock. If you place a sell order directly on the public market, the price may plummet before you finish selling half. The market sees this massive sell order and may panic sell or even front-run, ultimately causing you to execute at a price far below your expectations.
The U.S. Securities and Exchange Commission (SEC) recognized this issue and officially approved the legal status of "Alternative Trading Systems" (ATS) in 1979. These private exchanges allow institutional investors to facilitate large trades without disclosing orders, revealing results to the market only after the trades are completed.
By the spring of 2017, dark pools accounted for nearly 40% of trading in the U.S. stock market, a significant increase from 16% in 2010.
The basic mechanisms of dark pools include:
Order books are hidden, and trades are matched privately.
Trade prices are either negotiated prices or the midpoint of buy and sell prices.
Transaction results are disclosed only after the trade is completed.
Participation is limited to institutional investors.
These mechanisms ensure the privacy of large trades and market stability. However, replicating this model in the cryptocurrency space requires overcoming challenges posed by on-chain transparency while finding a balance between "decentralization" and "trade protection."
Why the Crypto World Needs "Dark Pool Trading" More
If dark pools are already very important in traditional financial markets, their significance will only increase in the cryptocurrency market. The extreme transparency of blockchain can become a burden in certain scenarios—when every address and every transaction is exposed to the light, and the market increasingly exhibits "player versus player" (PvP) competition, transparency means vulnerability.
In traditional finance, at least your broker won't publicly disclose your positions; in DeFi, your wallet address is your "asset history," completely open and transparent. This openness gives rise to various "predatory" behaviors:
MEV (Maximum Extractable Value): This is one of the core issues in current on-chain trading. Bots listen for pending transactions and "front-run" to capture profits that should belong to ordinary users. It's like someone secretly looking at your cards and then betting precisely.
Copy Trading: Why research strategies yourself when you can directly copy the successful wallet addresses? This "parasitic" trading behavior compresses the profit margins of advanced traders, but more and more experts have learned to reverse exploit copy traders as their "exit liquidity."
Liquidation Hunting: As shown in Wynn's case, visible leveraged positions on-chain can easily become prey. Traders can precisely calculate liquidation prices and collectively create volatility to breach them.
Quote Fading: When market makers notice a large order about to enter the market, they often withdraw their quotes and widen the bid-ask spread, causing traders to incur higher costs at the least favorable times.
To address these issues, crypto dark pools are creating "invisible" trading systems through a series of privacy protection technologies, such as:
Zero-Knowledge Proofs (ZKPs): Allow users to prove that a transaction is valid without revealing specific transaction details.
Multi-Party Computation (MPC): Enables multiple trading requests to be matched without any party fully grasping them, thus ensuring privacy.
Trusted Execution Environments (TEEs): Establish a secure "black box" for executing trades. For example, Uniswap's L2 network Unichain uses TEE to build blocks, preventing MEV bots from accessing transaction information. Its "Rollup-Boost" system locks transactions in an encrypted memory pool, providing near-dark pool privacy protection for the entire DeFi application.
The end result is: transactions are both private and verifiable, anonymous yet auditable—while maintaining the blockchain's "trustless" characteristics, providing real privacy protection for traders.
On-Chain "Dark Pool Trading" Practices
Currently, several projects are practicing the concept of dark pools in the crypto space:
Renegade: An MPC (Multi-Party Computation) dark pool DEX built on Arbitrum, focusing on privacy protection and zero slippage trading. The platform uses a peer-to-peer matching mechanism to facilitate token trades at Binance's mid-price, eliminating front-running and price manipulation. This means large trades can be completed privately without affecting market prices.
Silhouette: A privacy trading solution built on Hyperliquid, integrating a hidden order matching system with Hyperliquid's deep liquidity and high-performance infrastructure. It is still under development, with no launch timeline yet, but one of its major advantages is that it does not require a dedicated wallet, significantly lowering the barrier to entry and making privacy trading more accessible.
Penumbra: A new blockchain project focused on privacy within the Cosmos ecosystem, offering dark pool trading features for spot markets. It uses zero-knowledge proofs to hide all transactions, balances, staking activities, and even governance processes. Its DEX employs a batch auction mechanism to prevent front-running and achieves comprehensive privacy protection through encryption.
sFOX: A U.S.-based crypto trading service provider for institutional investors, its dark pool service is regulated by FinCEN and the state of Wyoming. By connecting to liquidity from over 30 exchanges, sFOX provides hidden order functionality, helping institutional users discreetly complete large trades.
Why Dark Pools Are Still Not Widespread?
Although dark pools help resist issues like MEV, liquidation hunting, and front-running, they remain scarce in the crypto world for three main reasons:
1. The Contradiction Between Privacy and Verifiability
Ensuring that trades are fair without revealing specific details is technically challenging. While the aforementioned technologies like ZKP, MPC, and TEE provide direction, actual implementation is far more complex than imagined. Simply "hiding data" is not enough; it must also prevent indirect inference of transaction information. For example, if anyone can query the price of a certain AMM at any time, it is not a true "privacy market."
2. Liquidity Dilemma: Which Came First, the Chicken or the Egg?
For dark pools to function, there must be sufficient trading volume. However, without initial liquidity, traders will not come in. This "cold start" problem is particularly severe in the perpetual contract market, as they have higher requirements for capital depth and real-time trading activity.
3. Trust Paradox and Price Discovery Mechanism Risks
The privacy features of dark pools bring inherent opacity, which can easily lead to trust crises. In the crypto industry, "trust but verify" is a fundamental principle. If transaction details are not visible, how can one confirm price fairness? Furthermore, dark pools may distort the price discovery mechanism of the public market. Institutions may obtain better prices through dark pools, while ordinary users can only trade in the public market with worse liquidity and greater volatility, effectively creating a "dual-track market."
Traditional finance has already seen cautionary tales. For example, Barclays was fined $70 million for falsely representing its dark pool operations, and several institutions, including Credit Suisse, faced penalties for unfair practices within dark pools.
4. Regulatory Barriers Are Particularly Complex
Launching a dark pool that supports perpetual contracts on-chain is not only technically challenging but also poses significant compliance difficulties. The combination of derivatives trading, privacy protection technologies, and cross-border liquidity means that project teams must navigate a compliance maze with almost no ready-made paths to follow.
Reflections on the Wynn Incident: Transparency is the Foundation of Trust, but It Can Also Be a Weapon
Whether or not Wynn's liquidation incident was truly a case of "hunting," it reveals a core contradiction: we have built an extremely transparent system to achieve "trustlessness," but this transparency itself can also be maliciously exploited.
Dark pools offer a repair path, but they tread a fine line—protecting privacy while not undermining verifiability and fairness. Projects like Renegade demonstrate that dark pools for spot markets are feasible. They achieve "proving you are honest" without revealing any details.
However, the "perpetual contract dark pool DEX" envisioned by CZ has yet to be realized, with only Silhouette currently moving in that direction.
As the crypto industry matures and institutional capital floods into on-chain markets, infrastructure must evolve to protect large traders without excluding retail participants. While the technical barriers are high, they are not insurmountable. Dark pools are not a perfect solution, but they are becoming increasingly necessary today.
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