A ‘dark pool’ is an ominously sounding term for a private trading forum, which exists outside the boundaries of a public market and provides access to high volumes of liquidity. While over-the-counter (OTC) markets and dark pools have been cast in a very unfavourable light, in reality they do serve a purpose and have been a popular way of execution of large block orders in traditional financial markets. Our recent guests on Epicenter, Taiyang Zhang and Loong Wang, applied the concept of a dark pool to the world of cryptocurrency trading while utilizing the inherent security of the blockchain, by building the Republic Protocol - a decentralized dark pool for crypto assets. Check out the Epicenter episode featuring them and read the key insights below.

Republic Protocol founders Taiyang Zhang and Loong Wang met at the Australia National University and connected through their passion for distributed systems — which eventually led them to blockchain and crypto space. From his experience working at a quant trading firm Taiyang realized that although multiple exchanges process billions of dollars or liquidity everyday, there is a lack of avenues for OTC trades, while many of the crypto hedge funds and large crypto traders are interested in sourcing liquidity from a dark pool in order to secure the best price for their order, just like in a traditional market. That’s how the idea for a dark crypto pool came about.

In the traditional financial markets, dark pools owned by exchanges and broker dealers have been around for 30–35 years. Currently, around 50% of equities volumes is being traded on dark pools. Some criticize them as being antithetical to the views to the views of an open and transparent free market — the issue that most regulators have with the dark pools is that many big banks give priority to customers who pay more which is seen as not fair. According to Taiyang that’s why a decentralized dark pool is very important to ensure that the trading rules are transparent and the same for everyone.

The key components of the protocol include a settlement layer, a hidden orderbook propagated by a P2P network, and an atomic swap mechanism that allows multiple parties to set a transaction. The most important thing for us is that it’s quite counterintutive to develop a decentralized dark pool in which the order book is hidden, yet still everyone owns it, and you are able to match orders that are anonymous until execution, says Taiyang. Republic Protocol uses the Shamir Secret Sharing Scheme to break down orders into a large number of fragments and distributes them throughout the network. Each fragment — a cryptographic encoding of each order — is allocated to the nodes on the network. The nodes can be run by any member of the community that stake a ‘bond’ amounting to 100,000 REN. The nodes engage in an order matching game, comparing them locally without sharing them, and once they reach the end of the computation, a boolean confirming or rejecting a match is revealed.

The trades on Republic Protocol are executed through a fairly new concept of atomic swaps, in which a Hashed TimeLock Contract ensures that the swap process is completely trustless by requiring the recipient of a payment to acknowledge receiving payment prior to a deadline, by generating a cryptographic proof of payment.

Tayaing and Loong considered two adversarial models while developing considering protocol security — adaptive and non-adaptive. The non-adaptive case pertains to a situation in which one person (or a close-knit group of people) try to attack the network upfront. In order to prevent that a threshold on the Shamir Secret Sharing Scheme has been set — unless you have 2/3rd of the pool, it is impossible to reconstruct the order at all. Ren bonds prevent those who are financially bound from attacking the network at scale, and acquiring that much Ren to attack the network would be too expensive. In case of adaptive adversaries, who would collude by sharing fragments with each other to discover the orders, an economic incentive is provided not to reveal fragments — if the fragment is ever revealed, the adversary loses their bond.

In February 2018 Republic Protocol raised 35,000 ETH for its REN token in a public crowdsale backed by lead investors Polychain Capital and FBG, as well as funds including Huobi Capital, Hyperchain Capital and Signal Ventures.

Watch the full episode on Epicenter, and don’t forget to subscribe to the show on iTunes, YouTube & SoundCloud. Drop by our Gitter community channel to discuss the show and leave some feedback!