DEFINITION of Decentralized Dark Pool Trading Platforms

Decentralized dark pool trading platforms are anonymized trading venues for trading cryptocurrencies without causing slippage (or significant price movement) in mainstream markets. Several cryptocurrency exchanges, such as Kraken and Bitfinex, offer dark pools for cryptocurrency trading. Singapore-based Republic Protocol launched the first dedicated decentralized platform for dark pool trading in early 2018.

BREAKING DOWN Decentralized Dark Pool Trading Platforms

Dark pools already constitute 15% of all trades in equity markets. The process for trading in dark pools in equity markets is fairly straightforward and involves matching of buyers with sellers followed by an exchange of shares. The unique selling point of dark pool trading within equity markets is that the transactions are anonymous and decentralized. In practical terms, this means that exchanges of cryptocurrencies are not facilitated by third-party providers. Instead the exchanges occur directly between the parties themselves and are anonymous in nature. The latter property means that the identity of traders conducting the transaction and critical information relating to the trade, such as price and volume at certain positions, is not divulged. In trades involving multiple cryptocurrencies, atomic cross-chain swaps are performed between currency pairs supported by the platform.

Dark pool trades have had a limited effect on equity markets because there are caps governing the number of such trades. Decentralized dark pool trades have had an even more limited effect on price movement in cryptocurrency markets due to the dearth of large institutional investors in the space.

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.