Original Title: [Issue] Darker than Black: Web3 Needs Dark Pools

Original Author: @SiwonHuh, Four Pillars

Original Translation: AzumaOdaily Planet Daily

On June 1st, CZ posted a tweet on X about dark pools, proposing the creation of a "Dark Pool-based Perpetual Contract DEX," and pointing out that the real-time transparency of DEX orders may actually harm traders' interests. CZ's proposal quickly sparked a market discussion on the privacy and efficiency of cryptocurrency trading, with the concept of dark pools particularly piquing the market's interest. 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

While CZ's wording may have led to the misconception that "dark pools are a Web3-specific product," dark pools are actually private trading platforms that have long existed in the financial markets.

The history of dark pools can be traced back to 1979 when the U.S. Securities and Exchange Commission (SEC) passed Rule 19c-3, allowing securities listed on certain trading platforms to be traded on other platforms. The rise of High-Frequency Trading (HFT) in the 1980s based on electronic trading exposed order book information more widely than before, leading institutional investors to demand private trading venues for undisclosed large transactions.

While we are mainly familiar with public trading platforms such as the NYSE and Nasdaq, establishing large buy or sell positions in these public markets can significantly impact market prices and potentially cause unexpected losses to ordinary traders. A dark pool refers to an independent trading system where institutions or large investment banks can privately execute such large block trades.

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 conceal their trading intentions while minimizing market impact. By 2025, 51.8% of U.S. stock trading volume is completed through dark pools, indicating that it has evolved from a supplementary trading method to a mainstream trading approach.

This type of dark pool trading differs from cryptocurrency over-the-counter (OTC) trading. Dark pools operate by accumulating stocks through short selling to deliver to the buyer, and since they need to disclose short-selling transaction details to financial regulatory bodies like FINRA, the details and scale of dark pool trades are actually disclosed. The distinction lies in not revealing the identity of the institution initiating the trade directly. The current dark pool trading volume is disclosed in the form of the DIX index, and traders usually use this information to speculate on institutional fund flows.

Controversy Surrounding Traditional Dark Pools

However, traditional dark pools in the conventional financial markets have long been criticized—due to being managed by centralized operators, traditional dark pools are highly susceptible to abuse when corrupt gains far exceed the cost of fines, and real-world dark pool crime cases have already occurred.

In 2016, several financial institutions were fined over $150 million for violating federal laws in dark pool operations, with Barclays and Credit Suisse being sued by the SEC for breaching dark pool regulatory rules. The charges included making false statements to clients about dark pool participants or providing preferential terms 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 disclosed confidential order information to high-frequency trading firms, allowing these companies to execute over $9 billion in trades against Citigroup clients and profit from them. The root of these issues lies in trust in centralized operators and conflicts of interest, which are the core pain points that a Web3 decentralized dark pool solution can address.

Innovation in Dark Pools in the Web3 Space

The concept of dark pools has also garnered attention in the Web3 space and been achieved in a more sophisticated and transparent form compared to traditional financial market dark pools. Based on the public nature of blockchain transaction data, Web3 dark pools can utilize cryptographic technologies such as zero-knowledge proofs (ZKP) and secure multiparty computation (MPC) to ensure transaction privacy.

The core advantage of Web3 dark pools is that they can mitigate operational risks compared to Web2 traditional dark pools. Since transactions are automatically executed through smart contracts, there are no intermediaries, and traders always have full control of their assets. There is also no risk of traditional dark pool operators abusing client information, and all transaction processes can be cryptographically verified.

Web3 dark pools also introduce a new paradigm of programmable privacy. Developers can autonomously decide which parts of the application should remain private and which should be public. For example, while maintaining the privacy of transaction orders, only the final transaction results are disclosed to specific regulators. While this technology may not be achievable with traditional software, Web3 technology has a relatively significant advantage in terms of the flexibility and verifiability of implementing programmable privacy protocols.

The Necessity of a "Dark Pool-based Perpetual Contract DEX"

When CZ proposed the need for a "Dark Pool-based Perpetual Contract DEX," he specifically pointed out several issues stemming from the transparency of existing DEXs. The core argument and supporting background are as follows.

Preventing MEV Attacks

The transparency of DEXs is a major factor contributing to MEV attacks. When DEX orders are publicly broadcasted in the blockchain mempool, MEV bots detect and execute various strategies such as frontrunning, backrunning, or sandwich attacks. This results in traders experiencing prices different from their expectations, with significant slippage on large orders. CZ also gave an example stating, "If you want to execute a $1 billion order, you definitely want to complete the trade before the market notices," advocating that a dark pool is a necessary solution to such issues.

Growth Potential

CZ pointed out that dark pools are widely used in traditional financial markets and emphasized that their liquidity can exceed that of public trading platforms by more than 10 times. He believes that the cryptocurrency market also needs similar solutions, especially in high-leverage products like perpetual contracts, where trader privacy protection is crucial.

In addition to CZ's arguments, the recent demand for dark pools in the Web3 market has significantly increased. Blocknative research shows that in 2022, Ethereum private mempool transactions accounted for only 4.5% of the total volume, but now represent more than 50% of gas fee consumption. Although the Solana network does not have a mempool mechanism, various trading bots and wallet solutions have made MEV protection a standard feature, indicating a significant increase in user awareness of MEV. This clearly demonstrates that the Web3 community has realized the impact of transaction transparency on outcomes and has generated a demand for proactive avoidance.

The Potential Harm of DEX Transparency

CZ particularly emphasized that the feature of "DEX real-time public display of all orders" would cause serious issues in perpetual contract trading. In perpetual contract DEXs, traders' positions and liquidation prices are both exposed on-chain, allowing malicious actors to potentially manipulate the market using this information. For example, when other traders identify a whale's liquidation price, they may deliberately move the market price to trigger forced liquidation. CZ linked this phenomenon to "recent events," likely referring to the Hyperliquid HLP liquidation event or James Wynn's large position liquidation case.

A more detailed explanation than CZ's tweet can be found in an article recently written by Hashed founder Simon Kim. The article points out that while Web3 promises decentralization and privacy protection, it has actually built the most transparent surveillance system in history—where all transactions are permanently recorded, publicly available to everyone, and subject to AI analysis.

The article specifically used the MicroStrategy (now Strategy) case as an example, showing that even corporations cannot escape tracking. Despite Michael Saylor's repeated warnings about the risks of disclosing a public wallet address, the blockchain analysis platform Arkham Intelligence was still able to successfully trace 87.5% of the company's Bitcoin holdings.

The article also focused on James Wynn's billion-dollar liquidation event on Hyperliquid, highlighting the significant demand for dark pools. Wynn had taken a 40x leveraged long position of $1.25 billion in Bitcoin, but because his liquidation price was publicly visible, it attracted targeted attacks from market participants. In fact, a trader continually took opposite positions to Wynn's and made a profit of $17 million within a week. This event not only demonstrated the backlash effect of perpetual contract DEX transparency but also indicated a strong market demand for a trading environment that does not expose position information.

Different Implementations of On-Chain Dark Pools

While many may have been introduced to the concept of dark pools for the first time through CZ's tweet, several projects have been advancing dark pool development. Due to the various technical paths available to achieve the core goal of "transaction privacy" in dark pools, different projects have adopted different cryptographic schemes. Here are the main implementation methods and representative projects.

Renegade

Renegade is one of the most prominent on-chain dark pool projects currently. The project is deployed on the Arbitrum mainnet and aims to build a privacy solution by combining Secure Multi-Party Computation (MPC) with Zero-Knowledge Proofs (ZKP).

In Renegade, all states (balances, order books, etc.) are managed locally by traders and do not rely on centralization or distributed servers. Transaction execution requires knowledge of both old and new wallet states and the submission of 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 full privacy before and after transactions: hiding order details before the transaction (price, quantity, direction, etc.), and after the transaction, only the counterparty is aware of the asset exchange details. All transactions are executed at the Binance real-time mid-market price, without slippage or price impact, providing a Web2-like experience that is highly appealing.

In Renegade's architecture, multiple independent relays continuously perform MPC via a P2P network. During the MPC process, Renegade proves a special NP proposition called "VALID MATCH MPC" to verify that both transacting parties indeed hold valid input orders. Through this collaborative zero-knowledge proof structure, Renegade provides users with complete anonymity, privacy, and security.

Arcium

Arcium is a privacy project in the Solana ecosystem that uses MPC technology based on additive secret sharing to achieve "encrypted shared state." Developers can leverage this to store encrypted state 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 should be stored encrypted in a Solana program and which functions should operate on the encrypted state. Arcium's MPC tasks are managed by a virtual execution environment called MXE, responsible for setting parameters such as data, programs, and computing nodes. This architecture supports large-scale parallel transaction processing similar to Solana. Recently, Arcium has successfully deployed a dark pool demo version on the Solana testnet, becoming the first confidential trading venue on the chain. Any Solana DeFi team can build a dark pool based on Arcium to provide users with privacy transaction services.

Aztec

Aztec is an Ethereum privacy-centric ZK-Rollup solution. In 2022, it completed a $100 million Series B funding round led by a16z crypto, making it one of the largest single investments in the field of privacy technology. Similar to Arcium, Aztec allows developers to annotate private functions—annotated functions are executed locally on the user's device and generate proofs, while only public functions are executed on the Aztec network. The state values of private functions are stored in UTXO form, decryptable only by the owner, ensuring that no one else can read them except the user.

Aztec has collaborated with Ren Protocol to develop a dark pool-based privacy exchange protocol. Its system conducts transactions using ZK tokens called Aztec Notes, where the order book does not disclose any transaction information. After users deposit funds, Aztec creates cash-like encrypted vouchers through an off-chain UTXO system, updating the state tree with encrypted messages during transaction execution. Only the owner can view the voucher contents, fully protecting user identity and balance.

The Challenge and Opportunity of Dark Pools

The primary technical challenge facing Web3 dark pools is scalability and performance issues. Current MPC and ZKP technologies are computation-intensive, and they still have limitations in processing large-scale transaction volumes. For example, in the case of Renegade, its P2P network structure experiences an exponential increase in complexity as the number of participants grows.

Additionally, there exists a trade-off between the privacy and scalability of dark pools. Zac Williamson, Co-founder of Aztec, has pointed out: "Fully private transactions contain more data because all content 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 a significant challenge. In a recent test by Arcium on the Solana Devnet of their dark pool demo application based on their testnet, some nodes crashed due to high traffic, resulting in an order queue backlog. This test was intended to validate infrastructure stability and address issues before the mainnet launch, and the issue was swiftly resolved. This indicates that implementing dark pools requires precision engineering and thorough testing to handle high-demand scenarios.

In the long run, dark pools are poised to become a vital part of the cryptocurrency trading ecosystem. Considering CZ's mention that dark pool trading volume in traditional finance exceeds 50%, a similar proportion may be reached in the crypto market. With the acceleration of institutional investor involvement, this trend will become more pronounced.

This does not mean that existing DEXes will be completely replaced; instead, they are more likely to form a complementary relationship in terms of demand—price discovery for crucial small transactions will occur on existing DEXes, while large transactions with strong privacy requirements will take place in dark pools. The development of dark pools will also extend beyond the realm of privacy. As explored by Arcium, the demand for privacy-preserving technologies 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 evolve into a core part of the privacy ecosystem.

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