Original Author: David C, Bankless

Original Title: Demystifying Crypto 'Dark Pools'

Original Translation: Ismay, BlockBeats

Editor's Note: Last night, according to Ember Monitor, the BTC price dropped early this morning, leading to James Wynn being liquidated for 379 BTC at 1 am. He then voluntarily closed his remaining position. According to statistics, James Wynn lost $2.9 million in this long position: he used a total of $3.6 million USDC as collateral, and after the complete liquidation, he had $700,000 remaining. This amount also includes the $225,000 in funds he received from two fundraising tweets. From a profit of $87 million to a current loss of $20.5 million, James Wynn only took two weeks.

This article focuses on the seemingly traditional but increasingly critical trading mechanism known as "dark pools," outlining its current development, technical path, and practical challenges in the crypto field. From Renegade to Penumbra, from CZ's vision to the game of privacy and verifiability, dark pools serve as both a shield against on-chain "hunt-the-stops" game and a redefinition of the boundaries of the crypto spirit. In a time when public chains are increasingly PvP-oriented and institutional funds continue to enter the space, perhaps we have to face a question: Does true decentralization also need a bit of "invisibility"?

The following is the original content:

Last week, the well-known "degen" player James Wynn was liquidated on Hyperliquid, suffering a loss of up to $100 million.

This loss includes 949 bitcoins (approximately $99.3 million) and 9.825 billion kPEPE (approximately $11.6 million), triggered by bitcoin falling below $105,000, which liquidated his long position leveraged 40 times. Interestingly, Wynn does not attribute this solely to bad luck. He firmly believes that he was "targeted."

"One thing is certain, and that is that I exposed the level of corruption in this market," Wynn wrote, claiming that someone deliberately orchestrated a so-called "liquidation hunt" targeting his large on-chain visible position, temporarily pushing the price down to trigger the liquidation, and then quickly rebounding.

Whether or not this accusation is true, this incident has exposed a significant vulnerability of decentralized exchanges: everyone's positions are public. Just like in a game of poker, everyone lays their 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 anyone else's position, then no one can "hunt." By using zero-knowledge proofs to hide the order book, it is possible to protect large traders from targeted attacks while maintaining decentralization.

Below, we quickly outline the origin, pros and cons of dark pools, as well as existing dark pool projects in the crypto space or upcoming solutions.

Origin of Dark Pools

The term "Dark Pool" may sound mysterious, but it is not something new and does not inherently equate to a "black curtain."

As early as the 1980s, dark pools emerged in the traditional financial sector to address a very practical issue: how can institutions execute large stock trades without impacting market prices?

Imagine this: you are a pension fund that needs 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 of your shares. Seeing such a huge sell order, the market may panic-sell or front-run, ultimately causing you to transact at a much lower price than expected.

The U.S. Securities and Exchange Commission (SEC) recognized this issue and in 1979 formally approved the legal status of "Alternative Trading Systems" (ATS). These private exchanges allow institutional investors to match large trades without disclosing orders until after the trade is completed.

By the spring of 2017, dark pools accounted for nearly 40% of U.S. stock market trading, a significant increase from 16% in 2010.

The basic mechanisms of dark pools include:

Order book hiding and private trade matching

Trades priced at a negotiated price or midpoint of bid/ask prices

Trade results disclosed only after completion

Participation limited to institutional investors

These mechanisms ensure the privacy and market stability of large transactions. However, in the cryptocurrency field, replicating this model requires overcoming the challenges of on-chain transparency while finding a balance between "decentralization" and "transaction protection."

Why the Crypto World Needs "Dark Pool Trading" More

If dark pools are already very important in the traditional financial market, then in the cryptocurrency market, their importance will only increase. The extreme transparency of the blockchain, in some scenarios, has become a burden—when every address, every transaction is exposed to the sunlight, and the market is increasingly displaying a "player versus player" (PvP) style of competition, transparency becomes synonymous with vulnerability.

In traditional finance, at least your broker would not make your position public; but in DeFi, your wallet address is your "asset resume," openly transparent and fully visible. This openness has given rise to various "predatory" behaviors:

MEV (Maximal Extractable Value): This is one of the most core issues in current on-chain transactions. Bots listen for pending transactions and use "front-running" to capture the profit that should have belonged to regular users. It's like someone secretly peeking at your cards and then placing a precise bet.

Mirror Trading: Why bother researching strategies yourself when you can simply copy those impressive wallet addresses? This kind of "parasitic" trading behavior squeezes the profit margins of advanced traders, but more and more experts are learning to exploit mirror traders in reverse, using them as their "liquidity exit."

Liquidation Hunting: As demonstrated in the Wynn case, leveraged positions visible on-chain are easy prey. Traders can calculate liquidation prices precisely and collectively create fluctuations to trigger them.

Quote Fading: When a market maker anticipates a large order entering the market, they often withdraw orders and widen the bid-ask spread, causing traders to incur higher costs at the most unfavorable moment.

To address these issues, the crypto dark pools are using a series of privacy protection technologies to create an "invisible" trading system, such as:

Zero-Knowledge Proofs (ZKPs): Allowing users to prove the validity of transactions without revealing specific transaction details.

Multi-Party Computation (MPC): Allowing multiple trade requests to be matched without any party having full control, thus safeguarding privacy.

Trusted Execution Environments (TEEs): Establishing a secure "black box" for transaction execution. For example, Uniswap's L2 network, Unichain, uses TEEs to build blocks, preventing MEV bots from accessing transaction information. Its "Rollup-Boost" system locks transactions in the encrypted memory pool, providing near-dark-pool-like privacy protection for the entire DeFi application.

The ultimate result is: transactions are both private and verifiable, anonymous and auditable—maintaining the blockchain's "trustless" nature while providing true privacy for transactors.

On-Chain "Dark Pool Trading" Practices

Currently, multiple projects are implementing 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 slippage-free trading. The platform facilitates large trades privately without affecting market prices through peer-to-peer matching using Binance's mid-price matching for token trades, preventing front-running and price manipulation.

Silhouette: A privacy trading solution built on Hyperliquid, integrating a hidden order matching system with Hyperliquid's deep liquidity and high-performance infrastructure. Still in development with no timeline for launch yet, a key advantage is the absence of a dedicated wallet, significantly lowering the entry barrier and making privacy trading more accessible.

Penumbra: A new privacy-focused blockchain project in the Cosmos ecosystem, offering dark pool trading for spot markets. It utilizes zero-knowledge proofs to conceal all transactions, balances, staking activities, and even governance processes. Its DEX employs a batch auction mechanism to prevent front-running and uses encryption for comprehensive privacy protection.

sFOX: A U.S.-based crypto trading service targeting institutional investors, offering dark pool services compliant with FinCEN and Wyoming regulations. By accessing liquidity from over 30 exchanges, sFOX provides hidden order functionality to assist institutional users in discreetly executing large trades.

Why Hasn't Dark Pool Trading Become Widespread?

Although dark pools help mitigate issues like MEV, liquidation hunting, and front-running, they remain scarce in the crypto world for three main reasons:

1. Privacy vs. Verifiability Conflict

Ensuring transactions are fair yet not revealing specific details is not straightforward technically. While technologies like ZKP, MPC, and TEE provide a roadmap, actual implementation is far more complex than imagined. Simply "hiding data" is not sufficient; preventing transaction information deduction through indirect means is also crucial. For example, if anyone can query an AMM's price at any time, it ceases to be a true "privacy market."

2. Liquidity Conundrum: Which Came First, the Chicken or the Egg?

For a dark pool to be effective, there must be sufficient trading volume. However, without initial liquidity, traders will not participate. This "cold start" problem is particularly severe in the perpetual contract market, as it has higher requirements for fund depth and real-time trading activity.

3. Trust Paradox and Price Discovery Mechanism Risk

The privacy feature of dark pools brings natural opacity, thereby easily triggering a trust crisis. In the crypto industry, "trust, but verify" is a fundamental motto. If transaction details are not visible, how can one confirm price fairness? Furthermore, dark pools may distort the price discovery mechanism in the public market. Institutions obtain better prices through dark pools, while ordinary users can only trade on the public market with poorer liquidity and greater volatility, forming a de facto "dual-track market."

Traditional finance has already learned from this. For example, Barclays was fined $70 million for falsely representing its dark pool operation, and several institutions, including Credit Suisse, faced penalties for unfair practices in their dark pools.

4. Regulatory Obstacles, Especially Complex

To launch a dark pool supporting perpetual contracts on-chain, not only is there a high technical difficulty, but the compliance challenge is even greater. The combination of derivatives trading, privacy protection technology, and cross-border flow forces project teams to navigate a compliance maze with virtually no ready-made path to follow.

Reflections on the Wynn Event: Transparency is the Foundation of Trust, but It Can Also Be a Weapon

Whether the Wynn liquidation event was truly "hunted" or not, it revealed a core contradiction: we have built an extremely transparent system to achieve "trustlessness," but this very transparency can also be maliciously exploited.

Dark pools provide a path to remedy, but they tread a fine line—protecting privacy while not undermining verifiability and fairness. Projects like Renegade have demonstrated that dark pools in the spot market are viable. Through encryption, they achieve "prove you are honest" without revealing any details.

However, the envisioned "perpetual contract dark pool DEX" by CZ has not been truly realized yet, with only Silhouette currently moving in that direction.

As the crypto industry matures and institutional capital flows into the on-chain market, 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 increasingly necessary in today's landscape.

"Original Article Link"

Welcome to join the official BlockBeats community:

Telegram Subscription Group: https://t.me/theblockbeats

Telegram Discussion Group: https://t.me/BlockBeats_App

Official Twitter Account: https://twitter.com/BlockBeatsAsia