It was just a matter of time until it happened. Dark pools, known for their anonymous transactions, are making an appearance in cryptocurrency markets.
Republic Protocol, which touts itself as a decentralized dark pool for atomic trading of bitcoin, ether, and ERC20 tokens, has received 35,000 ether ($33.8 million) from crypto hedge funds to establish a dark pool trading platform, according to a WSJ story. (For further information, see An Introduction To Dark Pools.)
Over time, the number of dark pools in bitcoin trading has increased. For example, in 2015, San Francisco-based bitcoin exchange Kraken started providing a dark pool trading service to consumers for an additional cost.
Customers may also get comparable services from Bitfinex. In 2016, broker-dealer TradeZero collaborated with Bitcoin pioneer Jered Kenna to establish a dark pool trading service.
Are Crypto Dark Pools Different From Standard Dark Pools?
Dark pools’ principal role is to allow huge investors to trade with one another outside of normal exchanges. This prevents slippage, which is the cascading impact of a huge sell or buy order that has been made public. The disadvantage of dark pools is that huge transactions go unnoticed and, when revealed, might trigger flash crashes.
Dark pools are also used in the cryptocurrency industry to facilitate transactions between major institutional investors who would otherwise have to look for a buyer. As a result, liquidity at exchanges is boosted.
Cryptocurrency dark pools vary from its equity equivalents in two ways.
First, they need cross-chain transactions, or transactions across various digital currency blockchains. To facilitate trading between cryptos, most exchanges provide pairings for dark pool buy and sell orders. According to Republic’s whitepaper, it will provide cross-chain atomic swaps, which are direct exchanges between several cryptos in its dark pool.
Second, the implementation of dark pool instructions differs, at least in Republic’s instance. Instead of matching buy and sell orders directly, Republic’s system employs a matching engine that use the multiparty computation (MPC) protocol. It divides a huge order into multiple smaller orders, which are then linked to purchasers and rebuilt using identifying information.
Order fragmentation provides security and anonymity. The overall liquidity of the dark pool, according to the whitepaper of Republic Protocol, cannot be “fairly calculated” by any pool member.
Will Crypto Dark Pools Affect Currency Prices?
In 2016, around 40% of all stock trading occurred outside of licensed exchanges. In December 2017, dark pools accounted for around one-quarter of the total 38 percent of such trade. However, the impact of such transactions on stock market movements has been restricted since there are limits on the number and scope of trades that may take place inside dark pools.
Taiyang Zhang, Republic Protocol’s 21-year-old creator, said in the WSJ report that he expects his dark pool to account for $9 billion in cryptocurrency trading on a monthly basis. To put this in perspective, bitcoin has seen trade volumes of more over $10 billion in the previous 24 hours. (Also see: Should You Be Concerned About Dark Pool Liquidity?)
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is very dangerous and speculative, and this article is not a suggestion by Investopedia or the author to do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site. The author holds a minor quantity of bitcoin as of the day this article was published.
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