A dark pool is a private venue facilitating the exchange of financial instruments. It differs from a public exchange in that there is no visible order book, and trades are not publicly visible (or only become visible once they already have been executed).
Liquidity on dark pool markets is called dark pool liquidity. A majority of dark pool trading is done in block trades. A block trade is a transaction of a large quantity of an asset at a predetermined price.
Dark pools first emerged in the 1980s and have mostly been used by institutional investors who trade large numbers of securities.
Using dark pools allows institutions to place orders and make trades without publicly revealing their intentions first. This is a useful trait, as their intentions to buy or sell large amounts of an asset could have a detrimental effect on their trade before they have a chance to execute it.
Dark pools have grown to be a sizable part of the global equity markets, and this article will examine their potential impact on the cryptocurrency space.
Similar to dark pools in the traditional equity markets, dark pools for trading cryptocurrencies are available in some trading platforms.
Compared to regular dark pools, decentralized dark pools can have the advantage of more secure digital verification methods. Decentralized dark pool protocols could maintain a fair market price for all participants without the possibility of price manipulation.
In trades involving multiple blockchains, cross-chain atomic swaps could be used to facilitate the trades without the need for an intermediary.
Decentralized dark pools could also employ other novel cryptographic technologies such as zero-knowledge proofs to verify the integrity of dark pool transactions.
Dark pools can also be useful in illiquid cryptocurrency markets, as they allow traders to execute larger trades with no slippage. While a sizable order could have a considerable impact on an illiquid market, the same trade can be executed in a dark pool without slippage.
Due to the lack of institutional traders in the cryptocurrency space, dark pools have had a minor effect on cryptocurrency markets, but that might change in the future.
Due to the complete lack of transparency, dark pools have been a topic of controversy since their existence. Concealing a majority of the trading volume is not a desirable property when it comes to any market.
With the recent developments in cryptographic verification methods, the process of using dark pools could become safer. Open-source protocols can be built in a way that verifiably maintains the same rules for every participant, which reduces the risk of using a dark pool.
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