Hello everyone. I welcome you all in the last week of season 5. This week, professor @fredquantum has taught us "Dark pool in crypto currency". This is my homework post.
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Question 1.) Discuss Dark Pools in Cryptocurrency in your own words. How does dark pool works?
The concept of crypto currency came into existence in 2008 with the invention of the bitcoin. The crypto currencies are getting popularity very rapidly all across the world because of their decentralized nature. The crypto currencies enable the users to perform the transactions without the involvement of the third party. The transactions are P-2-P and anonymous.
But a lot of the developments are made time to time to enhance the security of the crypto currencies. For this purpose, a lot of the new concepts has been introduced. One among such concept is "Dark Pool" which has been introduced to provide high level of security.
The dark pool concept was introduced to world in 1980s. Dark pool refer to the private platform which are used to perform the financial exchange that are not available to all the general public.
The dark pools are the private exchanges which allow the big investors and the whales to perform the trading on the big amount. The dark pools were introduced for the big investors who do not want to effect the market and the general public's trading decision by their large sell or buy orders.
The big investors set the limit order in the dark pool. The limit order are those orders which are placed at the planned and intended price decided by the traders. There is no risk of slippage. The orders are executed at the pre determined prices. The big traders place the limit orders on their high amount of asset on the dark pool. The order is executed when price reach to their predetermined level.
The dark pool keep the investors and whales identities and intention hidden from the common public. In the open exchange market, the limit order are visible to all general public on the public order book. Thus the users can make the trading decisions by following the footsteps of the whales or big investor's limit orders.
But in dark pool, the limit orders are not visible to the general public. The order book is keep hidden of the exchange. So the common public cannot get to know about the intention and plans of the whales. They cannot follow them. And thus their trading decisions do not effect the market and planning of the whales. Then the market move in the favor of whale and their limit orders executed when the price reach to the predetermined level. So the investors can perform the trading secretly and anonymously.
In the dark pool, no one is able to see the order book of other. The order book keep hidden and orders are executed at the predetermined price. So there is no risk of slippage.
The large orders are executed through the blockchain trading. The large amount of the assets are being traded without effecting the whole market of the assets at the time or placing the limit order. Because the general public cannot see the order book. They cannot make the trading decisions then according to that. Thus the market is not effected. In the dark pool, the orders who have the same predetermined prices get matched.
- The dark pool s are used to perform the trading of big amount of assets privately at the predetermined prices.
- Trading in the dark pool is known as Block trading
- The transaction can be completed at the planned and decided price so there is no risk of the slippage
- On the dark pool, the traders get the more best trades and deals as compare to the common open exchange platforms.
- There are more chances of the prices of the coins to rise up because here the traders get the best trades.
- The identities of the big stock holders are always keep hidden.
- The whales or big stock holders can perform the transaction of big amount of the assets without letting the general public know about it.
Question 2. Discuss any crypto exchange that offers a dark pool. How does its dark pool work?
Kraken is a very popular and well known exchange platform which offer the service of the dark pool. This exchange has been introduced in the 2011. This is the first ever exchange which provided the dark pool service in 2016. The main purpose behind invention of the kraken dark pool was to facilitate the traders who want to perform the trading of the big amount of the assets without being effected by the slippage.
The kraken started supporting the dark pool to decrease the impact of the large trades on the general market. Initially, the kraken launched an Ethereum dark pool only but now it has also been introduced the bitcoin dark pool.
The order book is not visible to the traders. Traders cannot get the current prices of the assets and this they cannot place the market orders. Thus the slippage has been reduced.
The traders are allowed to place the limit orders on the kraken dark pool. The traders place the limit order at their own predetermined price. The order book of the exchange keep hidden from the general public. No one is able to see the order book of others. Those order then get matched through the cross trading with the other limit order of the same price.
The trading fees is same for the the trading pairs, the order book keep confidential so the whales and the big stock holders keep hidden. When we visit the kraken dark pool website, we get to know about this dark pool thoroughly But currently, it is not available.
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Question 3. What are the supported assets on the dark pool mentioned in (2) above? What are the requirements for getting involved in dark pool trading on the platform? Is there any fee attracted? Explain.
As i mentioned earlier, Initially, the kraken launched an Ethereum dark pool only but now it has also been introduced the bitcoin dark pool. We have the some pairs of the BTC and ETH on the dark pools. One is ETH/BTC. Others are the following
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Ethereum
The Assets which are currently supporting with ETH pair on the kraken dark pools are;
- ETH/EUR
- ETH/USD
- ETH/JPY
- ETH/CAD
- ETH/GBP
Bitcoin
The Assets which are currently supporting with BTC pair on the kraken dark pools are
- BTC/EUR
- BTC/USD
- BTC/JPY
- BTC/CAD
- BTC/GBP
There are some requirements and rules which need to fulfilled in order to get involved in the dark pool trading on the kraken platform. These rules are as follow
- First of all, only the limit orders are available. the users are allowed to place only the limit orders on the kraken dark pool. The market orders are not allowed.
- Second is, only those users are allowed to perform the trading on the kraken dark pool who have achieved the Pro Level verification
- The minimum amount which is required for the BTC pair order on the kraken dark pool is approximately $100,000.
- The minimum amount which is required for the ETH pair order on the kraken dark pool is approximately $50,000.
The trading fee on the kraken dark pool is usually depend upon the last 30 days trading volume. The more the trading volume on the kraken dark pool, the less the fee they will perform on exchange. Dark Pool orders have trading fees ranging from 0.20% to 0.36%.
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Question 4. For the chosen dark pool, give a brief illustration of how to perform block trading on the platform. (Screenshots required).
- First of all, go to the kraken platform and click on the create account. If you already have account, then click on the login button. I didn't have the account, i will firstly create the account.
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- I entered my name, email, password, accept the term of privacy policy and then click on the create account button.
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- Then i got a verification code on email. I pasted the code over here.
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- Click on trade button
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- A new page will be appeared. Click on the Advanced section.
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- Then search for your pair of the dark pool
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- Now fill the field. Enter the required information and place your order.
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Question 5. What's your understanding of the Decentralized dark pool? What do you understand by Zero-Knowledge Proofs?
The decentralized exchanges are those where the transactions are performed directly without the involvement of the third party. The decentralized dark pools are those exchanges which allow the traders to perform the transaction privately of the big amount of the assets without the interference of any middle man or any third party. There is no one to get to know about the orders of the whales and the big stock holders
The whales can placed the limit orders and those orders are executed very secretly without getting visible to general public and even the intermediate party. The facilitators or also not even to watch the order book. The order book keep hidden from the common public and the intermediate party too.
The decentralized dark pools are more secured as compare to the centralized dark pools. There is no involvement of the third party in the transaction execution. Here the Atomic Swap functions are being used to perform the trade of the illiquid pair of the asset. The trading is done between the two p[arties without the involvement of any third person or the intermediate party. The slippage is reduce here because the orders are being executed on the predetermined prices.
The working of the decentralized dark pool is very simple and interesting. Here the big orders, after getting placed, are getting broken into the small pieces which later get compared and matched with the available orders in the dark pool network. The piece of the order which get match with any node is recorded. That node is rewarded.
The remaining nodes continuous to compare and match with the nodes unless and until the order is completed. The decentralized dark pools use the Zero-Knowledge Proof.
Zero Knowledge Proof is use in the decentralized dark pools for the verification of integrity of the transaction. It was introduced in 1985 to provide high level of authentication. This is an encryption protocol which make the communication system very secure, private and authentic. It is use to verify that either a piece of the information is true or not without revealing it. This prove that a piece of information is true but cannot reveal that piece of information.
The Zero knowledge proof is very secure way to perform the transactions in the decentralized dark pool. Here the users can perform the transaction of big amount and volume without revealing the volume, price or any other detail. The nodes who here match the piece of the order do their job without having any knowledge of the transaction and order.
Here two parties are involved in the Zero knowledge proof. One is the prover and other is verifier
- Prover is one who have the information but need to proof it.
- The verifier is one who verify whether the prover have the information which he claimed to have or not.
The Zero Knowledge Proof work on the base of the following points;
- Here the verifier do not know what the information is about. The information keep hidden.
- In the zero knowledge proof, if the prover have the information, then he need to convince the verifier that he have the information.
- But if do not have the information, the verifier should not be convinced by the prover.
Question. 6- State one decentralized dark pool in cryptocurrency and discuss it. How does it work?
REN Decentralized Dark Pool
RENEx is a decentralized dark protocol which was was introduced by the republic protocol in 2017. This is the decentralized dark protocol where the large volume transactions are performed hiddenly and anonymously. No intermediate party is involve in performing the transaction. The order book is not reveal to any one on the dark pool. No one is able to watch the order boo of any other.
This is very secure exchange where the users can trade the large amount of the assets easily. Here smart contracts has been used to perform the trading of the crypto coins from one blockchain to other blockchain. It is very secure multiple party computational protocol where the order information get revealed to the general public only when the order is completed.
In a single user transaction, the users are allowed to swap the digital coins in the decentralized dark pool between any two blockchain networks. This is very secure, private and fair decentralized dark pool. This allow the atomic cross trading methods to perform the transactions of the large volume of the assets.
This exchange provide the facility to the large investors, whales or the big stock holders to perform the large volume transactions very securely and privately. They can now easily and confidently enter in the atomic cross -chain trading of large volume of the digital assets. Now even the republic protocol is able to view the order book. It become public once the transaction get completed.
Question 7.) Compare a crypto centralized exchange dark pool with a decentralized dark pool. What are the distinctive differences?
| Kraken (Centralized dark pool) | RenEx (Decentralized dark pool) |
|---|---|
| Here the KYC verification is required to participate and start trading in kraken centralized dark pool | There is no need of the KYC verification to participate and start trading in the RenEx decentralized dark pool. |
| Here the orders are not get broken into the small pieces. | The orders here are broken into small pieces |
| Here intermediate parties or exchange is able to view the order book | Here no intermediate parties, general public or exchange is able at all to view the order book |
| Smart contracts do not use in the centralized exchange pool. | Smart contracts are used in the decentralized exchange pool. |
| The slippage fee is involved in the centralized dark pool. . | There is no slippage fee at all in the decentralized dark pool. |
| The orders are crossed in the kraken which is centralized dark pool exchange | The Atomic swap concept is used in trading in the RenEx which is decentralized dark poo. |
Question 8- Research any recent huge sale in any market in the crypto ecosystem and how it has affected the market. What difference would it have made if the dark pool was utilized for such sales?
We know that when a big investment is made in the market, the price rise up. When the big amount of the crypto assets is withdraw from the market, the price fall. Bitcoin is the largest crypto currencies in the world. It has the large market cap and at number 1 on the market ranking.
On the third november 2021, a very huge amount from the BTC market was withdrawn. The amount was 246 BTC which is approximately is 15 million dollar at the time of writing this post. This was very big transaction. The big amount was withdrawn from the market which effect the market very negatively and the price of BTC declined. from the $62.5k to $60K.
This was the market order. Because the whales knew that if they placed the limit order, the investors will watch that from the order book and they will start selling their assets. The price would not then be able to reach the level where the whales wants and his order would not execute in that case. He placed the market order and withdraw the money at the 62,500$. The price of the BTC effected very much and the price started declining. But if there are some traders who follow the whales regularly and check the order book, they also withdraw the assets when the whales make the exit order. In this case, the price decrease more.
The whales and big investors should always use the dark pools. They are able to set the limit order at the price which they want. Their limit order will not effect the market price because order book is keep hidden. No one is able to view the order book. The trades will not let to know about the whales intention. The whales then can set the order at the price they want. When the price reached to that level, their order will be executed and they will have the profit.
If the whales have had used the dark pool, the other would not be able to watch the order book and the price of BTC would not have been fall this much. Because in that case, no one was able to watch the order book and thus could not follow the whales. The small traders and the investors would not be able to follow the foot step of the whales and would not sell their assets. Thus their was not this much decline in the BTC price.
Question 9. In your own opinion, qualitatively discuss the impacts of trades carried out in the dark pool on the market price of an asset. (At least 150 words).
When the large order are seen in the order book by any whale, the small traders follow the whales and place the orders accordingly. When the large number of traders follow the same direction, the rice effected largely. For example, when the large buy order is view on the order book by some whale, the small traders will follow him and will buy the coin. The demand will increase and the price will rise up.
When the large sell order is viewed in the order book, the traders will act accordingly. They will follow the whale and will exit from the market by selling their own coins. The demand will decrease and supply will increase. The price of the coin will decrease and the market will face the bearish trend.
Thus the huge number of the traders in buying or selling direction effect the market hugely. The trend get change and the market start moving in the certain direction. But when the trading is done on the dark pools, this is not happen in the market.
The limit orders are placed by the whales. The order book keep hidden. No one able to watch it. So no one is able to get to know about the intention of the whale. Thus they do not follow them. And the market do not effect that much.
For example, if the whales place the limit order for selling the coin, the other traders will not be able to watch the order book. They will not get the sentiments of the whales and thus will not sell their coins. The selling pressure will not be increase that much so the market will not decline as much as in case of the market order
Similarly if the whales place the limit order for buying the coin, the other traders will not be able to watch the order book. They will not get the sentiments of the whales and thus will not buy the coins. The buying pressure will not be increase that much so the market will not increase as much as in case of the market order
Moreover, the large order effect the market very much. If we talk about the market order, if the whale sell his assets, the small traders will follow him and will sell their coins too. The selling pressure will increase and thus price will decreased because of demand and supply law. Similarly, if the whale buy the assets in large volume, the small traders will follow him and will buy the coins too. The selling pressure will decrease buying pressure will increase and thus price will increased because of demand and supply law.
But when we talk about the dark pool, here the large volume orders are executed only when the match with the large orders of the same volume. A large sell order will be executed only when a large order of same volume will be matched. So the demand and supply will be remain balance and market will not be effected.
Question 10. What are the advantages and disadvantages of Dark pool in Cryptocurrency?
| Advantages | Disadvantages |
|---|---|
| The limit orders are placed, so the slippage is reduced | When the whales start using the dark pool, the liquidity of the main market get disturbed badly. The liquidity of the main market reduced because of the dark pool. |
| The whales or big stock holders can perform the transaction of big amount of the assets without letting the general public know about it | The identities keep hidden, so it can be used to perform the illegal transaction. |
| On the dark pool, the traders get the more best trades and deals as compare to the common open exchange platforms | The whale's intention keep hidden. They can perform the buy or sell order without letting the public know about it. So it is unfair for the general and small traders. |
| The identities of the big stock holders are always keep hidden | The buy and sell of the whales on the dark pool effect the market badly. The small investors face lose when price decline at sudden because of the order execution of the whales |
| The Dark pool provide the high level of security and super privacy to the traders | The order book keep hidden which effect the transparency. More risk involve in the dark pool. |
| The market is not effected as much by the sell and buy activities of the whale | Because of anonymity of transactions, this become difficult to predict the future of market |
Conclusion
The dark pool are extremely useful to perform the high volume transaction in the crypto market very secretly and anonymously. The dark pools are the private exchanges which perform the functions outside the general and traditional exchanges. The Dark pool provide the high level of security and super privacy to the traders.
These private exchanges allow the trading of enormous amount of the assets in confidential manners. On the dark pool private exchanges, the transactions are performed away from the eye of the common public. The big stockholder's identities are not exposed at all in the dark pool anonymous trading system. These private exchange platforms might be shown as the different exchange platforms only for the big investors, whales and high stockholders.
Cc: @fredquantum