Author: c4lvin :: FP , Four Pillars Researcher

Compiled by: Tim, PANews

Key Takeaways:

• Former Binance CEO Changpeng Zhao proposed the need to build a dark pool-type perpetual contract DEX to solve the problems of MEV attacks and large position exposure caused by DEX transparency, triggering a wave of market attention to the dark pool track.
• Dark pools are private trading venues that have long existed in traditional financial markets. Their advantage is that they allow institutions to handle large positions without causing market fluctuations, but they have also been repeatedly abused and controversial due to their centralized operating model.
• Dark pools built in the decentralized environment of Web3 are able to address key shortcomings of Web3 and the existing financial system, and are assessed to be innovative initiatives that will play an important role in the future Web3 privacy market.

 Source: "Black Contract"

Today (June 1, 2025), a post by Zhao Changpeng, former CEO of Binance, on Twitter caused a huge stir in the community. He proposed the potential demand for "dark pool-style perpetual contract DEX", pointing out that the transparency of the current DEX's real-time public orders would be disadvantageous to traders. The post triggered a debate on the privacy and efficiency of cryptocurrency transactions, especially focusing on the concept of dark pools. This article aims to analyze what dark pools are and what dark pools mean in Web3.

 Source: CZ Twitter

1. What is a dark pool?

1.1 Dark pools in traditional fields

 Source: b2broker

Although CZ's remarks may lead people to mistakenly believe that dark pool trading is an innovation unique to Web3, in fact, this financial instrument has existed in traditional markets for decades. The history of dark pools can be traced back to 1979, when the U.S. Securities and Exchange Commission passed the 19c-3 Regulation, which allowed securities listed on specific exchanges to be traded on other platforms. With the rise of electronic high-frequency trading in the 1980s, the transparency of order book information has far exceeded that of the past, prompting institutional investors who are unwilling to expose large positions to demand private trading venues.

Usually, we come into contact with public exchanges such as the New York Stock Exchange or Nasdaq, but when opening large buy and sell positions on these public exchanges, it may significantly affect market prices and even cause unexpected losses to ordinary traders. Dark pools refer to independent trading systems that allow institutions or large investment banks to execute large-scale transactions privately.

In traditional exchanges, all buy and sell orders are publicly displayed on the order book for market participants to view, while dark pool trading platforms do not disclose order prices or quantities before the transaction. Due to this feature, large institutional investors can hide their trading intentions while minimizing market impact. By 2025, as many as 51.8% of US stock transactions will be completed through dark pools, indicating that dark pools have surpassed a simple alternative trading method and become a mainstream trading method.

This kind of dark pool trading is somewhat different from over-the-counter cryptocurrency trading. Dark pool operators accumulate chips by shorting stocks, thereby providing buyers with purchase volume. Since the details of short-selling transactions must be disclosed to financial regulators such as the US Financial Industry Regulatory Authority, the trading data and trading volume of dark pools are actually public and transparent. But the difference is that the identity of the institution that directly initiates the transaction will not be disclosed. At present, the dark pool trading volume is disclosed in the form of the DIX index, and traders often speculate on the fund movements of institutions based on this.

1.2 Criticisms of Traditional Dark Pool Trading

However, dark pool trading in traditional finance has been criticized. Since dark pool trading is controlled by centralized operators, it is easy to be abused when the profits from corruption far exceed the cost of fines to be paid. In reality, there are endless criminal cases caused by this.

 Source: SEC

In 2016, several major financial institutions were fined more than $150 million for violating federal laws in dark pool operations, including Barclays and Credit Suisse, which were sued by the SEC for violating dark pool regulations. These institutions were accused of providing customers with false information about the composition of dark pool participants and failing to transparently disclose the fact that they provided preferential treatment to high-frequency trading companies.

In 2018, the U.S. Securities and Exchange Commission fined Citigroup $12 million for misleading investors in its dark pool trading business. Citigroup leaked confidential customer order information to high-frequency trading firms, allowing these firms to execute more than $9 billion in trades against Citigroup clients and make easy profits.

These problems stem from the trust reliance on centralized operators and conflicts of interest, and the decentralized dark pool solution in Web3 can resolve these pain points.

1.3 Dark Pools in Web3

The concept of Web3 dark pools is also gaining attention, and its implementation is more complex and transparent than that of traditional financial market dark pools. Although all transactions on the blockchain are publicly recorded, which seems contradictory, Web3 dark pools effectively protect transaction privacy by using advanced cryptographic technologies such as zero-knowledge proofs and multi-party computing. The inherent transparency of blockchain has become its technical advantage in achieving more advanced privacy protection.

The core advantage of Web3 dark pools is that, unlike traditional Web2 dark pools, they can avoid operational risks. Since transactions are automatically executed through smart contracts without the intervention of intermediaries, traders can always maintain full control of their assets. At the same time, unlike traditional dark pools, there is no risk of operators abusing customer information in this model, and all transaction processes can be verified through cryptographic technology.

Web3 dark pools also introduce a new concept called "programmable privacy". This feature allows developers to flexibly set which parts of the application should remain private and which parts need to be made public. For example, under the premise of meeting regulatory compliance requirements, trading instructions can be kept confidential throughout the process, and the final transaction results are only disclosed to specific participants. Although traditional software technology is not unable to achieve similar functions, in terms of the implementation of programmable privacy protocols, Web3 technology has significant advantages in flexibility and verifiability of the protocol.

2. Demand for dark pool perpetual contract DEX

CZ proposed the need for a perpetual contract DEX with a dark pool model, and pointed out that the transparency of current DEXs has caused many problems. His core arguments and basis are as follows:

2.1 Avoiding MEV Attacks

The transparency of DEX is one of the main reasons for MEV attacks. As mentioned above, when DEX orders are made public in the blockchain memory pool, MEV robots will detect these transaction information and implement pre-trading, post-trading or sandwich attacks. This causes traders to end up with prices far below their expectations, especially large orders where slippage increases significantly. CZ once said, "If you want to complete a $1 billion order, you want to complete the transaction before anyone notices it." He advocates the need for a dark pool mechanism to solve such problems.

2.2 Huge potential demand

CZ mentioned that dark pools have been widely used in traditional financial markets. He pointed out that the liquidity scale provided by dark pools may be up to ten times that of public exchanges. He believes that the crypto market also needs such solutions, and especially emphasizes that trader privacy protection is particularly important in high-risk products such as perpetual contracts.

In addition to CZ's point of view, the demand for dark pools has recently been seen to be growing not only in the Web2 market, but also in the Web3 market. According to Blocknative research, Ethereum's private memory pool transactions accounted for only 4.5% of the total in 2022, but recently accounted for more than 50% of the total gas fees. Although the Solana network does not have a memory pool environment, various trading robots and wallet solutions currently have MEV prevention functions as standard, which shows that users' awareness of MEV has increased significantly. This clearly proves that the Web3 community is now fully aware of operational behaviors that affect transaction results, and there is a strong need to actively avoid these effects.

2.3 Potential damage from DEX transparency

CZ said that "all orders are public in real time on DEX", and stressed that this will cause major risks in perpetual contract trading. In perpetual contract DEX, traders' positions and liquidation points are directly public on the blockchain, which makes it possible for malicious participants to use this information to manipulate the market. For example, when other traders find the liquidation price of large position holders, they can deliberately push the market price to trigger forced liquidation. CZ also mentioned that this is related to "recent events", which seems to be a reference to the HLP liquidation event of the Hyperliquid platform or the large liquidation event of James Wynn.

 Source: @simonkim_nft

A more detailed explanation of CZ’s tweet can be found in a recent article by Simon Kim, founder of Hashed, which states that while Web3 can achieve decentralization and privacy protection, it actually creates the most transparent surveillance system in history, emphasizing a reality where all transactions are permanently recorded, visible to anyone, and analyzed by AI.

The article focuses on the case of MicroStrategy, proving that even companies cannot escape tracking. Despite repeated and strong warnings from Michael Saylor about the risks of public wallet addresses, blockchain analysis platform Arkham Intelligence has gradually successfully tracked the company's Bitcoin holdings, locking in 87.5% of its total holdings.

The article also focuses on the $100 million liquidation incident experienced by James Wynn on the Hyperliquid exchange, which highlights the necessity of dark pool trading. Wynn once established a 40x leveraged long position in Bitcoin worth $1.25 billion, but because his liquidation price was publicly available, market participants were able to use this loophole to attack him. Some traders continued to reverse his positions during the same period, making a profit of $17 million in a week. This incident revealed the drawbacks of transparent position information in perpetual contract DEXs, and also confirmed that there is a real need for a trading environment with opaque position information.

3. Different ways to implement dark pools on-chain

Although many people may have first come into contact with the concept of dark pool trading due to CZ's tweet, in fact, many projects have continued to promote the development of dark pools. In order to achieve the core goal of "trader privacy" of dark pools, there are also multiple technical paths, and different projects have adopted differentiated encryption schemes. The following are the mainstream implementation methods and their representative projects:

3.1 Renegade

 Source: Renegrade

Renegade is one of the most representative on-chain dark pool projects on the current Ethereum second-layer network Arbitrum mainnet. The project builds its privacy protection solution by combining multi-party computing with zero-knowledge proof technology.

In the Renegade protocol, all state data (balances, order books, etc.) are managed locally by traders without relying on centralized or distributed servers. When traders execute transactions, they must know the status of both the old and new wallets and submit three key pieces of information to the smart contract: commitment, nullifier, and validity proof. This structural design is also common in projects based on zero-knowledge proofs such as Zcash.

The core feature of Renegade is to ensure full privacy before and after the transaction. Before the transaction, the order details (price, quantity, direction, etc.) are completely hidden; after the transaction is completed, only the counterparty can know the type of assets exchanged. All transactions are anchored to the real-time middle price of Binance, with no slippage and no price impact, making it an extremely attractive Web2 project.

The architectural feature of Renegade is that whenever a new order enters the system, many independent relay nodes (relayers) will continue to perform multi-party computations with each other through peer-to-peer communication. In the process of performing multi-party computations, Renegade will prove a special NP proposition called "VALID MATCH MPC". The above proof shows that given the public order information commitment and the public matching tuple commitment, both parties actually know the valid input order. Through this collaborative zero-knowledge proof structure, Renegade provides users with complete anonymity, privacy and security.

3.2 Arcium

Arcium is a privacy project built on the Solana ecosystem. Its core technology is to use MPC with additive secret sharing to achieve encrypted shared state. This solution allows developers to store encrypted state and perform data calculations on the chain while ensuring that the underlying original data is kept confidential throughout the process. It is particularly worth mentioning that Arcium's innovative architecture can achieve local non-interactive addition operations and complete multiplication operations through a single round of communication, which greatly improves computing efficiency while providing strong security guarantees.

In addition, Arcium adopts programmable privacy capabilities, allowing developers to specify in Solana programs which states should be stored in encrypted form and which functions should perform computations on specific encrypted states. In Arcium, multi-party computing tasks are managed by a virtual execution environment called the Multi-Party eXecution Environment (MXE). MXE is responsible for setting the parameters of the task, such as the data used, the program executed, and the node responsible for the calculation. With this framework, Arcium can support large-scale, parallelized transaction execution similar to Solana.

 Source: Arcium

Recently, Arcium successfully launched a dark pool demo on the Solana public testnet, realizing the first on-chain confidential trading venue on the Solana blockchain. Any existing Solana DeFi project can work with Arcium to deploy a dark pool mechanism on Solana to provide users with confidential trading services.

3.3 Aztec

Aztec is a zero-knowledge rollup solution focused on privacy protection. In 2022, it completed a $100 million Series B financing round led by a16z crypto, becoming one of the largest investment cases in the field of privacy technology.

Similar to the Arcium solution, Aztec allows developers to mark private functions. Functions marked as private are executed and verified on the user's device, while only publicly marked functions will run on the Aztec network. The state value of a private function is stored in the form of UTXO that can only be decrypted by the user and cannot be read by anyone except the user.

 Source: Aztec

Aztec has reached a cooperation with Ren Protocol to jointly develop a privacy-preserving trading protocol based on dark pool technology. The trading system built by Aztec allows users to trade through zero-knowledge proof tokens "Aztec Notes", and transaction information and amounts will not be disclosed in the order book. When a user deposits funds to Aztec, the system generates a cash-like encrypted certificate through the off-chain UTXO state mechanism. As transactions are submitted and executed, the state tree will continue to update the encrypted information, and only the certificate holder can view the content, fully protecting the confidentiality of the user's identity and account balance.

4. If the technology is successful, dark pools will flourish

The biggest technical challenges facing Web3 dark pools are scalability and performance issues. Current secure multi-party computing and zero-knowledge proof technologies require extremely high computing power and still have limitations when processing large-scale transactions. Taking the Renegade project as an example, the peer-to-peer network structure will lead to an exponential increase in system complexity when the number of network participants increases.

There is a trade-off between privacy and scalability of dark pools. Aztec co-founder Zac Williamson once pointed out: "Completely private transactions require more data to be transmitted because the information is fully encrypted, which takes up more resources and reduces scalability." To overcome these fundamental constraints, it is necessary to develop a more efficient cryptographic library.

 Source: Arcium

Network stability is also an important challenge. Recently, Arcium tested a dark pool demo application based on the Arcium testnet on Solana's Devnet. During the test, some nodes crashed due to high traffic, resulting in a backlog of order queues. Arcium's test was designed to verify infrastructure stability and resolve such potential issues before the mainnet goes live, and the problem was indeed resolved quickly. This proves that implementing a dark pool requires cutting-edge technology and sufficient testing to cope with high demand loads.

In the long run, dark pools are expected to become an important part of the cryptocurrency trading ecosystem. As Binance founder CZ pointed out, dark pools account for more than 50% of trading volume in the traditional financial sector, and this trading model is likely to account for the same proportion in the crypto market. As institutional investors become more involved in the crypto market, this trend will accelerate further.

But this does not mean that the existing DEX will be completely replaced. The two are more likely to form a complementary relationship to meet different needs. It is expected that the market will show a trend of differentiation in the future: small transactions that focus on price discovery will still be conducted on existing DEXs, while large transactions that focus on privacy will be conducted in dark pools.

The development of dark pools will expand from the privacy field to a wider range of application scenarios. As Arcium continues to promote, the demand for privacy protection technology in various fields such as AI, DePIN and supply chain management is increasing day by day. As the starting point of the layout of privacy technology, dark pools are expected to develop into an important part of the privacy ecosystem.