What are Dark Pools?
A "dark pool" is a private financial venue or exchange for trading securities. Unlike public exchanges like the New York Stock Exchange (NYSE) or Nasdaq, the orders within a dark pool are not visible to the public. They are "dark."
This concept originated in traditional finance (TradFi) to solve a critical problem for large institutional investors.
Why Were Dark Pools Created?
Imagine a large pension fund wants to sell 5 million shares of a stock on a public exchange. The moment this huge sell order appears on the public order book, it would likely cause panic. Other traders would rush to sell, and the price would crash before the fund could complete its trade, resulting in massive losses.
Dark pools were created to prevent this by addressing two key issues:
Market Impact: They allow large orders to be executed without broadcasting the intention to the public, thus preventing the trade itself from negatively affecting the asset's price.
Anonymity: They allow institutions to execute large trades without revealing their strategies to the rest of the market.
How They Work
The mechanics of a dark pool are straightforward:
Hidden Order Books: Participants submit their buy or sell orders to the pool, but these orders are kept confidential and are not displayed publicly.
Fair Pricing & Matching: Trades are typically matched at the mid-point of the best bid and ask price available on the public exchanges. This ensures that even though the trade is private, the execution price is fair and tied to the public market value.
Post-Trade Transparency: After a trade is successfully executed, it is reported to the public record (like a consolidated tape). The key is that the intention to trade was hidden, not the final result of the execution.
Bringing Dark Pools to DeFi: The DarkVeil Approach
In the world of decentralized finance (DeFi), the "public market" is the blockchain itself, and the "predators" are sophisticated MEV bots that constantly scan for profitable opportunities. The problems of market impact and front-running are not only present but magnified.
DarkVeil adapts the dark pool concept for the decentralized world. Instead of a centralized server owned by a bank, DarkVeil uses a decentralized network of Secure Enclaves to create a provably secure and confidential matching environment.
This gives traders all the benefits of a traditional dark pool—no front-running, no market impact, and complete strategic privacy—but with the added trust and security of using the Ethereum blockchain for the final, authoritative settlement of assets.
Now that you understand dark pools, let's explore the specific technologies that power our protocol in Core Concepts.
Last updated