The best way for most investors to buy and sell crypto is through an exchange. However, if you are a wealthy investor who wants to buy or sell crypto tokens without changing prices significantly, you should use a dark pool. But what is a crypto dark pool and why are they needed?
What are Crypto Dark Pools?
Dark pools are privately organized crypto exchanges where securities are traded. They allow institutional investors and organizations to buy and sell large amounts of securities with each other without disclosing trade details to the wider market.
Dark pools are effective for institutional investors who execute block trades. A block trade is a large, privately negotiated transaction. Such transactions usually have no criteria and are so large that they can cause a large change in a security’s price.
How does a Crypto Dark Pool work?
Dark pools allow large fund owners to buy and sell assets privately, reducing the impact of such trades on market prices. Imagine a situation where you place a sell order on a share or other security. Then an institutional investor places a buy order on the same security using very large funds.
Such a buy order can significantly change the market price, leading to a bullish move. If you had seen the order from the large fund investor earlier, you would have changed your order to a buy order or not placed any order.
Other traders who see such a large order in the order book will also react. As a result, someone who intended to go bearish may take a bullish position and change market sentiment. If this happens frequently, market sentiment will also change constantly, reducing market efficiency. On the other hand, when such trades are not visible to the public, we expect to see less impact on overall market sentiment, which is why dark pools are necessary.
Dark pools also ensure that there are no slips during trades. With this, institutional traders can be sure that their trades will be executed at the intended price. This also makes them very effective in illiquid crypto markets. Trades are usually matched in dark pools by considering the best buy and sell prices.
Dark pools are not necessary for most retail investors because their trades cannot cause a significant change in the overall market price. Nor will they need the privacy and anonymity associated with dark pools.
Risks Involved in Dark Pool Trading
Dark pools are not transparent and operate under very little oversight compared to other exchanges.
They also give some investors advantages that others may not have, increasing the chances of unethical practices and conflicts of interest. Of course, whether it is a risk depends on whether you are the one benefiting from the dark pool trading.
Crypto Dark Pools offer more secure solutions
The way transactions are carried out on crypto dark pools is quite different. Transactions can be carried out across multiple blockchains without the need for any intermediary, using smart contracts, making it very difficult for anyone to have an undue advantage over another.
Large trade orders are usually split into smaller orders before being connected to buyers to guarantee security and anonymity.
Crypto dark pools also have better verification techniques and other protocols that make it very difficult to manipulate prices. As a result, they provide fair market prices for all.
Are decentralized dark pools a permanent solution?
The major setbacks in the traditional dark pools are resolved in crypto dark pools. Traditional dark pools tend to promote unethical practices and lack transparency. However, decentralized solutions like the one described in the previous section make crypto dark pools efficient and transparent, and you should expect them to continue to play important roles in the crypto markets.
Perhaps other financial markets will also adopt decentralized solutions, such as smart contracts, for better security and transparency.
