Darker than Black: Web3 Needs Dark Pools

Key Takeaways

• Former Binance CEO Changpeng Zhao proposed the need for Dark Pool-style Perpetual Futures DEX to address MEV attacks and large position exposure issues caused by DEX transparency, leading to a surge in interest in dark pools.

• Dark pools are private markets that have operated in traditional financial markets for a long time, with the advantage of allowing institutions to handle large positions without market impact, but have been subject to many abuse cases due to centralized operations.

• Dark pools built in Web3's decentralized environment can resolve critical shortcomings of both Web3 and existing financial systems, and are evaluated as initiatives that will play a major role in the future Web3 privacy market.

Source: Darker Than Black - Contractor of Black

Today (June 1, 2025), a post by CZ (@cz_binance), former CEO of Binance, on Twitter caused a major stir in the community. He raised the need for "Dark Pool-style Perpetual Futures DEX," pointing out that the transparency of DEX, where orders are disclosed in real-time, can actually work against traders. This post sparked debate about privacy and efficiency in cryptocurrency trading, particularly raising interest in the concept of dark pools. In this article, we aim to examine what dark pools are and what dark pools in the Web3 mean.

Source: @cz_binance

1. What are Dark Pools?

1.1 Dark Pools in TradFi

Source: b2broker

While CZ's mention might create the misconception that dark pools are something only implementable in Web3, dark pools are private trading platforms that have been used in financial markets for a long time. The history of dark pools dates back to 1979, when the U.S. Securities and Exchange Commission (SEC) passed Regulation 19c-3, allowing securities listed on specific exchanges to be traded on other exchanges. Subsequently, the emergence of electronic trading-based High Frequency Trading in the 1980s led to broader exposure of order book information than before, which created demand from institutions reluctant to expose large position trades for private exchanges.

Generally, we encounter public exchanges like the New York Stock Exchange (NYSE) or Nasdaq, but when opening large buy/sell positions on these public exchanges, they can significantly impact market prices and potentially cause unintended losses to general traders. Dark pools refer to separate trading systems that allow institutions or large investment banks conducting such large-scale trades to execute transactions privately.

In traditional exchanges, all buy and sell orders are displayed on public order books for market participants to see, but in dark pools, order prices or quantities are not disclosed until execution. Due to this characteristic, large institutional investors can hide their trading intentions while minimizing market impact. As of 2025, a remarkable 51.8% of U.S. stock trading occurs in dark pools, showing that dark pools have established themselves as mainstream trading methods beyond simple alternative trading means.

Such dark pool trading is somewhat different from over-the-counter (OTC) trading in crypto. Dark pool operators deliver purchase volume to buyers by accumulating stocks through short selling, and since they must disclose their short selling transaction details to financial regulatory agencies like FINRA, the trading details and volume of dark pools are actually disclosed. However, the difference is that the identity of the institution that directly requested the trade is not disclosed. Currently, dark pool trading volume is disclosed in the form of an index called DIX, and traders often infer institutional trading volume based on this.

1.2 Criticisms over TradFi Dark Pools

However, dark pools in traditional finance have received much criticism. Since dark pools in traditional finance operate by centralized operators, they have a high possibility of being abused when the profits obtainable from corruption are much greater than the costs to be paid as fines, and there are indeed many criminal cases arising from dark pool abuse.

Source: SEC

In 2016, major financial institutions were fined over $150 million for violating federal laws in dark pool operations, with Barclays and Credit Suisse particularly being prosecuted by the SEC for dark pool regulation violations. They were accused of providing false information to customers about the composition of dark pool participants or providing favorable conditions to high-frequency trading firms without transparently disclosing this.

In 2018, Citi Group was fined $12 million by the SEC for misleading investors about dark pool operations. They leaked confidential order information to high-frequency trading firms, allowing these firms to execute over $9 billion in trades against Citi's customers and profit from it.

These problems stem from dependence on trust in centralized operators and conflicts of interest, which are also major issues that Web3's decentralized dark pool solutions can solve.

1.3 Dark Pools in Web3

The concept of dark pools is also gaining attention in Web3 and is being implemented in more sophisticated and transparent forms than traditional financial market dark pools. Due to the nature of blockchain where all transactions are publicly recorded, Web3 dark pools utilize advanced cryptographic technologies such as Zero-Knowledge Proof (ZKP) and Multi-Party Computation (MPC) to ensure transaction privacy.

The key advantage of Web3 dark pools is that unlike traditional Web2-style dark pools, they can avoid operational risks. Since transactions are automatically executed through smart contracts, no intermediaries are needed, and traders can maintain complete control over their assets. Also, unlike traditional dark pools, there is no risk of operators abusing client information, and all transaction processes are cryptographically verifiable.

Web3 dark pools also introduce a new concept called Programmable Privacy. This allows developers to selectively decide which parts of an application should be private and which parts should be public. For example, it's possible to keep trading orders private while making final trading results public only to specific parties for regulatory compliance. While this technology is not impossible to implement in traditional software, Web3 technology has a relatively significant advantage in terms of flexibility and verifiability of programmable privacy protocol implementation.

2. The Need for Dark Pool Perp DEX

CZ mentioned the need for dark pool-style perp DEX, pointing out several problems caused by the transparency of existing DEX. His main arguments and supporting context are as follows.

2.1 MEV Prevention

DEX transparency is one of the main causes of MEV attacks. As mentioned earlier, when orders are disclosed in the blockchain mempool in DEX, MEV bots detect this and execute frontrunning, backrunning, or sandwich attacks. This makes traders settle at prices less favorable than intended, with slippage particularly increasing significantly in large orders. CZ mentioned, "If you want to buy a $1 billion order, you'd want to complete the order before others notice it," arguing that dark pools are needed to solve such problems.

2.2 High Potential Demand

CZ mentioned that dark pools are already widely used in traditional financial markets, arguing that dark pools could provide 10 times larger liquidity than public exchanges. CZ believed that similar solutions are needed in the cryptocurrency market, particularly emphasizing that trader privacy is more important in high-risk products like perpetual futures.

Apart from CZ's arguments, demand for dark pools is evaluated as increasing recently not only in the Web2 market but also in the Web3 market. According to research by Blocknative, private mempool transactions in Ethereum accounted for only 4.5% of the total in 2022, but recently represent over 50% of total gas fees. While the Solana network is not an environment where mempools exist, the fact that various trading bots and wallet solutions now include MEV prevention options as standard shows that user awareness of MEV has greatly increased. This clearly shows that the Web3 community is now aware of actions that affect trading results and that there is demand to actively avoid them.

2.3 Potential Damage from DEX Transparency

CZ mentioned that "all orders are disclosed in real-time in DEX," emphasizing that this causes major problems especially in perp (perpetual futures) trading. In perp DEX, trader positions and liquidation points are disclosed on the blockchain, creating the possibility for malicious participants to manipulate the market using this information. For example, other traders who identify the liquidation price of large traders (whales) can intentionally move market prices to induce forced liquidation. CZ also connected this to "recent events," which appear to be related to HLP liquidation events on Hyperliquid or James Wynn's large position liquidation.

Source: @simonkim_nft

A more specific explanation than CZ's tweet can be found in a recent article written by Simon Kim, founder of Hashed. The article points out that while Web3 promised decentralization and privacy, it actually created the most transparent surveillance system in history, emphasizing the reality where all transactions are permanently recorded, visible to anyone, and analyzed by AI.

The article particularly highlighted the MicroStrategy (now Strategy) case, showing that even companies cannot escape tracking. Despite Michael Saylor's strong warnings about the dangers of disclosing wallet addresses, blockchain analysis platform Arkham Intelligence gradually succeeded in tracking the company's Bitcoin holdings, tracking 87.5% of total holdings.

The article also focused on James Wynn's $100 million liquidation event on Hyperliquid, highlighting the need for dark pools. Wynn built a $1.25 billion Bitcoin long position with 40x leverage, but since his liquidation price was publicly known, an environment was created where market participants could exploit this. Indeed, one trader consistently bet against Wynn's position, earning $17 million in profit within a week. This event shows how transparency of position information in perp DEX can work against traders and that trading environments where position information is not exposed can have sufficient demand.

3. Different Ways to Implement Dark Pools On-Chain

While many people may have encountered the concept of dark pools for the first time due to CZ's post, numerous projects have been introducing dark pools. Since there can be various methods to achieve "trader privacy," which is the implementation goal of dark pools, they have adopted different encryption technologies. Below are the main methods and representative projects.

3.1 Renegade

Source: Renegade

Renegade is one of the most notable on-chain dark pool projects currently, operating on Arbitrum mainnet. Renegade built its privacy solution by combining Multi-Party Computation (MPC) and Zero-Knowledge Proof (ZKP).

In Renegade, all state (balances, order books, etc.) is managed locally by individual traders, without depending on central or distributed servers. For traders to execute transactions, they must know both previous and new wallet states and submit three pieces of information to the smart contract: commitment, nullifier, and validity proof. This structure is also commonly used in projects based on zero-knowledge proofs like Zcash.

Renegade's main feature is ensuring complete privacy both before and after trading. Before trading, order details (price, quantity, direction, etc.) are completely hidden, and even after trading, only the counterparty can know which assets were exchanged. Also, all trades are fixed to Binance's real-time mid-price and executed without spreads or price impact, making it an attractive project similar to Web2.

Renegade also has a structure where many independent relayers continuously execute MPC with each other through P2P (Peer-to-Peer) communication whenever new orders enter the system. During MPC execution, Renegade proves a special NP proposition called "VALID MATCH MPC." This proves that both traders actually know valid input orders when given publicly known commitments to order information and public commitments to matching tuples. Through this cooperative zero-knowledge proof structure, Renegade provides complete anonymity, privacy, and security to users.

3.2 Arcium

Arcium is a privacy project built in the Solana ecosystem that implements "encrypted shared state" using MPC with additive secret sharing. This allows builders to have applications that can leverage Arcium to store encrypted state onchain and compute on it, without revealing the underlying data. Specifically, Arcium’s approach enables local additions without interaction and multiplications with a single round of communication while maintaining strong security guarantees.

In addition, Arcium adopts programmable privacy, allowing developers to specify which state should be stored in an encrypted form in the Solana program, and which functions should compute on the specific encrypted states. In Arcium, MPC tasks are managed by a virtual execution environment named Multi-Party eXecution Environment (MXE), which sets the parameters of the tasks, such as data, program, and the nodes responsible for the computation. Through this structure, Arcium supports large-scale, parallelized execution of the transactions similar to Solana.

Source: Arcium

Recently, Arcium successfully launched a dark pool demo on Solana public testnet, enabling the first on-chain confidential trading venue on Solana. Any existing Solana DeFi team could potentially work with Arcium to launch the dark pool on Solana, allowing their users to trade confidentially.

3.3 Aztec

Aztec is a privacy-focused zero-knowledge rollup solution for Ethereum, completing a $100 million Series B round led by a16z crypto in 2022, making it one of the largest investments in the privacy technology field.

Similar to Arcium's case, Aztec allows developers to designate private functions, where functions designated as private are executed and proven on user devices, and only functions designated as public are executed on the Aztec network. State values of functions designated as private are stored in UTXO form that can only be decrypted by the owner, making them unreadable by anyone except the user.

Source: Aztec

Aztec has previously partnered with Ren Protocol to develop a protocol providing privacy-preserving swaps based on dark pools. Aztec built a system that allows trading through zero-knowledge proof-based tokens called Aztec Notes without disclosing transactions or their values in order books. When users deposit funds to Aztec, Aztec creates cash-like encrypted notes through an off-chain UTXO state system. As transactions are submitted and executed, the state tree is updated with new encrypted messages, and only the owner can see the note contents, completely preserving user identity and account balances.

4. If Technical Challenges Are Resolved, Dark Pools Will Develop as Major Privacy Initiatives

The biggest technical challenge facing Web3 dark pools is scalability and performance. Current MPC and ZKP technologies are computationally intensive and still have limitations in processing large-scale transaction volumes. In Renegade's case, the P2P network structure can lead to exponentially increasing complexity as the number of network participants grows.

Also, privacy and scalability of dark pools are in a kind of trade-off relationship. Aztec co-founder Zac Williamson has mentioned that "completely private transactions involve more data because everything is encrypted. This requires more resources, so scalability decreases." To solve these fundamental limitations, development of more efficient cryptographic libraries is needed.

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, causing a backlog in the order queue. Arcium's testing was aimed at verifying infrastructure stability and addressing such potential issues before the mainnet launch, and the issue was indeed resolved promptly. This demonstrates that implementing dark pools requires sophisticated technology and extensive testing to handle the high demands.

In the long term, dark pools are expected to become important components of the cryptocurrency trading ecosystem. Considering that dark pools account for over 50% of total trading volume in traditional finance as CZ mentioned, there's a possibility they could occupy a similar proportion in the cryptocurrency market. This trend will accelerate further as institutional investor participation in the cryptocurrency market increases.

However, this doesn't mean complete replacement of existing DEXs. Rather, they're likely to have a mutually complementary relationship serving different needs. The market is expected to differentiate with small transactions or trades where price discovery is important occurring on existing DEXs, while large transactions or trades where privacy is important occurring in dark pools.

Also, the development of dark pool will expand beyond privacy to broader areas. As Arcium pursues, the need for privacy-preserving technologies is increasing in various fields such as AI, DePIN, and supply chain management. Dark pools, as the beginning of privacy initiatives, are expected to develop into a major part of the privacy ecosystem.