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What Is a Crypto Dark Pool? Can Normal Traders Use One?


The best way for most investors to purchase and sell crypto is through an exchange. However, if you are a wealthy investor looking to buy or sell crypto tokens without significantly changing pricing, 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 trading is carried out. They allow institutional investors and organizations to buy and sell large amounts of securities with one another without revealing trade details to the wider market.

Dark pools are efficient for institutional investors executing 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 major change in a security’s price.

How Does a Crypto Dark Pool Work?

Dark pools let large fund owners 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 stock or any other security. Then an institutional investor places a buy order on the same security using very large funds.

Such a buy order can change the market price significantly, leading to a bullish move. If you had seen the order from the big fund investor earlier, you would have changed your order to a buy order or not entered any order.

Other traders who see such a large order in the order book will also react. As a result, some who intended to go bearish may take a bullish position, changing market sentiment. If this happens often, 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 general market sentiment, which is why dark pools are necessary.

Dark pools also ensure that there are no slippages 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 bid and ask prices.

Dark pools are not necessary for most retail investors because their trades cannot cause a significant shift in the general market price. They also won’t 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, raising the chances of unethical practices and conflicts of interest. Of course, whether that is a risk depends on whether you’re the one taking advantage of the dark pool trading.

Crypto Dark Pools Offer Safer Solutions

The way transactions are carried out on crypto dark pools is quite different. Trades can be carried out across multiple blockchains without the need for any intermediary, with the aid of smart contracts, making it very hard for anyone to have an undue advantage over another.

Large trade orders are usually broken into smaller orders before connecting them 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 everyone.

Are Decentralized Dark Pools a Lasting Solution?

The major setbacks in the traditional dark pools are solved in crypto dark pools. Traditional dark pools tend to promote unethical practices and are not very transparent. 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 playing important roles in the crypto markets.

Perhaps, other financial markets will also adopt decentralized solutions, like smart contracts, for better security and transparency.

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