The name dark pool may sound like something that is not legal or a type of cybercrime; however, dark pools are legal and vital to the development and growth of any market, whether fiat or cryptocurrency markets.
Dark pools were the main reason for the 2021 bull run in the crypto world. This led many people to turn to cryptocurrency and start using cryptocurrency for major transactions, abandoning fiat currency. Dark pools have enabled people to transact anonymously and subdivide huge stocks into smaller ones, allowing crypto enthusiasts to buy stocks at the range where their funds allow them to. Dark pools allow traders to trade anonymously away from public view, and they are usually privately owned.
How Do Dark Pools Work?
Since dark pools allow people to trade anonymously, there is a need for an intermediary who can sell the assets on behalf of the owner. The intermediary matches the seller and buyer who want to trade in the same cryptocurrency. The identities of everyone in the transaction remain anonymous and are kept away from public record books.
Though they are not accessible to the public, if one wishes to trade on dark pools, he or she can talk to someone who has access to the dark pool. Give an order for which asset to be bought or sold, with a specific amount and the price to be paid.
Typically, the asset owner pays the intermediary once the transaction is finished. The kind of item being exchanged, its liquidity, and the order placed are some factors that typically limit the payments.
Types of Dark Pools
The main type of crypto dark pool is the decentralized dark pool.
Decentralized dark pools
The decentralized dark pools, also known as DEX, enable transactions by large-scale enthusiasts and allow the enthusiasts to trade anonymously. The DEX has some unique features that enable it to work differently from the centralized dark pools. A good example of a DEX is Ren.
The DEX subdivides the huge amount of cryptocurrency being traded into smaller amounts, which can be bought or sold to many people easily and still hide the identities of both parties involved. This is very helpful because it aids in selling or buying quickly. If it were to be sold for a large amount, many people would avoid it since it’s too expensive for ordinary crypto enthusiasts.
Cryptographic mechanics like zero-knowledge proof help hide identities like wallet addresses and exchanges while transacting.
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The Future of Dark Pools
The future of dark pools is unpredictable, as many are divided, with some seeing it positively and others in a negative way, and they all have reasons backing up their ideas.
Those with negative feedback towards the future of dark pools have raised concerns about the lack of transparency and the strict government regulations in some countries as major causes that will lead to their downfall. This is because it will be more expensive to operate and trade.
However, many still believe that with the technological advancements occurring in the crypto world, it will bring more advantages as the interoperability will be easier and it will make it easier for the newbies who would like to invest in them.
The market demand for dark pools continues to grow due to high demand from investors, making them have a bright future as they are likely to emerge to meet the market demands that grow every day. With many dark pools emerging, it’s more likely that they will lead to more advancements, making them more advantageous to investors. Each will try to make its operability easier for investors.
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Regulations on Dark Pools
They are subject to transaction regulation by the Security Exchange Commission, much like any other cryptocurrency. This helps to keep off money launderers who may see it as a lucrative place to clean up their dirty funds. The SEC also monitors dark pools to keep them safe and a good place to trade.
The governing bodies monitoring the dark pools are also responsible for investigating firms and giving punishments if found to be violating the terms of the dark pools. The punishment may include a complete ban on dark pools.
Advantages and Disadvantages of Dark Pools
Advantages of Dark Pools
Through its ability to divide assets being traded in huge amounts, small-scale traders can trade fractions of the divided cryptocurrency. It also doesn’t have transaction costs, which makes it more popular among its users.
The ability to be anonymous among its users makes it possible for high-end traders trading with huge amounts to be safe. This keeps away people who may want to exploit high-end enthusiasts
Dark pool investors can be assured that their cryptocurrencies being traded cannot be spilled as they are in a blockchain and can be reversed if the payments are not made. This will encourage many investors to invest freely in them.
Disadvantages of Dark Pools
The belief that cryptocurrency should be decentralized and that no regulatory authority should be able to monitor transactions casts doubt on the SEC’s ability to keep an eye on the trades occurring in the pools.
Though they may sound interesting to many investors, they’re only accessible to a small number of retail traders. If you don’t have a trusted trader with access, it’s not advisable to stake large amounts of cryptocurrency.
Public exchange rates do not reflect on them something that affects market flow. Hence, it is lucrative for high-scale traders who may exploit the advantage, thus making it profitable only among high-scale traders.
Dark pools lack liquidity, which prevents traders from knowing the true cost of the trades that brokers are making. Hence, the trader does not gain full profits from the assets they own or intend to buy through the brokers. This may also lead to scammers taking advantage and scamming innocent traders.
Though they sound interesting to trade as they are lucrative and have a bright future ahead, it is advisable to do some personal research and find a trustworthy person with access to dark pools. Though dark pools are profitable, it is advisable not to trade with huge assets; only trade with assets that you can afford to lose.