On-chain Dark Pools: Bridging enterprise capital to DeFi

by Panther Team

Most people that follow Finance have never heard of Dark Pools, and this is by design.

Institutional dark pools are an alternative trading system for trading securities, where investors can find buyers and sellers for large orders with full anonymity. Dark pool trades are usually done off-exchange, meaning that trades do not appear on public exchanges, like the New York stock exchange.

Dark pools provide liquidity and allow institutional “whales” to complete block trades (large and private securities transactions) without disrupting the regular stock markets. This is possible because they’re opaque, and not open to the public, which ends up in retail investors being unaware of the parties involved, the size of the trade, or the execution price.

It’s estimated that at least 18% of all stock trading volume in the United States (and as much as 40%) take place in them. In terms of dollar amount, this means hundreds of billions of dollars.

Despite criticism for creating an uneven playing field, allowing institutional investors to bypass public markets and execute trades off-exchange, dark pools remain popular with investors who value the privacy, liquidity, and pricing advantages they offer. And they could very well be what the new financial paradigm needs to take off.

New Finance’s greatest problem

As the go-to investment vehicle for big fish in the financial industry, dark pools have evolved over the years. They now offer a variety of trading protocols and investment options, such as algorithmic trading and high-frequency trading (HFT). While the regulations governing dark pools continue to evolve, the role they play in institutional investment strategies will doubtlessly remain significant. However, concerns persist regarding the lack of transparency in their operations.

On the opposite corner of finance, the promise of transparency, security and true user autonomy have led Decentralized Finance protocols to grow by leaps and bounds. Nonetheless, DeFi protocols also face their fair share of challenges, including barriers to institutional and enterprise adoption.

The total value locked in DeFi protocols is currenty around $50 billion, yet the amount of institutional money invested in the cryptocurrency sector dropped 95% to $433 Million in 2022 (a low since 2018), a stark contrast to the trillions invested in the traditional sector. According to recent studies, institutions cite price volatility, security and regulatory concerns as reasons why they hesitate to step into DeFi, despite 91% of institutional investors reportedly being interested in investing in tokenized assets.

These same investors also report concerns about the reputation risk associated with DeFi protocols. Given the numerous hacks and exploits in the DeFi space, institutions are worried about the potential damage to their brand should they suffer losses as a result of investing in DeFi.

And yet, enterprise and institutional capital can doubtlessly benefit from DeFi

Even if the risks and volatility are high, established capital stands to benefit from DeFi in a myriad of ways. For one, DeFi protocols create a 24/7 access to almost 100% liquid capital as well as access to an array of decentralized and fully democratized financial services. Even though they’re quite similar to standard markets with similar order types and rules, DeFi protocols have unlocked over $5 billion in liquidity pools through yield farming, a strategy not available in traditional finance.

Although the potential upside remains high, regulatory ambiguity makes investing in DeFi over a medium to long-term a daunting project. However, there is a possibility to capitalize on the opportunity for growth and innovation. The DeFi ecosystem is growing at an unprecedented rate, new projects are launched every day, there is a growing trend towards privacy and scalability in the blockchain scene and, above all things, these solutions are composable with one another, enabling multiple automation scenarios.

Decentralized dark pools

A middle-of-the-road solution that both DeFi and traditional players (like JP Morgan) are starting to recognize lies in the zero-knowledge realm.

Decentralized dark pools operated by compliant entities can become the crossing point on the Venn diagram that bridges institutional capital into DeFi. Thanks to the advances in zero-knowledge proof (ZKP) technology, they can ensure security, privacy, and meet all regulatory requirements to become a comprehensive solution.

ZKPs enable data verification without revealing any information about the input or output data. This makes them ideal for ensuring privacy and security in decentralized dark pools, where participants can conduct anonymous trade execution without revealing their identities or transaction details. Furthermore, these pools can be configured to interact with DeFi protocols to send assets back-and-forth. In other words, institutions can trade crypto and digital assets privately, securely, and without anyone being able to surveil their activity, but retaining the ability to showcase their history to comply with regulations.

The advantages of on-chain dark pools

Pairing the above with true decentralization and DeFi’s endless composability potential, it is also possible to see an underlying layer of transactions being used by multiple operators. Such a setup can serve many functions, including:

  • Separating the liability of operators from that of the protocol. In such a case, if any operator were to be deemed irresponsible and its funds blacklisted, users of other operators could continue undisturbed.
  • Flexibility at an operator level. Different operators with different risk profiles or different target markets could follow different rules. For example, a given operator could provide open access to all users with a certain transaction limit, while others would be KYC-only.
  • Benefits to users’ privacy regardless of their operator. Perhaps the greatest possibility is that, if the distinction between operators is sufficiently clear while sharing the same protocol, all users will benefit from the same privacy. This can only happen due to zero-knowledge’s other immediate application, blockchain scalability, which continue to showcase the incredible potential of this technology, whether it is for institutional dark pools, zkEVMs, zk-rollups, or other applications.

The promise of decentralized dark pools is the perfect scenario for institutions to onboard into DeFi en masse. Without the limitation of fully public order books and complete access to DeFi’s opportunities and the ability to perform large trades without network congestion and MEV attacks affecting them, growth will become inevitable as enterprise and institutional capital finally finds its way to decentralized finance.

About Panther

Panther is a chain-agnostic privacy layer that allows users to access DeFi privately and compliantly. Its users can execute transactions and deploy assets across DeFi. Panther’s zero-knowledge primitives are also generalizable to KYC, selective disclosures between trusted parties, private ID, voting, and data verification services.

Users access Panther’s privacy by depositing assets from different chains into Multi-Assed Shielded Pools (MASPs or simply Shielded Pools). Shielded Pools exist in different chains, interconnected by zBridges. Using DeFi Adaptors, users can also deploy their assets into DeFi dApps/Protocols, or they can transact with and swap them privately within MASPs.

Since Panther’s privacy is enabled by zero-knowledge proofs, users can disclose any part or the whole of their transaction history to anyone at will. They can also choose to withdraw their assets from MASPs into stealth addresses.Panther also features ZK- and non-ZK Reveals.