Dark pool trading, which accounts for approximately 15% of all trades on Wall Street and is not currently widely available in cryptocurrency markets, would allow traders to sell large orders of Bitcoin and Ethereum on a hidden order book without affecting market prices
Republic Protocol, a new blockchain project with ties to Kyber Network and other well-known projects in the space, has announced they will be building a decentralized dark pool for the trading of crypto assets. Initially, the company will allow large-scale trading between bitcoin, Ethereum and Ethereum based tokens on a hidden order book, while on a public blockchain, to not affect the pricing of those assets.
The development of alternative trading systems is critical for trading large blocks of cryptographic assets while maintaining minimal price slippage and market impact.
A dark pool is a private exchange where ﬁnancial assets and instruments are traded and matched by an engine running on a hidden order book. These exchanges are primarily created to serve institutional or HNW retail investors who require a system where signiﬁcant volumes of assets can be block traded with minimal price slippage. Dark pools are estimated to represent approximately 10-15% of the trading volume of all US stock trades.
Republic Protocol is proposing a decentralized open-source dark pool protocol facilitating atomic swaps between cryptocurrency pairs across the Bitcoin and Ethereum blockchains. Trades are placed on a hidden order book and are matched through an engine built on a multi-party computation protocol. This provides order execution without exposing market-sensitive information such as price and volume at a certain position, which would provide an advantage to other traders.
Republic removes the need for a trusted intermediary to operate a dark pool and provides crypto-economic incentives through a protocol token for governance; enabling the development of a secure, decentralized, scalable dark pool protocol capable of handling billions in trading volume daily.
[perfectpullquote align=”full” bordertop=”false” cite=”Taiyang Zhang, CEO of Republic Protocol” link=”” color=”” class=”” size=””]“Dark pools represent a large percentage of daily trading in traditional financial markets for a reason. A dark pool enables institutional traders to protect their hand from public view while not adversely affect market prices when they are buying and selling large orders. We feel like there is an incredible opportunity to apply this proven concept to the world of cryptocurrency trading while also utilizing the inherent security of the blockchain.”[/perfectpullquote]
Achieving a Decentralized Dark Pool on a Public Blockchain
The Republic Protocol proposes using the Shamir Secret Sharing Scheme to break down orders into a large number of order fragments and distributes them throughout the network. Orders cannot be reconstructed unless a majority of the order fragments are recombined. To prevent this from happening, the Republic Protocol deﬁnes an Ethereum smart contract called the Registrar, that organizes nodes into a network topology that makes it unreasonably diﬃcult for an adversary to acquire the enough of the order fragments to reconstruct an order. As long as traders respect the network topology deﬁned by the Registrar, their orders will be safe. If they fail to do so, only their own orders are at risk of exposure.
Using order fragments from two diﬀerent orders, a node can cooperate with other nodes that hold other order fragments for the same two orders to perform a decentralized computation that will determine if the two orders match. The decentralized computation does not expose the order fragments and performs a random scaling of the ﬁnal output. This prevents nodes from reconstructing the original orders and prevents them from using the output to infer anything about the orders. A Zero knowledge proof is used to verify the integrity of the computation, without revealing any information. These proofs are simple and eﬃcient, allowing them to be performed by an Ethereum smart contract called the Judge.
After two orders have been matched, an atomic swap is initiated between the two traders over the Republic Swarm Network, a decentralized peer-to-peer network. Using standard asymmetric encryption primitives, the details of the atomic swap are kept secure.
The company plans to first build the Republic Terminal, a DApp (Decentralized Application) for interacting and trading BTC, ETH, and ERC20 with the underlying Republic Protocol. Republic Terminal, along with all the other components of Republic are open-source.
Mining will also be implemented to discover orders on the distributed hidden order book. Miners are paid in the tokens of the platform called REN, which is a fee traders must stake and transfer for their usage of the protocol. The order matching process is decentralized.