Steemit Crypto Academy Contest Season 11 Week 3 - "Dark Pools In Cryptocurrencies"

TASKS

• Discuss in your own words what Dark Pools are in cryptocurrency. And explain how it works?

• Do all crypto exchanges offer a dark pools? If yes, explain how does its dark pool work? What tokens are supported? Are there any fees attracted? And What are the requirements to get involved in dark pools trading on the platform?

• For the chosen dark pools, show how to perform block trading on the platform. (Screenshots required).

• Explain the decentralized dark pools? State a decentralized dark pool in cryptocurrency and discuss it. How it works?

• Compare a centralized crypto exchange dark pools with a decentralized dark pool. What are the distinctive differences?

• What are the advantages and disadvantages of the Dark pools in Cryptocurrency?

---

(
_{Image designed in canva}

Discuss in your own words what Dark Pools are in cryptocurrency. And explain how it works?

Dark pools in cryptocurrency are mostly used by big-time investors such as institutional traders to facilitate the trade between a large number of securities. This form of trading has been present since the 1980s and has over the years grown and developed to occupy a sizeable percentage of the global market. A dark pool as mentioned facilitates the exchange of financial instruments just like any public exchange but the major difference which single out dark pools from any traditional public exchange is the absence of order books. Due to this, trades made on the dark pool are not made visible to the general public unless executed.

This feature of anonymity has proven its importance to institutions because of the avenue to make and place trades without the need to reveal the intentions behind such orders. This allows them to trade large amounts of assets without the disadvantage of suffering a potential inimical effect on orders before execution.

A sizeable percentage of all dark pool trades is done in block trading. These kinds of trade involve the attribution of a predetermined price to a transaction of large quantity.

How dark pools work
In dark pools, orders placed or made can only be matched with other dark pool orders because the order books here are not visible to the general public. Due to the invisibility of order books, its somewhat vague to allow orders to get placed at market price. This is because the absence of the order book is detrimental to placing orders at market and so only limit orders are allowed on dark pools.

These orders just like any other limit orders only execute when a corresponding order suffices and a cross occurs, for this reason darl pool orders are limited to large transactions to prevent traders from discovering where the others side of the order book lies. It's interesting to note that there is no such thing as margin or leverage trading in dark pools, therefore the orders have to be met using real balances.

Do all crypto exchanges offer a dark pools? If yes, explain how does its dark pool work? What tokens are supported? Are there any fees attracted? And What are the requirements to get involved in dark pools trading on the platform?

NO!, not all crypto exchanges offer dark pool trading options however, one crypto exchange that offers a dark pool is the Kraken exchange.

Kraken exchange is a cryptocurrency exchange that facilitates the purchase and sale of cryptocurrencies and this exchange proud itself as one of the oldest bitcoin exchanges founded in 2011 by Jesse Powell to facilitate trading between fiat currencies and cryptocurrencies as well as provide useful information relating to prices of instruments to Bloomberg terminal. Its dark pool allows traders to be able to place orders and trade without the need to divulge their interests to other traders.

To access the dark pool on the Kraken exchange, traders would have to meet certain requirements mentioned later in this post. Once these requirements are met, trades in the form of limit orders can be placed on the dark pool incurring certain fees which would then be matched with other orders on the dark pool until its executed. Trades cant be placed at market prices because of the absence of order books and to prevent slippage from occuring.

There is no way to determine if a trader is a market maker or taker on the kraken dark pool because the trading fee incurred are the same for both parties in a trading pair.

The dark pool on the kraken exchange only supports asset transactions involving the bitcoin and ethereum currency pairs. Some of the tradeable assets include:

• Cryptocurrency pairs - BTC/ETH only

---

Is there any fee attracted
Dark pool trading also attracts certain fees. The fees in dark pool are larger than rates of normal limit orders, ranging from 0.20% to 0.36% on the Kraken exchange dark pool. However, with consideration to execution and completion of orders on the dark pool, the fees eventually decline. Therefore the basis for determining the fee to incur while trading on dark pools is dependent on your 30-day trade volume and executed orders.

Requirements for getting involved in dark pool trading on kraken exchange

• Dark pools are restricted to only users who have completed verification up to pro-level on the Kraken exchange
• 50,000 USD is the minimum order quantity tradeable for ETH pairs
• 100,000 USD is the minimum order quantity tradeable for BTC pairs.
• Lastly, as mentioned before due to the absence of the order book only limit orders are supported in dark pools.

For the chosen dark pools, show how to perform block trading on the platform. (Screenshots required).

It's important to note that dark pool trading is only available to those who meet the requirements mentioned above, especially verification up to pro level.

Once the conditions are satisfied, on the order menu. Users are required to switch from the default simple mode to advanced mode.

• In the advanced order menu, click on the drop-down menu icon beside the order pair.
• The dark pool option will be listed at the bottom of the options as shown below.

_source

Explain the decentralized dark pools? State a decentralized dark pool in cryptocurrency and discuss it. How it works?

Decentralized dark pools in cryptocurrency are anonymous channels and private trading platforms developed using blockchain technology. Here digital assets can be traded with increased privacy and reduced market effect which as a result of this feature proves to be very secure and efficient.

There are a number of decentralized and one popular one is the Republican Protocol.

Republic Protocol
Republic Protocol is an open-source decentralized dark pool exchange for the cryptocurrency space established in 2017 by Taiyang Zhang and Loong Wan to facilitate OTC trading as well as the exchange of ERC20, Ethereum and Bitcoin cryptocurrencies through a decentralized dark pool medium.
The main aim behind the republic protocol was to create a medium to facilitate trustless transactions and enable a decentralized node network to assist in matching orders. By using a protocol called the Shamir Secret Sharing Scheme, republic protocol is able to break down these orders into smaller orders and redistribute them throughout a network.

Since orders are broken down into fragments in a decentralized dark pool network, it's sometimes possible to reconstruct an order if enough fragments of these orders can be combined and reconstructed. To prevent this from happening, republic protocol makes use of a smart contract built around the ethereum network called the registrar to prevent such scenario from occurring by organizing nodes into a kind of network topology which makes it very difficult to acquire enough fragments of orders required to reconstruct an order in a network.

Having explained, the different protocols on republic protocol, when an order is placed on the dark pool, the Shamir Secret Sharing Scheme breaks down the order into fragments and distributes these fragments across the network, after which the smart contract "registrar" is used to reorganize nodes in the network to prevent any particular node from being able to gain enough fragments of an order to reconstruct the initial order. Thereafter, the integrity of the orders is verified with the use of the zero-knowledge proof before being matched with other orders on the network.

Compare a centralized crypto exchange dark pools with a decentralized dark pool. What are the distinctive differences?

Parameters	Kraken Centralized dark pool	Republic protocol decentralized dark pool
participation requirement	In order to have access to the dark pool on kraken users need to attain the highest KYC verification level	Participation in republic protocol doesn't require any KYC verification procedure
Order visibility	Although the order book is made invisible, the exchange can still view the orders placed	No visibility of orders
fragmentization	Orders are not broken down into smaller orders	using the zero-knowledge proof, orders are broken down to fragments
smart contracts	doesn't make use of smart contracts for trade	Makes use of smart contracts for trade and organization of nodes

9. What are the advantages and disadvantages of Dark pool in Cryptocurrency?

Advantages

• Transactions here are anonymous providing privacy
• No slippage as traders certainty of execution of trades at intended prices is sure
• Matching of trades is done by taking the average of the best between the bid and the ask price, therefore this leads to an improvement of price.
• Far more secure digital verification procedures when compared to traditional public exchange trading.

Disdvantages

• Constant usage and mass adoption of dark pools by large firms and big investors for trading would reduce the liquidity in the market.
• Lack of transparency due to the absence of order books on dark pools.
• It's sometimes abused and used for exploitative practices by high-frequency traders.

Conclusion
Dark pools are very useful in performing large volumes of trades and transactions anonymously with minimal impact to price.