As the cryptocurrency trading frenzy continues, one firm is now committed to creating one of the first dark pools where traders can buy and sell their currency anonymously.
Republic Protocol, a new blockchain project with ties to Kyber Network, has announced they will be building a 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.
In equities, dark pools are estimated to represent approximately 10-15% of the trading volume of all US stock trades. They have done well to attract institutional investors who seek anonymity and large "block" trades that are not normally available via the public or "lit" exchanges such as the NYSe, Nasdaq or Cboe.
Cryptocurrency trading has exploded recently, as daily trading volume has reached approximately $50 billion with a total market cap over $750 billion in upwards of 100 cryptocurrencies. With institutional investors arriving into the cryptocurrency market, the development of alternative trading systems or dark pools can only help in the trading of large blocks of cryptos while maintaining minimal price slippage and market impact.
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.
“Dark pools represent a large percentage of daily trading in traditional financial markets for a reason,” said Taiyang Zhang, CEO of Republic Protocol. “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.”
Republic Protocol looks to implement the Shamir Secret Sharing Scheme to break down orders into a large number of order fragments, and distributes them throughout the network. That is, 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.
