- Dark pools are private exchanges where institutional investors can trade large amounts of assets without affecting the market price.
- In the crypto space, there is a need for similar privacy and large trade execution optimization.
- Dark pools provide a solution by allowing traders to buy or sell tokens without affecting the market or protocol mechanics.
- Crypto dark pools offer pre-trade and post-trade privacy through encryption and privacy-preserving technologies.
- These dark pools shield order details and ensure privacy throughout the trading process.
- The use of dark pools eliminates the need for traders to rely on OTC desks and pay premium fees.
- Tornado Cash, a shared pool in the crypto space, can be considered a quasi-dark pool.

- The article discusses various dark pool protocols and their different approaches to privacy and compliance.
- TornadoCash is a shielded mechanism without swapping capabilities, making counterparty discovery difficult.
- Proof of innocence can be used to ensure funds are not mixed with corrupted funds in anonymity pools.
- Dark pools like Renegade and Portalgate use different keys or ZK KYC Oracle for compliance.
- Different dark pool protocols use various privacy-enhancing technologies such as ZK technology, NPCs, and fully homomorphic encryption.
- Portalgate and Renegade are pure play dark pools where order matching and execution happen within the protocol.
- Panther, Railgun, and Penumbra execute orders against external liquidity pools or DEX aggregators.
- Renegade uses multi-party computation for order matching, while Portalgate uses fully homomorphic encryption.
- The primary difference between dark pools is whether they rely on internal liquidity or external sources for trades.

- Railgun and Panther are dark pools that bootstrap liquidity from other DEX or DeFi protocols.
- They offer immediate liquidity and do not require users to sign up or lock in their assets.
- These dark pools provide privacy and protection against tracking and analysis of institutional wallets.
- MEV (Miner Extractable Value) opportunities exist in Railgun and Panther due to their use of external protocols.
- Portalgate, Penumbra, and Renegade also have potential MEV opportunities, but they minimize it to a great extent.
- Dark pools charge fees, including gas fees and relay fees, but they may be on par or lower than traditional exchanges in the long run.
- Trust assumptions are solved in crypto dark pools as users do not have to trust a single operator.
- Running your own relayer in dark pools can further enhance privacy and eliminate additional trust assumptions.
- Railgun is live, while Panther and Penumbra are still in development and testing stages.

- Penumbra, a dark pool platform, is still in development and the swap feature is not live yet.
- Dark pools are useful for whales and institutions who want privacy and don't want to trust a single intermediary like Coinbase.
- Dark pools demand KYC measures, but it is uncertain if these measures will be accepted by regulators.
- Dark pools aim to provide zero information leakage and prevent front-running.
- CalProtocol and Uniswap X are variations of dark pools, but without the expectation of privacy.
- Dark pools are primarily targeted towards institutional users and unlikely to see much retail usage in the future.
- Running your own relayer provides more privacy compared to trusting another relayer.
- The interviewer has used Railgun and is excited to see how it develops.
- There may be risks for US citizens using dark pools due to potential crackdowns by the government.

- The speaker discusses the regulatory risks and uncertainties associated with dark pools and privacy protocols in the crypto space.
- Compliance at the protocol level, such as KYC requirements, is being implemented by some dark pools.
- The speaker highlights the compliance risks and lack of regulatory approval for these dark pools.
- The challenges of bootstrapping liquidity in dark pools are discussed, including the need for institutional investors and external liquidity sourcing.
- The speaker mentions specific protocols like Railgun and Panther Protocol that are exploring different strategies for liquidity.
- The speaker's research on dark pools is available on their Substack page.
- The episode concludes with announcements of upcoming guests and where to find more information.

- The video is a wrap-up of the latest crypto news
- The presenter mentions they are close to the top of the hour and will see everyone again tomorrow
- They thank the viewers for tuning in

Dark pools in the crypto space provide privacy and optimization for large trades, allowing traders to buy or sell tokens without affecting the market. These dark pools use encryption and privacy-preserving technologies to ensure privacy throughout the trading process. They eliminate the need for traders to rely on OTC desks and pay premium fees. Different dark pool protocols use various privacy-enhancing technologies and approaches to compliance. Some dark pools rely on internal liquidity, while others bootstrap liquidity from external sources. Dark pools charge fees, including gas fees and relay fees. They are primarily targeted towards institutional users and provide protection against tracking and analysis of institutional wallets. However, there are regulatory risks and uncertainties associated with dark pools, and compliance measures such as KYC requirements are being implemented. The challenges of bootstrapping liquidity in dark pools are discussed, and specific protocols like Railgun and Panther Protocol are exploring different strategies for liquidity.

Guest: Muhammad Yusuf
Twitter: https://twitter.com/yusufxzy

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It's Monday, October 30th, and today we're going to talk about how the big boys trade assets.

For us mere mortals, we have to use a regular exchange to do so.

Typically, when you're trading stocks, you go into a brokerage account, you fire off your order, and then it goes through a bit of machination.

It'll get swapped through the exchange, and then the securities get delivered to you.

But what if you have a couple of billion dollars that you need to buy some bonds, you need

If you're doing that, you just can't place a billion dollar order right at the market.

Everybody knows that you're trying to buy and you'll get a much worse execution price just because people know that you're buying in size and that they can widen up the bid or the ask on the assets that you're trying to buy so that you're forced to buy at a higher price.

And so several years back, back in the 60s, people started trading with what's known as dark pools and dark pools are these like private independently operated Exchanges that are run by essentially independent companies right Private networks and they allow institutional investors who want to be able to do like block trades where they have a specific amount of assets they want to buy or sell to be able to swap back and forth.

And so These have become pretty prevalent for large institutions to trade with because they allow for privacy and they allow for large trades to be filled.

And so we don't really have a system like that yet, specifically in crypto.

I mean, we have more specifically in DeFi.

Like in DeFi, if you're going to go fire off a trade, it's going to be through like Uniswap or it's going to be through curve or any other public venue.

And the issue with this is that when you fire off these trades, they get added into the mempool.

You're going to have, there's going to be MEV, you may get front-ran, you may get back-ran.

There's all sorts of things where your trade execution probably could be more optimal, but isn't because you're using a public network.

And so there are several projects out there that are trying to figure out a solution for this.

And We've brought on somebody who's just done a great research paper on this subject, on crypto dark pools.

And he is a research analyst over at Delphi Digital.

And he is here to talk with us about dark pools today.

So Mohamed, thank you for coming on Leviathan News.

So I kind of explained dark pools the way that I kind of know it, right?

But maybe you go a little bit more into detail about what is the reason that these dark pools exist in the first place?

Why don't we have that sort of private trading here in crypto yet?

So dark pools specifically cater to institutions or whales.

You know, if at all, they'll have to move large orders.

And if these orders were to be seen in open markets, they definitely affect the price of the asset that's being bought or sold.

It would be pretty inconvenient for the trader themselves and also for the broader market as the price shifts.

Let's say I was a DAO or protocol or a whale right, where I have considerable stake with 1 particular token.

And if I had to offload or let's say even buy, you know, this particular token, And if I were to go into the open market in a decentralized exchange and place my orders, it would have some consequential effect within the community of that particular token, and it would also end up affecting its market cap and a lot of other protocol mechanics that would be tied to the price of that particular token.

And dark pools, they cater for exactly this particular issue where you know I could freely you know offload or buy a particular token without you know anyone you know hearing about it and in crypto right a lot of OTC deals happen over you know word-of-mouth over telegram groups all of that I guess could you know find a place within dark pools where a lot of trust issues would be minimized.

You wouldn't have to rely on the other person, you know, correctly stating the details in the telegram message.

It's just a lot more trustless and much more convenient.

Yeah, we had on Jason Leibowitz last week and he was talking about for his clients at the institutional level, you know, he's only working with OTC desks that deal with like post-trade settlement.

And essentially what that is, is that the institutions are entering into an agreement with the OTC desk saying like, okay, like we will settle in cash after the trade is complete.

So send us your ETH, send us your BTC, we'll wait 6 confirmations.

And as soon as we're done with that, then we're gonna fire off whatever sort of USD transaction or USDC or whatever.

And additionally, the OTC desk knows all the counterparties.

So hopefully your OTC desk isn't trading against you.

That would be also the risk as well, too.

So the kind of base case for these dark pools, at least the way that I understand it, is that you can fully remove any sort of identifying information from these trades and that you're able to put all the trades into a big black box where nobody really knows what's happening and funds can kind of go in and out.

And at the end of the day, everybody gets what they want and hopefully at the best execution price possible.

And the traders are also spared the premium fee that they'd have to pay to the OTC desk for facilitating those trades as well.

So I want to get into like the mechanics of how a crypto dark pool is set to function.

What are the basic ideas of how these things operate?

So when it comes to privacy on crypto dark pools, you have 2 major aspects.

That's pre-trade privacy and post-trade privacy.

So dark pools like you know Renegade right What they have in place is a relayer network that receives a particular order.

And order details are encrypted from the relayers as well.

And anyone could operate as a relayer and charge a fee to a particular trader, right?

So this relayer network, as it receives the order, it uses a few privacy preserving technologies like MPC or FHE, to basically match orders among the relayers themselves.

You have a bunch of orders coming in to the relayers, and these relayers, they're a network, and they gossip orders amongst themselves, and they match orders.

Once an order is matched, SDK proof is released and that is verified by another contract.

So again, all the details remain hidden, even with the contract.

So this way, right, it basically acts as a shield, right?

Right from the point where the order enters and right to the point where the order is settled.

So you're writing your article, which we have in the show notes.

So an Ethereum transaction essentially is like recording a state change.

So there's 2 states, beginning state, end state, and then there's a transaction that changes it.

And that transaction is always going to be public.

So the question becomes, how do you have 2 state changes and hide all the information from everybody else?

That's really kind of the core question of what's trying to be solved here in crypto.

And there's a bunch of different solutions out there.

Before we talk about specific products, I want to go back to Tornado Cash, which was added to the OFAC list this past year.

Would you consider that a quasi-dark pool?

Here's of coming into a shared pool, right?

You can't really see what's happening on the back end and you have fixed amounts that can go in and out.

Right Now, there is no swapping that's taking place, which I think a lot of these newer dark pool protocols are trying to facilitate, but it does break the chain of custody, and you don't really know who's using Tornado.

And it also relies on relayers to generate those ZK proofs.

Very similar to what is happening with the current slate of Dark Pool protocols.

I don't think it would be that efficient of an exchange or a dark pool Because I think counterparty discovery will be a big issue Because I guess if you're the 1 depositing into TornadoCash, you'd be the 1 aware of that particular transaction and you would have the know-how as to how to withdraw that particular set of funds on the other side.

So I guess when it comes to, you know, standalone mixers or rather, you know, protocols like TornadoCache, they are basically, you know, a shielded mechanism, right?

So again, counterparty discovery will be quite difficult unless you personally know the other party, right, whom you can fully trust, using something like TornadoCache as a dark pool.

So the issue with tornado cash is that you have like this shared anonymity set between everybody.

So when I deposit funds in the tornado cash you deposit funds Garrett does as well too.

Since Garrett is a North Korean hacker, when he deposits funds into Tornado Cash, it taints the entire anonymity pool because you're not able to tell who the counterparty is.

And so this is 1 of the bigger issues with the dark pools is that because these are institutional actors that are using them, there is a responsibility on their part to have either like KYB or KYC, all sorts of compliance protections to ensure that they're swapping with another acceptable party.

For you in particular, I think more recently Vitalik and Amin Suleimani and a couple of others came up with this paper on privacy pools that talks about proof of innocence.

With proof of innocence, you can basically prove that the set of funds that you had deposited in an anonymity pool was not mixed with a particular set of funds deposited by certain other addresses.

So that's what proof of innocence is all about.

And I think that will basically help solve for what you just mentioned about funds being mixed with corrupted funds on the other hand.

Dark pools like maybe Portalgate or Renegade could also have this proof in a sense mechanism in place.

When it comes to compliance in general, there are a couple of different ways, I guess each of these dark pools are approaching them.

With Renegade, you basically have different keys for different interactions that you'd want to do in the dark pool.

For example, if you want to view a particular wallet, you'd have a key for that.

If you'd want to send a transaction, you'd have a key for that.

So you could use that particular viewing key and reveal a particular set of interactions within the dark pool.

And protocols like Portalgate, What they have in place is basically a ZK KYC Oracle, wherein whenever you're setting up a new wallet on PortableGate, you'll have to do a KYC, a KYB with a traditional KYC provider with the help of a ZK Oracle.

And you have this proof in your wallet, right?

That's when your wallet is capable of interacting with the port, or else you wouldn't be able to interact with a portal gate without that particular roof.

Yeah, so I've got this little schematic that you made up here that shows all the different protocols that you mentioned in the article.

You had Portalgate, Penumbra, Z-Swap, Railgun, Renegade, and then Panther protocol as well, too.

And so they all use different ways of using ZK technology or maybe NPCs, what you call privacy enhancing technology or PETs, fully homomorphic encryption as well too, to be able to essentially hide the, or like anonymize and make private these transactions.

So can you run through the different technologies and kind of like run through the benefits and downsides of each?

Because like I see 5 or 6 implementations here of these dark pools.

Like why would I choose 1 over the other?

Like, what's the, you know, like, if I'm looking at this from like a higher level, like what's the differences in these?

So Renegade and Portalgate, they are pure play dark pools.

They are intended to be dark pools, but when it comes to Penumbra or Raildon or Tantra.

So when you say like, just to stop you there.

So when you say Portalgate and Renegade are supposed to be dark pools, right?

That means that like all the order matching and execution is done inside of the protocol itself.

So like when coming back to like how a regular dark pool works, There's like block orders that are being made.

Essentially, you broadcast what kind of trade you want to make and the price that you want to execute the trade at.

And then somebody else has to come in and fill it, right?

So that's what you're saying happens inside of these, right?

That you have like all the execution and order matching and order broadcasting happens with inside the protocol here.

With dark pools, orders are matched with other orders by other traders, you know, supply meeting demand within that particular dark pool itself.

But with the case, but in case of, you know, Panther or Railgun or Penumbra, orders are basically, you know, executed against another liquidity pool, or let's say for Railgun, for example, right?

It uses 0xAPI that routes trades to a DEX aggregator and with Penumbra what happens is you have orders right The sum of all orders in a particular epoch, they are executed against concentrated liquidity pools within the ETF.

You have the sum of the details being revealed, but individual details.

And the same with Panther is pretty similar to Railgun in the sense that you know orders are routed to external you know dexes.

But yeah with Portricate and Renegade it's you know order into order, just orders crossing with each other.

That's what happens with pure paid artboards.

And to your question about how these different privacy enhancing technologies are used, with Renegade, right, within the Relayer network where orders are gossiped, so multi-party computation is used on those relay nodes for order matching because the orders are encrypted.

No 1 else knows what the order details are.

And with the case of Portalgate, what you have is again a set of nodes receiving orders, and which are encrypted again.

FHE is used again on those nodes to help those encrypted orders match against each other.

So in the case of both these dark pools, these privacy enhancing technologies are used to match orders privately, basically.

So just to come back to the primary, so I see the primary difference between all these dark pools is that there are some dark pools that rely on internal liquidity to be able to facilitate trades.

So for like Portalgate or Penumbra or Renegade, they have to have traders like they have to have sell side traders who are coming in and essentially posting their offers saying like, I want to make this order and then someone else has to come in and fill that.

So All the liquidity is internal versus something like Railgun or Panther, which essentially bootstraps liquidity from Curve or Uniswap or really any other DEX or DeFi protocol that they can.

And it's not just AMM swaps as well, too.

They have the ability to go out and deposit LP.

They could interact with, say, Aave or Compound.

They're like a more generalized pool where you deposit all of your assets into it.

So think about it like this, where you have a shared pool where institutional clients can put all their assets into and then they can interact with DeFi from that pool.

And so you don't really know who is depositing from that pool, depositing, withdrawing, but those assets are getting sent out and then used in DeFi.

So Railgun and Panther have immediate liquidity from day 1.

There's no need to have to go out and get people to sign up to your new system and try to get them locked in.

It's just like, hey, we already have this.

Come and use our privacy layer so that you can start obfuscating your wallets, right?

Because we all know that the big institutional wallets get tracked.

I mean, you can go on D-Bank or like any of the other big tracking websites and see what everybody's buying, right?

And it's the same case with copy trading or any other wallet analytics platform.

If at all you end up using any of these privacy preserving protocols, you would most likely be exempt from all of that tracking and analysis.

So like when you're talking about like tracking analysis, there's 2 things that I wanna touch on here.

Like what are the possibilities for MEV with these dark pools?

We just talked about Railgun and Panther, which are using external protocols.

So their trades are going to be made public and they will be subject to MEV because they're swapping through Uniswap or Curve and there's nothing that they can do to hide their trade.

So like the way that I understand Railgun and Panther is that there's a set of relayers who essentially take the transactions from the shared pool and then broadcast it out to the mempool, to get the trades executed.

And then once trades are executed, they bring that liquidity back into the pool.

So there is MEV that could be extracted there.

But what about for like Portalgate and Penumbra and Renegade?

There could be, you know, but mostly I'd say MEV is minimized to a great extent.

And in the cases where, so Renegade, right?

With Renegade, you could basically reveal certain order details in order to attract more liquidity or a counterparty on the other side.

And if at all you were to do that, you would definitely be leaking information and that would potentially lead to some form of front running.

And in the case of portalgate, you do have a clear demand to supply order matching mechanism running.

But again, in the case of shortage on the other side, you have orders that get routed to an AMM.

Again, you have potential for capturing MEV when orders are routed to this AMM.

There will be some form of leakage 1 way or another.

Just that with pure-play dark pools like Renegade or Portuguese, those MEV capturing opportunities are greatly reduced.

So like within those internal liquidity systems, you know, because everything, both transactions, both sides of the transaction are private and everything's sourced internally, it's much easier to keep that information hidden so that there's no MEV.

But for all the other ones, there is some.

I was curious about the fees that are associated with these.

Because last time I looked into it, like the transaction fees were like much higher than you would see on mainnet or L2s.

So would you consider this to be the premium that people are paying for having this privacy?

Because if you were to look at traditional dark pools, what you had is institutions paying somewhat of a monthly subscription fee to the dark pool operator.

And what you have with dark pools and crypto, it could be that additional premium of a fee that the protocol charges for each order that gets executed.

But still in many cases, I think if at all crypto pools were to significantly grow over time, I'd say the protocol fees would in general be on par or lower than traditional exchanges.

So typically I see the average fee is gonna be about 20 basis points here with Penumbra charging 0.

But then on top of this, there's also gas fees, right?

There's gas fee, and then there's also a relay fee that the trader would have to place.

And in many cases with Poregate or Renegade, you can choose to run your own relayer in order to avoid paying that fees.

And if at all you do choose to run your own relayer, I'd say it enforces greater privacy to your respective orders than relying on some other relayer to trustlessly relay that order.

So what is the trust model that comes into these?

Like if I'm a institutional client, like how can I be sure I'm getting good execution?

You know, everybody always says like, you know, is EK can prove both sides, but you know, like what's the risk in trust assumptions coming in with these dark pools?

So in traditional dark pools, you had to trust the dark pool operator.

And in many cases, the dark pool operator was trading against its own customers or leaking that information to other high frequency traders who trade against their customers.

And I've made a mention of all of the violations that have occurred in the last couple of years.

About 340 million or so have been paid by these dark pool operators to the SEC but I think that pales in comparison to the gains that they would have made by trading against their own customers.

With crypto dark pools you basically have this assumption solved for.

And in some cases where a relayer is receiving your order.

They may have access to certain details with respect to your order or to your wallet.

But if at all you choose to run your own relayer, which is, I guess, particularly easy when it comes to dark pools.

You basically avoid that additional trust assumption as well.

And I wouldn't say it's 100% trust proof, because none of them are live yet.

There's no actual saying, you know, what's to happen.

But it is pretty easy to run your own relayer.

It's basically another wallet that ends up, you know, receiving the order.

So of those 5 protocols that you just mentioned, which ones are live right now?

So, PurePlay, DarkPools, Renegade, Portalgate, they're still in development.

But with respect to the other privacy-related protocols, Railgun is live.

Panther is live to some extent, not all of its features are out there yet.

Oh yeah, so Panther is in the middle of its testing stage.

I think they have like 2 of their ninth step.

Penumbra is also pretty much in development.

I ask, when I look over this, if I'm a big institutional client or even the US government trying to sell off massive amounts of Bitcoin that was seized, Why on earth would I use these dark pools instead of just going to Coinbase and asking them to conduct the OTC on my behalf?

Yeah, I'd say, actually, these dark pools do demand KYC.

Not all of them, but those KYC measures or KYB measures are being put in place.

Not to say that these KYC measures will be accepted by the government or any regulatories.

But as for whom Darkpools would be particularly useful for, I'd say it's these whales and other institutions that do not want to trust any 1 particular intermediary, right?

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Trading in the Shadows: An Introduction to Crypto Dark Pools w/ Muhammad Yusuf