The Future of Blockchain Dark Pools: Balancing Transparency and Privacy

Around 2008, some developers wanted to put an end to the "conspiracy" of American exchanges. These exchanges often gave big clients the privilege of receiving order information ahead of others, allowing them to act just a little faster than ordinary users. Ordinary users often do not realize that their orders are actually contributing to the profits of professional trading teams.

Unfortunately, the tools developed to display trading data were ultimately absorbed by quantitative trading exchanges. Information has indeed become more transparent, but there are always some people who can obtain more transparency than others.

As someone who has been paying attention to FHE( fully homomorphic encryption ) for a long time, I am pleased to see industry insiders, especially the CEO of a well-known trading platform, starting to discuss the topic of "dark pools." This is also a potential application scenario for real encryption technologies such as ZK, MPC, and FHE. However, it should be pointed out that the CEO's understanding of dark pools and the blockchain-based dark pool practices do not seem to be entirely consistent.

In the discussion about dark pools, the CEO mainly focuses on how to hide large order information to avoid potential targeted attacks. For James Wynn, who recently encountered misfortune, this is undoubtedly the technology he needs. The on-chain mechanism of Hyperliquid, combined with the function of hiding information, seems to herald a more liberated trading world beckoning us.

However, we cannot say that the CEO's idea is wrong, but at least his viewpoint is not entirely equivalent to the situation James encountered this time. The first question we need to answer is: why did James choose to make large transactions on Hyperliquid instead of on some large centralized exchange? At its core, it is because he can obtain more benefits on Hyperliquid while facing fewer restrictions.

Hyperliquid has two main advantages:

1. No KYC required, no funds review.
2. On-chain transactions effectively prevent malicious pinning.

Although Hyperliquid's level of decentralization, leverage, and liquidity cannot be compared to large centralized trading platforms, its on-chain characteristics have successfully attracted a group of large users. This is similar to the situation with Curve War, where professional traders choose Curve as the only on-chain DEX.

However, the Hyperliquid incident was not strictly due to its mechanism design. On the contrary, it is precisely the transparent nature of the blockchain that allowed the "attacker" to see James's position and liquidation price. This is also why the CEO proposed the need for dark pool DEX.

But this is not the case. The field of on-chain privacy transactions has been deeply explored. Whether it is Arcium's FHE dark pool approach, or "real" privacy protection tools like Bitcoin, Zcash, and Tornado Cash, they have failed to gain mainstream adoption in the market. On the contrary, functionalities like ERC-7702, which have numerous issues but are more convenient to use, are continuously expanding their influence.

People always prefer convenience, and only a few are willing to pay for privacy.

Returning to the CEO's dark pool theory, I can frankly say that what he describes is actually "Hyperliquid after solving the MEV problem." As a practitioner from the traditional trading market, he should be aware that the emergence of dark pools in traditional finance is the result of excessive competition in high-frequency quantitative trading. Large transactions can be completed through OTC channels, and the core of high-frequency trading lies in competing for price advantages over ordinary users.

The main strategies of high-frequency trading include:

• Preempt or wait for ordinary users to trade
• Predict or attack large transaction orders
• Faster than other high-frequency trading counterparts.

The answer is already apparent; the dark pools of traditional finance and the MEV of blockchain are consistent in effect. Essentially, this has no direct relation to privacy protection. However, the transparency of on-chain transactions has led to the fact that there is currently no truly effective solution other than "centralization." If everyone remembers, a certain public chain even directly "commanded" nodes not to sandwich orders, just to barely control the MEV issue.

If Hyperliquid can completely eliminate MEV, then even if you see James's order, you won't be able to manipulate the market. The only question is, how do we achieve all of this:

• Eliminating MEV Roadmap
• Enhancing privacy protection roadmap

It is important to remember that dark pools are not about "hiding trading intentions," but rather "hiding trading prices." This is more in line with the execution process of MEV. The dark pool that everyone imagines on the Blockchain is more like Hyperliquid, optimized by MEV and completed with ZK/FHE transformation. The reason it cannot be a centralized exchange is that centralization itself is the largest MEV process.

New Possibilities Opened by Risc-V

The traditions of the deceased often linger in the minds of the living like a nightmare.

It is reiterated that the privacy protection roadmap superficially resembles MEV, but the two are not directly related. The source of blockchain privacy technology can be traced back to Bitcoin, which combines features such as PoW, P2P, microtransactions, and one-time addresses. On the other hand, blockchain MEV and its prevention and control technologies originate from Ethereum. The decentralized blockchain consensus mechanism will inevitably lead to disharmony and noise.

Despite Ethereum's strong embrace of Risc-V, the MEV issue will still exist. The number of staking nodes has increased to 2048, which may enhance the influence of super nodes. However, Risc-V will bring new development opportunities in the integration of software and hardware, especially in the area of FHE dark pools.

Currently, the EVM underlying layer is not compatible with overly complex opcodes, and the new VM mechanism will fundamentally change this situation. This is not just an alternative to SVM or Move VM, but a true innovation. In short:

• OP Code and EVM: The new opcodes will support complex technologies from a lower level, allowing for a comprehensive upgrade with just one iteration.
• New VM, new compatibility: Risc-V VM will be improved from both hardware and software collaboration aspects, not just software optimization.

Let's briefly discuss the significance of Risc-V. Architectures like ARM are hardware for chips, on which operating systems like Windows, macOS, or HarmonyOS can be built, but these are essentially products of commercial companies. Risc-V, on the other hand, is an open-source chip instruction set, allowing Ethereum to fully customize its own system and break free from complete dependence on existing commercial hardware. This customization will bring new potential.

Regarding dark pools, we can categorize them into three levels: subject anonymity, trading anonymity, and interaction anonymity.

1. The blockchain itself is an anonymous system. Unlike traditional finance, anonymity is an essential feature of blockchain. James's self-disclosure or the address association of data analysis platforms is merely a probabilistic match. Without a private key, it is impossible to truly determine the ownership of funds.

2. Transaction anonymity can be divided into price protection and order anonymity. Price protection means that once the price is determined, it cannot be changed; order anonymity can include price protection, but it can also simply hide the on-chain address of the transaction order without enforcing a fixed transaction price.

3. Interactive anonymity is a phased characteristic of the Blockchain. For example, in the most typical issue of deposits and withdrawals, if USDT is used, there will always be the possibility of being tracked and frozen. Hackers have spared certain exchanges' USDT wallets for this consideration.

Starting from the perspective of privacy protection, Risc-V has the necessary conditions to build dark pools, but the MEV problem will still exist. In current practice, the combination of ZK and TEE is the mainstream choice. TEE can isolate private keys, especially suitable for multi-key management systems; ZK can hide order details. However, whether MEV can be completely eliminated will depend on future developments.

At this point, FHE may be a more optimal technical route. Its feature of computed encryption can achieve both subject anonymity and transaction anonymity simultaneously. The only issue is the high cost and slow speed. With the expectation of Risc-V custom hardware, there is a possibility to support spot DEX, but there is uncertainty regarding perpetual contract DEX.

Overall, the deep integration of Risc-V with ZK technology can provide a usable perpetual contract DEX dark pool mechanism. The combination of FHE-specific Risc-V acceleration chips with Ethereum is expected to achieve the blockchain version of the traditional financial dark pool envisioned by a certain CEO—anonymity, high frequency, and large amounts in a trinity.

Conclusion

Whether dark pools can truly be realized is still unknown, but it is obviously a capital and technology-intensive track. Currently, we have only seen:

Historical opportunity - the CEO of a well-known trading platform intends to develop dark pools and realizes that centralized exchanges are not suitable for this.

Regulatory Relaxation - Tornado Cash and DeFi Decriminalization, Transparent Dark Pools Are Not a Pipe Dream, People Just Want to Trade Safely, Not Money Laundering;

Clear market demand - the evolution direction of DEX is finally no longer limited to speculating on Meme coins; professional traders indeed need such tools, with Curve and Hyperliquid being successful examples.

Satoshi Nakamoto believed in Bitcoin, and thus Bitcoin was born. This time, can a transparent dark pool become a reality in this world?