As cryptocurrencies face mainstream adoption, there has been an influx of institutional investors – or whales, as some would call them – who are ready to trade huge sums of money. However, the movement of these astronomical amounts of money will inevitably affect market sentiments, leading to market manipulation and the general volatility of the cryptocurrency market.
With the intention of allowing big investors to trade Bitcoin and Ethereum in large quantities without affecting the market, Republic Protocol has raised 35,000 Ether ($33.8 million) in this month alone to fund a dark pool for cryptocurrencies. The Singapore-based company reportedly gathered money from various cryptocurrency hedge funds from all over the world to make this project a success.
According to the company’s 21-year-old CEO, Taiyang Zhang, the launch of Republic Protocol – which is projected to take place in the third quarter of 2018 – should increase cryptocurrency trading volume.
The Republic Protocol predicts that cryptocurrency dark pools like itself will be recording trading volumes of up to $9 billion every month. To put this into perspective, the average daily trading volume of Bitcoin alone is around $8 billion, thanks to the recent surge in the cryptocurrency market.
When asked about the motivation behind founding Republic Protocol, Zhang gave a fairly straightforward response.
“If I have 1,000 Bitcoin and I want to trade it for another cryptocurrency, everyone can see that and it puts downward pressure on the price. We can’t hide orders on the bitcoin blockchain.”
However, what a dark pool does is that it temporarily conceals the details of a certain trade and the identity of the trader (public key), making it possible for institutional investors to move large amounts of money around without triggering a market selloff.
The concept of dark pools is not exclusive to the cryptocurrency market. In fact, over the last decade, dark pools have become more and more common in the global equities market. According to data from the Financial Industry Regulatory Authority, over $270 billion worth of stock was traded off-exchange. Furthermore, data from Tabb Group also shows that 37 % of all stocks in the U.S. were traded independently, away from any exchange, and dark pools accounted for merely a quarter of that exchange activity.
The difference between a regular cryptocurrency exchange and a dark pool is simple. In an exchange, a specific algorithm matches multiple buyers and sellers who wish to transact a certain type of cryptocurrency in different amounts. On the other hand, a dark pool does the exact same thing while making the whole process anonymous, without revealing any intention to buy or sell