How Do “Dark Pools” in Traditional Finance Compare to Private Mempools in DeFi?
Dark pools are private, off-exchange trading venues in traditional finance where large institutional orders are executed without being publicly displayed, minimizing market impact. Private mempools in DeFi serve a similar function by allowing large crypto transactions to be submitted and executed without passing through the public mempool.
Both mechanisms address the problem of transaction visibility and the resulting front-running, but dark pools are regulated trading systems, while private mempools are a technical solution on a decentralized network.
Glossar
Dark Pools
Venue ⎊ Dark Pools in the cryptocurrency derivatives context are private trading systems that allow institutional participants to execute large orders anonymously, shielded from the public visibility of order books.
Transaction Visibility
Characteristic ⎊ Transaction Visibility describes the degree to which the details of an on-chain transaction, such as the asset, amount, and counterparties, are publicly viewable on the distributed ledger.
Traditional Finance
Comparison ⎊ Traditional Finance refers to the established, regulated global system of financial intermediation, including centralized exchanges, custodians, and clearinghouses, which provides the conceptual and structural backdrop against which novel crypto derivatives markets are often compared.
Off-Exchange Trading Venues
Anonymity ⎊ : These venues allow for the execution of large block trades, often involving crypto derivatives, away from the public view of the main order book.
Private Mempools
Environment ⎊ Private Mempools are segregated, often encrypted, networks or channels through which users submit transactions directly to block builders or validators without exposing the transaction details to the public mempool.