Binance Co-Founder Eyes Dark Pool DEX To Counter exploitation

Changpeng “CZ” Zhao, the visionary founder of Binance, has sparked fresh excitement in the decentralized finance (DeFi) world by floating a bold new concept: a decentralized exchange (DEX) that operates much like a traditional dark pool, shielding traders from predatory practices such as front-running and liquidation manipulation.

In a recent post on X, CZ stated how he was always puzzled how everyone's orders were visible in real time on DEX.

"If you're looking to purchase $1 billion worth of coins, you generally wouldn't want others to notice your order until it's completed."

This was to deter gain front running and maximum extractable value (MEV) bot attacks, which can result in increased slippage, worse prices and higher costs, CZ said.

His comments followed the incident of a trader known as James Wynn, who was a target of a coordinated attack by bad actors to hunt his liquidation.

One X user has claimed that Tron co-founder Justin Sun was interested in the idea, but the claim remained unconfirmed.

This anonymous X user even went so far as to invite Eric Trump, the son of President Trump to invest in the idea.

Dark pool Protects Users From Malicious attacks and Bots

CZ claims that large traders in TradeFi tap on the power of dark pools, which are often 10 times bigger than traditional transparent pools.

Dark pools are private trading venues where large orders are hidden from public view until after they are executed.

Such features prevent front-running, slippage and MEV attacks by concealing order size, price and intent.

However, implementing decentralized dark pools would require a complex privacy security system like the zero-knowledge proof (ZK-proofs) or delayed settlement mechanism.

Philipp Zentmer, the founder and CEO of the decentralized exchange Li.Fi explained how in a decentralized dark pool, human brokers are often replaced by cryptography.

Zentmer cited examples like Arbitrum-based protocol Renegade which encrypts every order with multiparty computation (MPC) and then posts a zero-knowledge proof so Ethereum can verify settlement without seeing he raw book.

Similarly, the Penumbra protocol, which operates in the Cosmos ecosystem, conducts sealed-bad batch auctions; only the net flow becomes public, and a ZK circuit proves fairness.

While Dark Pool has its perks, but one of the greatest challenges is maintaining a healthy balance of privacy and verifiability.

To which, Maria Carola, the CEO of instant exchange StealthEX said that the ZK proofs and encrypted order matching are promising solutions moving forward.

"I think one concrete approach is leveraging zk-SNARKS or ZK STARKs to validate trade execution and settlement without revealing trade details."

OXAw, the lead developer at Base decentralized exchange Alien Base, also added that implementing dark pools is not technically challenging. Still, doing it well is not easy.

"There are most likely many complexities with making this data truly hidden and not subject to being deduced with certain queries etc. For example, it's well known that a private AMM cannot exist as long as you can query its price at any moment."

CZ Admits Transparency Has Its Perks Too

Zhao stressed how privacy is particularly important in derivatives market, claiming that the public visibility of liquidation level will just expose traders to coordinated attacks that could force premature liquidation.

"If others can see your liquidation point, they could try to push the market to liquidate you. Even if you got a billion dollars, others can gang up on you."

But CZ also argues that there are also perks to transparency, such as allowing market makers to absorb large orders.

CZ argued that this is very nuanced issue, and there is never a cookie cutter response to this problem.

"I won't get into an argument whether it is right or wrong. Different traders may prefer different types of market."

Ultimately, opacity is a double-edged sword. While it reduces front-running, but it also obscures manipulation attempts.

Hence, it is important that dark perp DEX to address this issue move forward.

Zhao concluded by encouraging developers to launch an onchain dark pool decentralized exchange with perpetual swaps.

He said this could be achieved "either by not showing the orderbook, or even better, not showing deposits into smart contracts at all, or until much later."