The term dark pool might sound ominous, but investors think building one could prove to be a boon for the crypto market.
Announced today, Republic Protocol has officially completed an initial coin offering (ICO) for its REN token, raising 35,000 ether (roughly $30.5 million at current prices) from lead investors Polychain Capital and FBG, as well as funds like Huobi Capital, Hyperchain Capital and Signal Ventures.
Along with retail investors, the participants above are betting big on a way to execute large trades without spooking the market. At least, that's the argument advanced by Taiyang Zhang, CEO of Republic Protocol, who sees the project as a trustless alternative system for crypto trading.
Zhang told CoinDesk:
In other words, if a whale goes to move an unusually large quantity of bitcoin or ether today, that sell order will likely hit an exchange or a broker, thereby inspiring other traders to start selling as well. If the trade ends up getting broken into pieces over time, the market will start seeing those large sales, and it will drive the price down even further.
Not only does this contribute to general volatility, but it means the whale's last trades go for significantly less than the earlier ones. This is, of course, non-optimal, especially for investors. So, it's little wonder that major crypto investors would be eager to find a solution.
In total, Polychain and other large investors picked up 60.2 percent of the total supply of 1 billion REN tokens. Roughly 15 percent were set aside for the team, advisors and early partners, with another 5 percent set aside to build the community. (Republic Protocol has 19.9 percent in a reserve to provide liquidity in the early days.)
This is notable, as participants in the network will need REN to pay nodes and run the computations that find trading partners. Nodes will need to stake REN to guarantee non-malicious behavior.
For the whales
Stepping back, Republic's platform will allow traders to send very detailed parameters to the dark pool about the trades they would like to make.
The pool will then break trades up into pieces and either find the best trades that meet those parameters or boot the trade back out if the terms can't be met – all without the wider world ever knowing the full details of what the trader was willing to do.
So, for example, someone could say that they had 1,000 ETH that they wanted to sell for between 0.095 and 0.125 BTC, and the sale could close providing it found partners for at least 80 percent of positions within 24 hours.
The process uses something called Shamir's Secret Sharing, a cryptographic algorithm for splitting up a reconstructable secret, to divide the orders into parts and share them out to nodes on the Republic platform.
"I think what's really important is it's provable that no one can see inside this dark pool at all," Zhang said, not even his own team. "There's no information asymmetry. Everyone gets the same information."
Using multi-party computation, the nodes find the best possible trading partners within the bounds of the order. It's designed so that all anyone can ever know is the details of the final trades, but it still won't reveal either party's total offer (such as how low they might have gone, or how much they would have been willing to buy at a given price).
"Where a dark pool could be very handy is, instead of negotiating prices or even trusting OTC (over-the-counter) brokers, it's a way to place an order trustlessly," Zhang said.
If the criteria are met, the orders would be settled among the relevant parties using peer-to-peer atomic swaps.
A lot of attention has been paid to cross-blockchain trades using atomic swaps in recent months. For Republic, it functions as a settlement layer, but that part of the system ends up being one of the simpler parts.
For the big orders, "a lot of times people are not expecting it to happen instantly," Zhang said. So it's not a problem to move the currencies into smart contracts that trade directly between wallets.
For the minnows
So, Republic can help out the whales who want to move big positions and don't want to see $20,000 shaved off their net profit, but won't the final sale have roughly the same effect on market?
Zhang admits we can't really know until the platform is live, and that it can be argued both ways, but his company has been studying the issue.
"We do have a paper coming out on the impact of price exchanges," he said.
And there are some real-world examples to look at. In the stock market, there are estimates that something like one-seventh of all trading happens on alternative trading systems.
"What we find is it does impact the LIT exchanges but it doesn't impact them nearly as much," Zhang said. By "LIT exchange," he means one where the full order is transparent, the sort of trade where a retail or more modest traders will be active.
This could simply be psychological. It's one thing to see a big trade execute all at once, but another to watch a giant, looming order sitting there on the books, waiting to close. Instead, with this system, a trader looks up and a giant trade is just done. They never saw the spread offered. They never sat there watching the price fall as it went through. It's just over.
If Zhang's thesis about the pool quelling volatility proves correct, it should benefit traders even if they never move volumes large enough to use Republic. That's because fewer big price swings will mean fewer margin calls for leveraged trades.
Furthermore, the market will have time to adjust to the dark pool before it reaches its full trading potential, because when the platform hits the mainnet in Q3 2018 as planned, it's likely to be missing a key feature: a seamless way to move from crypto to fiat.
"We are working to see which partners we can bring in on this, but that's the real pain point," Zhang granted. The most obvious solution is "stablecoin," one that people can really trust to trade smoothly with fiat at a consistent rate. There's not one on the books to do that yet, however.
Nevertheless, the pre-sale met with what the company has called "overwhelming interest," suggesting that major crypto asset holders see uses for the platform with or without a way to trustlessly trade into fiat.
As Gordon Chen, a partner at FBG Capital, said in a press release:
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.