Top Highlights
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CZ’s Proposal: Binance founder Changpeng Zhao (CZ) suggests a decentralized exchange (DEX) that conceals order books and positions to combat front-running and liquidation risks, emphasizing the need for privacy in trading.
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Dark Pool Comparison: CZ draws parallels between traditional finance’s "dark pools," which hide order data, and potential on-chain solutions using zero-knowledge cryptography to protect user trades.
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Market Manipulation Concerns: The proposal gains traction following high-profile liquidations in crypto, highlighting vulnerabilities to meme transactions and the corrupt practices prevalent in high-leverage trading environments.
- Diverse Reactions: While several projects, like Tristero and SKALE, support privacy-enhancing protocols, critics argue that introducing dark pools may undermine the core values of transparency and decentralization in DeFi.
CZ Advocates for Dark Pool Perp DEX to Protect Traders from Front-Running in DeFi
Changpeng Zhao, known as CZ, founder of Binance, has proposed a revolutionary idea for decentralized exchanges (DEXs). He suggests creating a platform where user orders and positions are concealed. This strategy aims to protect traders from front-running and liquidation risks, particularly in perpetual futures markets.
In a recent post on X, CZ pointed out a significant issue. He noted that current DEXs display user orders in real-time, making them vulnerable to predatory tactics. “For perps, it is even more important to not let others know your orders,” he stated. He fears that if traders reveal their liquidation points, others could collude to force a liquidation.
CZ compared this to traditional finance, or TradFi, where large institutional traders utilize "dark pools." These private exchanges keep order books hidden and, according to CZ, can be “10 times bigger” than regular order books.
He introduced the idea that blockchain technology could use zero-knowledge (ZK) cryptography to shield trade data until execution. This advancement would enhance privacy for all traders, especially larger investors, protecting them from manipulative practices like Maximal Extractable Value (MEV).
His proposal comes on the heels of significant losses suffered by trader James Wynn, who recently faced liquidation across multiple positions. This incident prompted Wynn to call out the corrupt practices within the crypto market.
Several projects have already started to address the privacy challenge. Sam from Tristero shared that his team has been working on a project similar to CZ’s vision for two years. Additionally, 0x0 and SKALE are also making strides in this area. 0x0 will soon launch the Spectre platform for privacy-preserving trading, while SKALE’s new BITE Protocol aims to eliminate MEV by obscuring transaction visibility.
However, not all in the community support CZ’s dark pool concept. User Cedric Beau argued that introducing dark pools contradicts the fundamental principles of crypto, which prioritize transparency. He warned that hiding order books may replicate problematic practices prevalent in traditional finance, undermining the decentralized nature of the blockchain.
As discussions on this topic unfold, the crypto community remains divided. While some see enormous potential for increased security and privacy, others caution against straying from the core values that define decentralized finance. The future of DEXs hangs in the balance as innovators explore these complex issues.
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