Binance co-founder Changpeng “CZ” Zhao has proposed the creation of a dark pool perpetual decentralized exchange (DEX) to combat front-running and market manipulation in the crypto trading ecosystem. His suggestion comes amid renewed concerns over transparency-related vulnerabilities in decentralized finance (DeFi), especially for high-value traders.
Dark Pools: Shielding Large Trades from Market Eyes
In a post on X (formerly Twitter) on June 1, Zhao expressed concern over the visibility of trading activity on decentralized exchanges, particularly those offering perpetual swaps. “I’ve always been puzzled by the fact that everyone can see your orders in real-time on a DEX,” Zhao wrote.
He added that this transparency, while aligned with the ethos of decentralisation, can be harmful to perpetual DEXs due to the risk of forced liquidations. “If you’re looking to purchase $1 billion worth of a coin, you generally wouldn’t want others to notice your order until it’s completed,” he said, highlighting how front-running and maximum extractable value (MEV) attacks can increase slippage and execution costs.
Dark pools, traditionally used in traditional finance (TradFi), are private trading venues that conceal the details of large trades until they are settled. Zhao believes adapting this model to DeFi could help mitigate price manipulation and protect large investors.
Triggered by Major Liquidation Event
CZ’s comments follow the liquidation of nearly $100 million in Bitcoin long positions reportedly held by a trader known as James Wynn on the perpetual DEX Hyperliquid. The liquidation occurred after Bitcoin dropped below $105,000, and it has sparked widespread speculation of coordinated activity to “hunt” Wynn’s liquidation.
One X user even claimed that Tron co-founder Justin Sun expressed interest in the incident and that Eric Trump, son of U.S. President Donald Trump, was invited to the same group. However, these claims remain unverified.
Technical and Regulatory Hurdles
While the concept of dark pool DEXs is compelling, implementing them in a decentralised environment comes with significant technical and regulatory challenges.
Maria Carola, CEO of instant exchange StealthEX, stated that the key difficulty lies in achieving both privacy and verifiability. “The fundamental challenge in building a dark pool-style perp DEX is achieving both privacy and verifiability,” she noted. Technologies like zero-knowledge proofs (ZK-proofs), zk-SNARKs, and zk-STARKs are seen as potential solutions that could enable trade execution and settlement without disclosing sensitive order data.
However, Carola cautioned that beyond the technological complexities, such systems also face a difficult regulatory landscape. The opacity that dark pools offer could be viewed unfavourably by financial watchdogs, especially in leveraged environments.
Balancing Transparency and Trade Protection
Zhao stressed the importance of privacy for derivatives trading, where public exposure of liquidation levels can make large traders vulnerable to targeted manipulation. “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,” he warned.
At the same time, he acknowledged opposing views that favour transparency, suggesting it may allow market makers to better absorb large orders. “Different traders may prefer different types of markets,” CZ said, avoiding a definitive stance.
Carola echoed this duality, saying “opacity is a double-edged sword.” While it protects traders from front-running and MEV attacks, it can also conceal malicious manipulation. For this reason, she advocated for advanced risk management systems in any dark pool DEX implementation, ideally incorporating cryptographic accountability and anomaly detection.
Call to Developers
Concluding his post, Zhao urged blockchain developers to explore the development of an on-chain dark pool perpetual swap DEX. He suggested various levels of concealment could be employed, from not displaying the order book to delaying visibility of deposits into smart contracts.
As discussions continue around privacy and market protection in DeFi, Zhao’s proposal has stirred fresh debate about the balance between transparency, regulation, and the evolving architecture of decentralised markets.
