DeFi
September 28, 2022
What is Token Burn and it's effects on price
An A-Z guide on token burning and how it is largely impacting the cryptocurrency industry.
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The crypto world has come a long way from where it started. Now millions of people use it to make money and investments. When so many people are involved in such a thing, complications will definitely arise.
These complications can be literally anything from having slow transaction speeds to affecting the market by making very big trades. Hence, to counter them, people come up with ideas. We are going to tell you about one such idea called the Dark Pool Trading.
Dark Pool Trading is something that not everyone is privy to and only a select few people can do. The reason behind that will be explained in this article. We will also explain in detail about what exactly Dark Pool trading is, its pros and cons along with the controversies associated with it. So stick around and find out.
A dark pool is a place that is kept hidden from the common populace where transactions occur in huge amounts. These pools are sometimes revealed after the whole operation has been executed or sometimes they are just not revealed at all. When liquidity pools are organized in these dark or private venues, they are called Dark Pool Liquidity markets.
All the trades that take place in the dark liquidity pools are known as Dark Pool Trades. Most of the dark pool trading gets done in block trades which means that the amount of assets being traded is pretty huge. The price of these assets is predetermined so as to not cause any issues.
Dark pool trading is not accecissble to the general public because of several reasons. One of them is that there is literally no transparency involved with these trades. Another is that this kind of trading is done by the institutional traders or investors who do not want to create an impact on the market with their huge trades.
Dark pool trading is suitable for only a select populace and that is the reason why a lot of people look at it in a bad light. In this age where people like everything to be transparent, the idea of not having it with these dark pools makes them itch.
Dark pools are not something that were invented with cryptocurrencies. They originated back in the 1980s. Dark Pools are beneficial for some investors because they let them make orders without having to reveal what they are doing or are about to do. When the market is so volatile, this comes as a huge benefit for these investors.
SEC data states that as of February 2022, there are 64 registered Dark Pools or Alternative Trading Systems present. Whether you should think about these Dark pools in a positive or negative manner that is completely up to you. But we will provide you with the advantages of using these pools and the controversies attached with them that might help you make up your mind.
There are a number of reasons of why one should use Dark Pools. If you know what you are doing and how to do it, then these pools will help you a great deal. Let us see what the advantages of using dark pools are.
As we mentioned before, Dark Pools are not transparent at all, they have no visible order book and that helps the traders to trade a large amount of assets without disturbing the market.
When you trade in a dark pool, the trades are matched and that is done based on the average of the best bid available and the price that is being asked. What this does is that it will provide a favorable price to both the buyer and the seller as the buyer buys with a lower price and the seller gets a higher price.
As we mentioned earlier, the dark pool trading allows trading of the assets to take place at a predetermined price. This helps in preventing any slippage from happening as all the traders are ensured that their trades will be completed at the intended price only.
As dark pools are places that are specially made for big buyers and sellers, it is easy for the institutional sellers to find buyers for their blocks as large investors are always available.
Despite all the advantages, the grass is not all green. In fact, advantages might also be listed as negatives, if we shift our from POV dark pool trader to that of a normal trader. Let's take a look at how dark pool trading influences the rest of the market for a minute.
A real-time order book is typically shown on exchanges where the majority of traders conduct their transactions. Consequently, everyone knows the market rate and performs their trades accordingly.
However, because the dark pool is designed to be entirely anonymous, there is no order book to monitor market values, so anyone can trade at any price they choose.
Dark pools if used in limited manner can serve its purpose harmlessly. However, if the majority of people begin trading on dark pools instead of exchanges then the actual rates won’t be able to reflect on the actual market.
For High Frequency Traders aka HFTs, dark pools are a great way to execute their large orders at infinite number of times. They can front-run huge orders and take advantage of naïve traders if they have privileged access to order book data.
This was all about the dark pools which are used by equity market traders. This similar concept is now encorporated by crypto sector and it serves greater purpose as most of the cryptocurrency related operations are decentralized.
Decentralized dark pools operate in more secured and controlled manner in the cryptocurrency market than the equity market. In the decentralized dark pool, each participant is verified digitally.
Only verified users can take part in the dark pool. The decentralized nature of these pools ensure that pool price is kept fair and cannot be manipulated by a single institution. Therefore, each trade is executed at a fair market price.
With the higher liquidity provided by these decentralized pools, traders can perform their trades in an immediate manner without any slippage.
As far as legality is concerned, regulated dark pools are allowed by Securities and Exchange Commission (SEC). Dark pools remain a controvertial concept as it acts like a double edged sword.
The advantages offered by dark pools are disadvantages for some people. The lack of transparency benefits big institutions to execute their trade annoymouly whereas it affects general public in a negative way.
We hope by now you have a clear understanding of dark pools and how they work in equity as well as crypto market. If you have any doubts regarding dark pool trading, feel free to reach out to us.
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