Tim Mossholder | Unsplash
In many cases we have seen markets that have been manipulated in such a way that it could translate as the ideal place to lose all your money, or at least a large part of it. This is something that the more experienced profit from, so if there is a record of your trading, it is likely that someone will want to take advantage of you.
This is something that affects DeFi in a sense, as well as Futures contracts, which are exposed to mechanisms exploited by certain malicious actors. It is quite likely that there is a suitable person for this, but it is also common to use a bot (front-running), for example to search for positions that are about to be liquidated, doing a kind of price manipulation to make this happen.
In particular, one begins to observe these suspicious movements as one gains experience. When a bot is used, it usually buys tokens before the person who is setting up a large purchase, and sells at a high price when he has already bought, so that it makes significant profits, automatically.
What distinguishes the traditional Spot market with the Futures market is that in the latter operations are leveraged, which could represent large gains as large losses made by the liquidation of the position; something unfortunate for the user if he has leveraged in excess, thus reducing its margin at the time of trading.
This is possible because we are still talking about a blockchain, so it is possible to monitor what is happening in real time the flow of orders. While we could envision this scenario in a centralized exchange, we are talking about what could happen in a DEX.
Changpeng "CZ" Zhao | Binance founder
While a blockchain is known for its transparency, there are those who prefer to maintain privacy, especially if we are talking about situations where markets can fluctuate a lot, with the detail that these can be manipulated, making everything become unfair. To solve this problem, one of the proposals that has emerged comes from the founder of Binance; Changpeng Zhao (CZ).
CZ's proposal takes into account a new decentralized exchange in which users would be protected through the obfuscation of transactions, positions, and deposits, which would counteract the events that have been seen recently. This became known through Zhao's words on social networks, where he states that it is the ideal time for someone to launch a DEX under these parameters, calling it a “dark pool DEX”. He also mentions that some may be in favor or against it, but it is something that is left to the preference of each operator in the market that most satisfies and suits them.
From one point of view, the necessary infrastructure could be implemented through ZK protocols, making available encryption algorithms that allow hiding order books, as well as activity in smart contracts. It seems that the importance of this development is vital, especially if we indicate that this trend in seeking the liquidation of a position is starting to be done through a group attack.
According to Komodo Platform's CTO, Kadan Stadelmann, CZ's proposal is very convincing in offering a secure, non-custodial solution, although he adds that the construction of a DEX like Zhao's requires it to be fully decentralized and interoperable between chains, which could well work through hashed blockchain contracts.
While there is debate about the transparency of markets based on the context of DeFi and Futures contracts, there are people who argue that whoever implements this new architecture would be the one who manages to set a new benchmark with respect to private DeFi; something with which the leader of the Avail ecosystem, Annu Shekhawat fully agrees, although the weight of the crypto-financial community will also have to be considered.
- Main image edited in Canva.
- Information consulted in decrypt.co and CZ post on X.
- Translated to English with DeepL.