Use case: Private on-chain dark pools
Bring darkpools on chain with accelerated Fully Homomorphic Encryption
1. What are dark pools?
In traditional finance, dark pools have been around since the 1980s. They are private exchanges for eligible traders, usually institutional, to trade large orders of stock, assets, and other securities.
They exist to prevent adverse market manipulation and volatile price movements with the trading of large orders on public exchanges.
2. Decentralised dark pools
In a decentralised scenario, dark pools operate in the same way as traditional dark pools enabling large transaction orders of digital assets and securities that occur on a private blockchain, shielding large trades from causing price slippage in public blockchains.
3. Privacy issues for on-chain dark pools
Smart contracts automate trade execution but lack native privacy features. The order size and price remain visible which undermines the core purpose of dark pools: concealing large trades to prevent market manipulation and front-running. In Ethereum, for example, the EVM lacks the support to provide a programmatic way for the developer to conceal details such as order size and price.
4. How FHE can help
Fully Homomorphic Encryption (FHE) allows for the creation of a truly trustless and decentralised dark pool on a blockchain. Participants can submit encrypted orders to a smart contract, which then matches the orders using homomorphic computations. This maintains complete confidentiality without requiring a trusted intermediary, combining the privacy of a dark pool with the security of blockchain settlement.
How we can help you bring this use case to life
A trustless on-chain dark pool requires a computationally intensive matching engine to sort and match encrypted orders without a central operator.
LightLocker Node provides the necessary processing power to run this engine efficiently. It can handle a high volume of encrypted order submissions and execute the confidential matching logic at speeds that meet the demands of institutional traders, making a secure, decentralised, and performant dark pool a practical reality.
Commercial benefits
Reduced counterparty and operational risk
FHE enables a trustless dark pool that doesn’t rely on a central intermediary to maintain confidentiality.
This eliminates a major single point of failure and mitigates the risk of data leaks or manipulation by the operator, a critical benefit for risk-averse institutions.
Access to decentralised settlement
An FHE-based dark pool combines the confidentiality of traditional off-chain venues with the security and efficiency of on-chain blockchain settlement.
This ‘best of both worlds’ approach is a compelling product for both traditional and crypto-native financial institutions.
New market opportunity and revenue streams
You can create a technologically superior, secure product that can capture market share from traditional dark pools.
It also opens new revenue streams by offering a unique, high-security trading solution to a global pool of institutional clients
How does it work?
Tech-friendly description
Standard AMMS operate on plaintext state, making their mempools a transparent environment ripe for MEV extracttion via front-running and sandwich attacks.
FHE offers a robust cryptographic solution by enabling computation on encrypted inputs within the AMM’s smart contract logic.
In an FHE-powered AMM, a user’s swap—including the asset pair, input amount, and slippage tolerance—is encrypted client-side before being submitted as a transaction. The smart contract, executed by network validators or L2 sequencers, then performs the necessary operations homomorphically.
For example, it can use FHE circuits to:
– Verify balances: Check if the encrypted user account holds a sufficient encrypted balance of the input token
– Calculate swap amounts: Apply the x*y=k formula or more complex bonding curve logic directly on the encrypted input amounts.
– Check slippage: Homomorphically compare the resulting output amount against the user’s encrypted slippage parameter.
Schemes like TFHE are particularly well-suited for this, as they can efficiently handle the boolean logic and comparisons required for operations like slippage checks via programmable bootstrapping.
The state of the AMM’s liquidity pools is also updated using encrypted values.
Only the final output amounts are returned to the user (often via threshold decryption mechanisms involving multiple parties), preventing any intermediary from gaining an advantage by observing the transaction’s content. This fundamentally alters the economics of MEV by removing the information asymmetry that attackers exploit.
Exec-friendly description
Within DeFi markets, users are losing billions through predatory MEV tactics like front-running and sandwich attacks.
This often happens through ‘front-running’, where predatory bots see incoming trades on the public blockchain and place their own orders first to profit from the price change, resulting in a worse price for the original trader. This erodes trust and makes institutional participation risky.
Confidential AMMs, enabled by Fully Homomorphic Encryption (FHE), solve this problem. They function like a secure black box on the blockchain.
Traders submit their swap intentions in an encrypted format, meaning the details – what they are buying, selling, and for how much – are shielded from public view. The AMM smart contract processes these encrypted trades without ever decrypting them, preventing bots from seeing and exploiting the orders.
For financial institutions and professional traders, this creates a fairer, more predictable, and secure trading environment. It protects valuable trading strategies from being copied and significantly reduces the hidden costs of MEV, delivering the trust and privacy needed for mainstream adoption of DeFi.
