Private On-Chain Exchange

Introduction

Synchronicity Exchange leverages Corino to create a highly performant yet private exchange that protects traders from a variety of problems, including position hunting, strategy reverse engineering, profiling and MEV, while revealing sufficient information for highly efficient markets.

Privacy Protects Traders

Position Hunting

October 11-12 marked the largest set of liquidations in crypto history, totaling an estimated $19-40B. Some believe that an internal team at a major exchange triggered the selloff, given their access to positions’ liquidation prices and account balances. Within their own exchange, this team has proprietary access to sensitive data as the platform’s operators. While such access is officially denied, there is currently no way for the public to verify that this information isn’t being exploited. Combined with on-chain platforms like Hyperliquid where all trading activity is public, this team can use flow-analysis software in order to link exchange-verified identities to otherwise anonymous “public” wallets.

We don’t know the truth behind these specific events, but the mere possibility of this behavior reflects a fundamental problem in current market structure. Until privacy is the default, markets will remain vulnerable to this type of institutional manipulation.

Synchronicity Exchange addresses this by using TEEs (Trusted Execution Environments) to keep information about individual open positions, including their liquidation thresholds completely private. This data remains hidden even from Synchronicity itself, thereby eliminating the potential for position hunting.

Profiling

After the cascade of liquidations, rumors started to swirl about which firms blew up. As one trader so eloquently put it “we know they blew up because we saw what happened to their accounts”. This problem – where even though wallets are pseudonymous, many larger market participants’ accounts are well known – is entirely solved by privacy. No longer will traders’ every move be tracked by other participants due to the excessive transparency of public blockchains.

Alpha Leakage

Arguably worse than having your identity known by many parties is having your activity tracked. Over time, trading strategies can be reverse engineered. Your positioning can be used to understand your perspectives on the market. Your alpha leaks, leading to worse returns.

MEV

MEV is one of the most corrosive elements of on-chain markets. Synchronicity Exchange eliminates all types of MEV via the combination of private orders and strategies. Private orders eliminate the potential for frontrunning. Private strategies prevent state from growing stale, such that value can be extracted. For a complete description of how Synchronicity Exchange eliminates MEV, see Eliminating MEV.

The Arguments for Transparency (and a Response)

Not everyone agrees that more privacy is always better when it comes to exchanges. There have been compelling arguments for transparency, espoused by some industry experts. The crux of the pro-transparency argument is that markets function best when information is openly available, allowing prices and liquidity to adjust efficiently to demand.

For example, Jeff Yan (of Hyperliquid) argues  that when large traders operate in a fully transparent order book, they often get better execution than in opaque venues because market makers can see their intents and compete to fill their orders.

“If a trader wants to trade massive size, one of the best things to do is tell the world beforehand.”

– Jeff Yan, Hyperliquid CEO & Co-Founder

Transparency, then, becomes a tool for greater efficiency which helps the market digest large trades. Jeff’s argument is essentially that traders benefit from making their intentions public, despite the cost of position hunting, alpha and identity leakage and MEV.

However, while broadcasting intents can sometimes lead to tighter spreads in specific contexts, there’s no justifiable reason for total transparency to be the default for all market information. Different information has different effects on market efficiency.

1. Information that, when published, makes a market optimally efficient: clearance prices and volume, liquidation volume, open interest and aggregate order books.

2. Information that, when published, makes a market less efficient: liquidation prices, individual positions, account order histories.

3. Information that, when published, may make a market more efficient: intention to trade.

Synchronicity resolves this tension between privacy and transparency to create efficient markets with minimal value leakage. On Synchronicity, (1) is public, (2) is private, and (3) is up to the traders themselves, creating the optimal degree of transparency for efficient markets.

Recent advances in cryptography and exchange design enable this new frontier:

1. Privacy-enhancing technologies (PETs) including trusted execution environments (TEEs), secure multi-party computation (MPC), and ZK-proofs provide the cryptographic foundation for highly efficient and reliable confidential computation and selective disclosure.

2. Exchange implementation choices, such as private frequent batch auctions and encrypted mempools use these privacy primitives for execution that improves market efficiency with privacy.

In the context of Jeff’s argument for the efficient filling of large orders, Synchronicity’s private frequent batch auction model publishes aggregate order books after each clearance. Thus, after being added to the order book, the intent to trade is broadcast to the market as Jeff suggests is optimal, but on Synchronicity Exchange, traders can place and execute orders without leaking their strategy or identity, orders cannot be MEV’d prior to getting added to the order book, and the public can still verify prices, volumes, and settlement outcomes.