A New Era for DeFi: CZ Proposes Hiding DEX Orders from MEV Bots

While decentralized exchanges (DEXs) continue to gain traction, their transparency poses significant risks for large traders, according to former Binance CEO Changpeng “CZ” Zhao. He argues that publicly visible DEX orders leave users exposed to MEV bots, highlighting the need for structural changes in the DeFi ecosystem.

As a solution, CZ proposed a specialized DEX for perpetual futures, with all orders, positions, and deposits hidden from public view. Such infrastructure could help shield large market participants from front-running attacks.

DEX Vulnerabilities and Their Impact

CZ’s proposal comes in the wake of major losses suffered by trader James Wynn, who lost nearly $100 million in late May following the liquidation of high-risk positions. His highly leveraged trades on the Hyperliquid platform were exposed to market activity from other participants.

Related: James Wynn Refocuses on Memecoin Communities After Major Losses

Decentralized exchanges are inherently transparent, with all orders and positions visible on-chain in real time. While often seen as an advantage over centralized platforms (CEXs), this transparency allows anyone to monitor the strategies of large players and act on them in advance. 

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,

CZ noted in a post. 

As a result, traders planning large crypto purchases become easy targets. The issue is even more pronounced in perpetual futures, where liquidation levels are public and MEV bots can react instantly, leading to increased slippage and worse execution. 

The Dark Pool Perpetual DEX Concept

CZ suggested masking orders, positions, and deposits until transactions are finalized, using encryption technologies such as zero-knowledge proofs (ZK). This would keep trading activity hidden from public view until execution is complete.

Now might be a good opportunity for someone to launch an on-chain dark pool style DEX + perps, either by not showing the orderbook, or even better not showing deposits into smart contracts at all, or until much later,

Zhao wrote.

The cross-chain functionality would require atomic swaps and Hash Time Lock Contracts (HTLCs), enabling decentralized exchanges between networks without counterparty risk. These mechanisms allow funds to be returned if the terms of a trade are not fulfilled.

Related: No Exchange, No Problem: Trading Without CEX Is Possible

Outlook for an Innovative DEX

Vulnerabilities in current protocols have led many institutional players to favor CEXs over DEXs. However, the introduction of private DEXs for perpetual futures could present new opportunities for institutions seeking anonymity in the market.

Following recent high-profile liquidations, such as the case of James Wynn, the first project to successfully launch a futures DEX with a hidden order book could define a new segment of private DeFi.

This could pave the way for larger brokers and funds that have remained cautious due to MEV and front-running risks. However, questions around regulatory oversight and contract enforcement in such a model remain unresolved.

Related: OKX Freezes OKX Web3 DEX Aggregator Amid Regulatory and Security Concerns