Context:

Blockchain technology is the latest buzzword in the fintech industry. It is hyped as a game-changer in several use-cases in the financial sector. One such leading use case is asset trading. Digital assets as well as physical assets which may include property, gold, and shares are digitized through a process called tokenization. Individual units of those assets are represented as data in the blockchain comprising of ownership, historical records along with any additional metadata. Each such unit is generally referred to as a token. Decentralized exchanges facilitate trustless trading of such tokens between different parties. The context of the current study is to identify the limitations and pitfalls of existing exchanges and explore an alternative design that overcomes those limitations.

Objectives:

The primary objectives of the study are to first identify the shortcomings of decentralized token exchanges and explore existing scalability solutions through literature survey. Furthermore, propose a specification and implementation for a scalable 2-party token exchange.

Methods:

A mixed method approach is used for this study. Literature survey has been employed to study and critique the start-of-the-art scalability solutions applicable to decentralized token exchanges. The second approach is an experiment in a controlled environment.

Results:

Performance of our implementation in a restricted case has been quantified and the results are compared with estimated figures of existing decentralized exchanges.

Conclusion:

Our experiment and statistical tests demonstrated how our 2-party decentralized token exchange implementation is superior in terms of latency, speed, and cost of trade execution. Although not intended as a full-fledged solution in its current state, we have demonstrated how state channels technology could be a viable candidate for scalability of decentralized token exchanges.