Decentralized Cryptocurrency Exchange A Proof-of-Concept based on Hashed Timelock Contracts

Abstract

In recent years, cryptocurrencies have grown rapidly to a market capitalization of 400 billion US dollars. As the value of cryptocurrencies has increased, several exchanges have emerged. Some of these exchanges have been targets of attacks leading to losses of cryptocurrency worth hundreds of millions of dollars. The attacks have been made possible as a result of exchanges keeping track of the cryptocurrency in circulation on the exchange by storing their users’ funds. A successful attack puts not only the exchange, but all its users at risk. This bachelor’s thesis explores an alternative to a centralized cryptocurrency exchange by trading directly on the blockchain using peer-to-peer technology. This decentralized approach eliminates the risk for attacks with far-reaching consequences as users’ funds are not stored in a central location. A protocol for exchange between cryptocurrencies is proposed and a prototype based on this protocol is implemented. An evaluation is done to ensure the quality of the prototype and protocol based on three parameters - delay, cost and trading pairs. The protocol is proven to be a possible alternative to the solutions offered today. The prototype displays a proof-of-concept of a decentralized platform that implements this protocol.