03 Jul
Technology , Opinion

The Benefits of A Decentralised Exchange Model

George Nicholson

With exchanges continuing to be a hot topic in the world of blockchain and securities, TokenMarket examines the benefits of a decentralised model.

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Security tokens are a revolutionary new method in which company shares are represented. The traditional method of paper shares being given to recipients, lack of overall transparency in the market, slow transactions and settlement times, and manual management of cap tables have been a problem for some time now. Utilising blockchain technology, tokenised securities, and/or security tokens, are tackling all of the issues above and more. 

We wanted to give users and traders an overview of how our decentralised exchange will work when it comes to trading security tokens. Below, you will be able to see just how we will list tokens, execute trades for buyer and seller and run the above all on the blockchain.

With the recent announcement that we will be opening our Security Token Offering (STO), TokenMarket has decided to give a deeper insight into how our exchange model is better over legacy stock and cryptocurrency exchanges. This is for all users who plan on using our exchange and access, invest and trade in the most exciting high growth startups. 

    The Bigger Picture

    As it currently stands, there are almost no exchanges actively trading tokenised securities. There is also much debate about how these exchanges will work, specifically how trades will be executed on the blockchain and how the overall distribution of tokenised securities is going to work.

    Step One: Placing a Buy Order

    Before a user is able to begin trading on the TokenMarket Security Token Exchange, they will be asked to provide all KYC information. Users will also be asked to link a wallet address to their TokenMarket profile which will then be linked to TokenMarket Exchange smart contract. 

    A buyer sees tokens on the centralised order book. They decide that they want to buy these tokens and so they make the buy order to TokenMarket’s off-chain order book. The buy order is confirmed through the user's wallet which is connected to exchange and has been whitelisted by TokenMarket. This enables the wallet address and the TokenMarket Exchange smart contract to communicate and begin the trade.

    Step Two: TokenMarket Smart Contract Checks Order

    The buy order confirmed by the user will initiate a few processes. First, the smart contract will check that the user has enabled for trading via their wallet, confirms the seller's tokens are available for the transaction. The smart contract will also check the balance of the wallet, as well as any limits that the individual user may have on their account. The smart contract will then check if the users buy order is going over their individual threshold and ultimately give the decision on whether to approve or decline the transaction.

    If all checks out then the trade is executed via the TokenMarket smart contract and the atomic swap process begins between all three parties; buyer, seller and TokenMarket. It will process and record the trade execution, the price at which the tokens were bought and the trade will then begin. The atomic swap means that all three parties also receive their tokens/stable coins/fees instantly at the same time, removing any counter-party risks.

    Step Three: Tokens are Distributed to Buyer

    Tokens are sent to the buyer and the price they paid leaves their wallet address.

    Step Four: TokenMarket Takes a Fee

    TokenMarket will take a small fee for carrying out the transaction.

    Step Five: Payment to Seller is Sent

    The payment is then transferred to the seller and the trade has been fully executed. 

    Why Use a Decentralised Exchange Model?

    TokenMarket’s security token exchange is based on a decentralised model. What this means is that our exchange uses both centralised and decentralised elements to provide a good user experience while ensuring a secure and regulatory compliant trading environment. 

    Using a centralised system for order books is so that we are able to match all buy and sell orders quickly in a secure environment. This also enables us to do necessary compliance monitoring and reporting conveniently. 

    Our Know Your Customer (KYC)/Anti-Money Laundering (AML) checks are also carried out on a centralised system. It means that we are able to have on record the customer profile as well as their identity. KYC/AML is a central part of the regulatory compliance that TokenMarket services. Using a centralised system to do so means that we are able to store all of this private information in a safe and secure way, for regulatory compliance purposes, protecting, protecting this data with the utmost security, while recording transactions for transparency on public blockchain in an encrypted format. 

    The decentralised parts of our platform focus on the user's assets; the most important part of the exchange from the security point of view as a whole. Users are in control of their assets. TokenMarket never holds a users assets on its exchange just as centralised exchanges do. For us, the decentralisation of users assets is vital. Whilst we store information like profile, balances on the given wallet address and limits, we will never hold the assets on our system. Whitelisting is a way for us to match real-life identities with wallet addresses for the regulators. 

    By doing this, users are able to give TokenMarket access to execute trades once they have decided to buy tokenised shares or other tokens. This makes it easier for a regulator to get all necessary information they may need when looking at trades and market conduct on the blockchain. For regulators, this is a very important part of having blockchain succeed. Conducting ourselves in the correct manner and ensuring that we are carrying out necessary KYC and AML checks, as well as regulatory processes, means that we are working with the regulators to make blockchain safer. As history has shown, centralised storage of assets like centralised exchanges is susceptible to being hacked and users having their assets get stolen.

    The TokenMarket Exchange

    Our exchange is designed to make the trading of tokenised securities quickly, securely and easily. Users will be able to trade pairs on the same blockchain protocol in a regulated, transparent and secure platform. It will eliminate counterparty risk whilst recording individual transactions in a regulatory compliant manner instantly.

    TokenMarket is protecting users from the inside whilst giving them full custody of their tokenised shares; the comfort of our being in control of their own assets.

    View the TokenMarket Security Token Exchange

    View the TokenMarket Utility Token Exchange