P2P cryptocurrency exchange is carried out through peer-to-peer or decentralized exchanges exclusively due to software. That means - without involving a third party, but directly between two users.
This seriously distinguishes them from the classical exchanges, which usually play the role of an intermediary between participants, earning substantial profits from commissions. Alternative P2P exchanges are a great example of the efficient use of decentralized networks. Not without flaws, of course, but also with considerable advantages for users.
The history of peer-to-peer exchanges
For almost its entire history, Bitcoin and other cryptocurrencies have used a variety of online exchanges as gateways between the real world and the world of cryptocurrencies. This was the only way to interact, because, especially at first, an extremely small number of trading floors, companies and stores agreed to work with the new currency.
Therefore, such online exchanges as MtGOX, BTC China, Bitstamp and others very quickly became an extremely popular place for exchanging cryptocurrencies for fiat and vice versa. And they played a significant role in popularizing the idea itself among the general population.
However, unlike various blockchains, these exchanges were centralized. That means, they were governed by specific
people and obeyed by specific laws governing their activities. However, they also carried out their business - they carried out control and regulation of financial interaction, acting as arbitrators in the event of disputes. However, this was not the best option in terms of confidentiality of information, so it was decided to create an alternative - peer-to-peer exchange services.
How are transactions carried out?
To begin with, let's remember how regular online exchanges work. A person who wants to sell a certain amount of bitcoins creates an order in which he indicates the desired amount and exchange rate. This information is placed in the “order book”. When another person wants to purchase the bitcoins, for example, he starts looking at this list, choosing the options he likes. Or, if there are none, creates his own “purchase order”, also placed in the order book.
If the conditions of supply and demand coincided, a request for transactions is sent. This takes some time - from a few seconds to several hours. To this should be added time for the implementation of fiat transactions, which can even take several days. Therefore, to expedite the process, the exchange assumes payment obligations. Both participants immediately receive the indicated amounts from the exchange reserve, and when the transactions are completed, the exchange sends them to this reserve.
P2P exchanges work without an intermediary, so the interaction algorithm looks different. Special programs analyze the “order book” and look for matches there. And when they find it, they bind the participants together, so that they already agree on additional characteristics of the exchange.
At the same time, however, a third party can also be involved in the process, but mainly as an arbitrator to resolve disputes. This is perhaps the only situation requiring outside intervention - everything else works quietly in a decentralized model.
Advantages
- High resistance to external influences. There is no central governing organisation that can be influenced by laws and regulations, therefore a situation similar to the one when the People’s Bank of China froze the process of withdrawing bitcoins on the two largest Chinese centralized exchanges for a month is impossible. Decentralized networks will continue to work, even if some of their nodes are blocked.
- Less commission. The amount charged by ordinary exchanges is calculated from the need to pay salaries to employees, pay rent, as well as the degree of personal greed of the owners. In decentralized, many of these factors disappear, so the exchange commission is much lower.
- High privacy. According to AML and KYC rules, classic online exchanges were forced to collect data about their users. Otherwise, the cancellation of a trade license. Decentralized exchanges are not afraid of this, so all trading there is extremely confidential - like most of the actions with cryptocurrency.
- Safety. Users' money is stored on their own wallets, and not on the exchange servers, so it is much more difficult for third parties to use it. The danger arises only at the time of the transaction, as this is an irreversible process.
Disadvantages
- Less convenient interface. Initially, P2P networks were created by cryptocurrency enthusiasts for enthusiasts. Usually, they had a rather high level of technical knowledge. So for a beginner it can be a little difficult to get comfortable with the functionality of decentralized exchanges.
- Low speed. The need for negotiations between the two participants leads to an even greater delay in the process, since at the time of the conclusion of the transaction one of the participants may not be online. In addition, the need to expect fiat transactions is also added here.
- Small trading volumes. Most of these P2P networks do not last long, so they have not yet managed to gain a certain reputation. In addition, large traders do not like to work with platforms that do not support instant exchanges and do not guarantee a refund in case of fraudulent transactions.
- Higher risk of fraud. Bitcoin transactions are irreversible, unlike fiat transactions. Regularly there are situations when one of the parties, having received cryptocurrency, organizes the cancellation of a fiat transaction.
Ways to Prevent Fraud
Different decentralized exchanges use different methods to prevent fraud. One of the most common is a simple deposit. Both parties, before entering into a transaction, contribute some of the funds to the total deposit offered by the exchange. If everything goes well, at the end of the exchange, everyone gets their money back. If not, these funds will be used to pay for the services of the arbitrator and compensation for the loss-affected party.
In addition, there is a special reputation system of arbitrators, which keeps the parties from the abuse of their powers. There are other ways. For example, some decentralized exchange services offer participants the opportunity to hold personal meetings. It is believed that this guarantees the security and controllability of the entire process of the transaction. However, the need for participants to go to meet each other seriously limits the potential of the service.
Decentralized exchanges are now a good alternative to centralized ones. And if they'll manage to solve the problem with small volumes of liquidity and achieve the attraction of large investors, then the situation will improve significantly. So the prospects for this phenomenon are extremely positive.