Crypto trading is the bedrock of the global cryptocurrency market. To complete the four critical aspects of trading including capital deposits, order books, order matching, and asset exchange, you have to use a cryptocurrency exchange platform. Most regular exchanges use a centralized white-label crypto exchange to process transactions.
While centralized exchanges are quick and easy to use, they are often susceptible to technical failures, cyberattacks, and theft. This is where peer-to-peer (P2P) or decentralized crypto exchanges come in. They allow the seller and the buyer to complete a transaction directly without the need of a trusted third party.
P2P exchanges are steadily gaining momentum in the crypto community. For example, Paxful, a popular peer-to-peer crypto exchange, gained a trading volume of $739 million in 2018, up by 130% in transaction volume from $320 million in 2017.
A. How P2P Exchange Works
A P2P crypto exchange does not rely on a third-party service to hold the customer’s funds. As buyers and sellers can directly exchange cryptocurrencies, there is no need for an individual or institutional middleman. It is a striking example of the blockchain ideology, which is the backbone of crypto.
A P2P system runs exclusively as cryptocurrency exchange software. Usually, a preprogrammed set of instructions carries out each transaction automatically. Unlike a centralized exchange, a P2P exchange matches the people behind buy/sell orders instead of matching buy/sell orders in the ledger.
So, when the software finds a matching buy-and-sell order, it connects the respective traders with each other. They can process the transaction without an intermediary. You can to involve third-party arbitrators only in case of a dispute. However, by default, there is no human intervention on behalf of the exchange.
B. The Transition from CEX to P2P Exchange
Although centralized exchanges (CEX) provide a gateway between the real-world market (fiat currency) and crypto economy, they are vulnerable to frauds and cyberattacks. You also need to maintain a substantial amount of time, money, and labor to create paperwork and carry out daily transactions. Essentially, traders have to pay for this infrastructure in the form of transaction fees and service charges.
The transition from centralized exchanges to P2P exchanges took place to provide a better alternative to the traditional centralized trading system. They are way more simplified, trustless, transparent, and cost-effective compared to the CEXs.
C. Advantages of P2P Exchange
P2P exchanges offer several advantages that attract many crypto advocates. Some of the notable benefits include
1. Low Transaction Cost
It cuts out the central authorities creating a trustless ecosystem of crypto trading. As a result, you don’t have to shell out hefty transaction fees and other services charges. As P2P exchanges are simple software, the overhead costs are negligible.
2. No Government Censorship
As there are no middlemen involved, P2P exchanges offer high resistance to transaction censorship. Government authorities can’t exploit such exchanges like the CEXs by imposing regulations as there is no central authority. Thus, anyone can trade on a P2P exchange.
3. Privacy
Unlike centralized crypto exchanges, most P2P exchanges aren’t required to conform to AML and KYC regulations. In other words, you don’t have to share personal information such as place of residence and ID number. So, your trading activity remains private. There is also no risk of identity theft.
4. Security
Security is perhaps the biggest benefit of P2P exchanges as you don’t have to entrust your crypto coins to a third party. According to a recent estimate, exchanges suffered a total loss of $882 million due to targeted attacks in 2017 and in the first three quarters of 2018. Most attacks exploited the security vulnerabilities in the centralized hot wallets of the exchange. However, as no hot wallets are required in P2P exchanges, they offer better security.
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