'peer-to-peer' (P2P) or 'decentralized' exchanges are operated and maintained solely by software.
P2P exchanges enable the users of the market to trade directly with each other with no trusted third parties to process all trades.
Traditional crypto exchange platforms are businesses, which act as intermediaries between their customers and make gains by taking fees. Also, the interactions between parties on peer-to-peer exchanges are coordinated single handedly by pre-programmed software, with no necessity for human middlemen.
This alternative approach has a number of pros, and in addition drawbacks. In general, the peer-to-peer cryptocurrrencies exchange are obvious examples of the decentralization logic.
How did P2P exchanges develop?
P2P exchanges were a natural development of the idea, focused at removing some of the consistent Bitcoin exchanges' limitations.
Since Bitcoin's emergence, online exchanges served as the main gateways into the cryptocurrency world. Looking at how few shops, both on the web and physical, take cryptocurrency as payment, there is a need for users to have a type of interface between the economies of the real world and Bitcoin.
Online exchanges, for example, coinbase, bitfinex and others, have been satisfying that need as the most popular place for trading Bitcoin and different cryptocurrencies for fiat money and the other way around.
The drawback is that, unlike Bitcoin itself, these exchanges are controlled by organizations. This implies they have staff, they administer and deal with every transaction between their users, they fill in as mediators in instances of dispute, and they collect fees for doing all that.
Seeing how that causes a whole number of disadvantages, a few individuals from the Bitcoin community have embarked to disrupt the market by creating a fresh solutions - decentralized peer-to-peer exchanges, that are run not by individuals, but rather by software.
How are transactions performed on P2P exchanges' platform?
The exchange software is employed to consequently pair buyers and sellers with each other, basef on the terms they specified.
To begin with, let's understand how a 'regular' cryptocurrrency exchange functions. Individuals hoping to sell Bitcoins put the amount and the price they'd like to sell them at. All those requests, known as 'orders', are put in a typical book, called the 'order book.'
At the point when someone else needs to buy Bitcoins, they either search for an acceptable offer in the order book or, if none can be found, make their own 'buy order', indicating the terms of the transaction as they like. At whatever point possible, the exchange matches buy and sell orders by price and processes the trades.
Presently, Bitcoin transactions can take quite a while - from five to 10 minutes at the least time, and up to a few hours. Fiat money transfers more often take much more time; most times, international payments may take a few days to go through. So as to accelerate the process of trading, the exchanges act as middle person: it settles all transactions promptly, despite the fact that the real transfers may have not yet been done.
To eliminate the need for a third party, P2P exchanges work in a unique way.
Rather than connecting orders in the order book, they pair the individuals behind those orders. That is, at whatever point a matching buy and sell requests are discovered, the exchange software does not quickly process the transaction, but rather, it connects the buyer with the seller, enabling them to execute the transaction with no middle man.
Later, third parties might be involved as mediators if there should arise an occurrence of dispute, however no human involvement from the exchange is required naturally.
Here, much the same as with Bitcoin itself, the software alone is impeccably fit for matching dealers with each other in a decentralized way.
What are the pros of P2P exchanges?
Peer-to-Peer trades offer high protection to transaction being censored, cheap transactions, private and secure; at least when acknowledged legitimately.
All benefits of cryptocurrency exchanges emerge from not having a single company accountable for things. A single authority offers a few benefits - basically, the faster trades. Also, it likewise functions as the single point of failure, implying that any harm to it influences the whole system.
So here are the upsides of the P2P exchanges, accomplished by eliminating that single point of failure.
Trade Censorship Resistance: Normal cryptocurrency exchanges are controlled by individuals - they are defenseless, and might be exploited by governments by forcing administrative regulations.
But, P2P exchanges are basically safe to government regulations, since they don't have any main authority which could be exploited. Regardless of whether a few parts are compelled to stop their operations, the rest of the system stays unaffected. This favorable position is precisely what has caused a sharp increment in the user base of LocalBitcoins, one of the best P2P exchanges.
Cheap Operations: Once more, regular exchanges are operated by individuals, who must be paid for their work. P2P exchanges are controlled by programming, so there's little to zero corporate overhead, and, by augmentation, little fees for the users, assuming any.
Privacy: Over the years, governments around the world have been effectively implementing AML and KYC regulations on cryptocurrency exchanges. This oversight makes the companies running those exchanges to gather as much information on their customers as possible: names, locations of home, ID numbers and much more.
It means that governments can't force those controls on P2P exchanges, which implies that exchanges can be coordinated in a considerably more private way there.
Security: P2P exchanges don't hold Bitcoins for their users - rather, they link traders, enabling them to transact directly. Not entrusting your coins to a middleman makes the procedure substantially more secure. If that no one holds your assets yet for you, at that point no one can take or lose them - purposefully, or incidentally.
What are their drawbacks?
P2P exchanges aren't superior to the normal ones in every respect - longer exchange times, less instinctive use cases and lower liquidity are some of their similar impediments.
Most defects of decentralized exchanges are caused basically by the fact that they are a generally new kind of service. For instance, Bitsquare, arguably one of the oldest of such exchanges, has been around for only three years and the majority of that was the development period.
In that capacity, these exchanges have to manage various issues. For instance, a large number of them are focusing, particular on gatherings of crypto enthusiasts and haven't taken into account newcomers - thus, they tend to be less intuitive to utilize.
For similar reasons - small audience and early stage of existence, decentralized exchanges usually have much lower trading volumes than the general ones.
Longer trade times, also, are likely an impediment that will require a significant length of time to settle, if at any time. They are caused by the way in which the trades are directed - with traders having to wait for actual Bitcoin and fiat transfers to finish before an exchange is closed.
If there is no central authority in control, how is extortion prevented?
So as to avert potential deceitful activities, different P2P exchanges utilize distinctive solutions.
Ordinarily, they are a reputation based system of arbitrators, required deposits for the span of an exchange or vis-à-vis meetings between dealers.
The way trades are coordinated on P2P exchanges leaves the clients helpless against fraud. Once Bitcoin payments are finalised, they can't be refunded, and, on the other hand, fiat cash transactions are most times refundable.
To avoid such occasions, P2P exchanges present a wide range of security features. For instance, Coinffeine has a system of mandatory deposits: Once a trade starts, both counterparties need to deposit a specific amount of Bitcoins. In the event that all goes well and the trade finishes well, those deposits return back to the dealers.
If by chance that a dispute arises, an arbitrator designated by the community hears the two sides and resolves it. The deposits are then used to remunerate the victim of the fraud and the mediator's services. A reputation system is also enforced for arbitrators to guarantee that they don't misuse their powers.
LocalBitcoins has picked another approach: it enables the clients to meet face to face to carry out their deals. Along these lines they can guarantee the transaction is completely finished before going separate ways. Clearly, this kind of trades is limited to the particular area a trader dwells in. Henceforth, the name of the service, LocalBitcoins, yet for a few, it is an advocated tradeoff for expanded security.