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What is a Peer-to-Peer (P2P) crypto exchange? How does it work

Peer-to-Peer exchange is a decentralized form of exchanging crypto tokens that allow buyers and sellers to negotiate the token price before it is transferred. According to CoinMarketCap, there are currently over 9,000 cryptocurrencies in existence, with a total market capitalization of over 2 trillion dollars. Investors from all over the world are eager to trade in this rapidly expanding market. As a result, a slew of blockchain exchanges has sprung.

A peer-to-peer exchange platform, in particular, is known for its decentralized network, transparent, and highly secure transaction mechanism. If you’d like to know more about crypto exchanges you can refer to this article – How to launch a cryptocurrency exchange using white label solutions

In this article, we will be discussing the various aspects of peer-to-peer exchange and how it could help your organization. So, let’s have a look at the below topics to gain better insights:

What is a Peer-to-Peer (P2P) exchange?

Peer-to-peer (P2P) or ‘decentralized’ exchanges is a software-based platform that allows crypto-market participants to trade directly with one another by eliminating any third-party involvement. It has made the transactions most accessible by eliminating the risk associated with middlemen as it has elevated the levels of security and is worth mentioning the speed of digital transactions.

Peer to Peer exchange process flow
Peer to Peer exchange process flow

How does a Peer-to-Peer (P2P) exchange work?

A peer-to-peer cryptocurrency exchange allows verified buyers and sellers to conduct hassle-free asset trading. To connect buyers with preferred sellers, top-of-the-line match engines are used. To balance trading needs, a buyer or seller may have additional features that he or she expects from the peer. Some people equate a P2P exchange to marketplaces such as Craigslist or Facebook Marketplace since P2P exchanges connect crypto buyers and sellers. This platform involves two parties that have related data with each other.   Rather than using an order book to pair buy and sell orders and controlling the platform’s assets, the P2P cryptocurrency exchange model allows market participants to transact directly with one another without the need for a middleman to process transactions or retain funds.

Take the following example to understand the concept better.

Assume John puts a purchase order for 3 BTC. Henry, on the other hand, puts a sales order for 3 BTC. John and Henry are matched by a peer-to-peer exchange platform, which allows them to make a contract without the intervention of a third party. The smart contract-driven escrow keeps 3 BTC of Henry until they agree on the terms of trade. John transfers the necessary funds to Henry’s account. Escrow releases 3 BTC and sends them to John’s wallet address as soon as Henry accepts the payment.

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Why P2P exchanges could be the future of trading values

  • Global Marketplace:

One advantage of using P2P exchange is that it gives you access to a global market of cryptocurrency buyers and sellers. You can buy and sell cryptocurrencies with people across the globe in a few seconds.

  • Multiple Payment Methods:

When trading on conventional exchanges, you can not have as many payment options as when trading on P2P exchanges.

  • Useful in countries where exchanges are banned:

Many countries are imposing strict laws on cryptocurrency exchanges. Likewise, peer-to-peer networks are known to provide a better solution to Government hostility. These are not located in just one location and cannot be banned in any case.

  • Providing privacy:

Many cryptocurrency exchanges require signing up with personal details and identity proof like Email ID, etc. Some of the exchanges require better information like passports. Besides, in decentralized exchange, there is no requirement to sign up. Most of the P2P platforms ask for sign-up, but they don’t require personal information.

  • Security:

The decentralized exchanges help in enhancing security. Secondly, it provides so much protection as there is no third party involved. The users have complete control over the currencies and even other types of securities.

Disadvantages of P2P model

  • Slower Trading Speeds:

Though P2P transactions can be completed almost immediately after both parties validate the transaction, one party can postpone the transaction for a variety of reasons. Traditional trading does not require you to wait for the buyer or seller to confirm before proceeding with the trade. With P2P, the buyer or seller may change their minds and cancel the transaction halfway through.

  • Low Liquidity:

P2P exchanges are not at all in demand with professional traders, who need fast transactions to make big deals and they tend to use centralized exchanges. In their current state, these exchanges can only be useful to people who are interested in specific advantages like privacy, security, and multiple payment options.

How to start your decentralized or Peer-to-Peer exchange?

Starting an own exchange involves setting up the five framework parts:

  • Trading and matching engine, the chief of any exchange system
  • Cryptocurrency wallets
  • Liquidity
  • Administration system

For a secure network of exchange, each of these five frameworks can be decentralized. Let’s dive a little deeper.

  • Trading and matching engine:

The trading engine and the matching engine is a chain of request books and trading bot motors. If functionality is considered, this is less significant. There are two kinds of requests on the system; predetermined price and market price. Recording these requests on a blockchain is possible, but there is no choice of change.

This is not a worthy capacity for an exchange system with uncertain appropriate responses, thereby less significant.

  • Crypto wallets:

This entity should be property decentralized for safe infrastructure on a decentralized network. This device (not a physical wallet, though) stores public or private keys for digital cryptocurrency transactions and therefore needs to be decentralized or secured.

The involvement of a third party can undermine security and secrecy. So, these have to be decentralized to strengthen the safety of transactions.

  • Liquidity:

For now, liquidity is the weakest point of the decentralized framework and remains an area of research. However, this can be entertained by the creation of a half-breed cryptocurrency exchange. And a different segment can be made in-charge of liquidity.

  • Administration system:

Admin key is an important and significant part of a decentralized exchange network. The history of transactions, trades made, and user data are essential for the proprietors and should be dealt with.

What’s the future of P2P exchanges?

Today the blockchain technology is all about decentralization, thanks to its advantages like supporting multiple currencies, quick liquidation, better privacy, and security which is basically accelerating the adoption of decentralized exchanges. Even though there are some limitations like user-friendliness and ownership suspense, with the evolution of technology the P2P exchanges are all set to become the future of cryptocurrency trading.

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Need help with crypto exchange development?

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Author

Rahul A R is a technologist and full stack developer who specializes in Blockchain technologies and Cryptocurrencies. Though he’s worked within numerous privacy and security sectors, Rahul’s recent emphasis has been on solutions built on Ethereum, Tezos, smart contracts, and smart signatures, in particular, decentralized self-sovereign identity. He’s Helped clients, from start-ups to Fortune 500 companies, across North America and Asia, develop their blockchain strategy and build several decentralized applications using blockchains and smart contracts.

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