How does a P2P decentralised exchange work?
A Peer-to-Peer decentralised exchange works completely dependent on the software that powers it. All aspects of the exchange are operated and maintained via this platform and there is no additional requirement for a third party to facilitate trade or establish trust. All transactions operating in a decentralised manner are verified by cryptography, thus removing the need for a third-party intermediary.
A cryptocurrency exchange is a marketplace where both buyers and sellers are able to conduct transactions. For example, someone selling Bitcoin is able to use the address of the exchange to deposit their Bitcoins and they are also able to use this balance to sell their Bitcoins for other cryptocurrencies or fiat currencies. Someone looking to buy anything on the exchange would deposit their money onto the exchange and then use it to purchase coins from sellers. This way a direct merchant-customer relationship is established without the need for a government authority or centralised bank to facilitate any step of the process, meaning a significant reduction in fees. The lack of need for an intermediary also means that the processing time is significantly less and for these reasons, decentralised exchanges are increasing in popularity with more and more people and institutions as well as some governments, exploring this new and interesting concept.
Evolution of P2P exchanges
Unfortunately, at the present time, not that many physical stores or outlets accept cryptocurrencies as a legal form of payment for their services. Due to this, online exchanges have been the primary source of transactions in the cryptocurrency sector. These exchanges act as a platform for people to make a connection between crypto and real-world economies.
Prevention of fraud
When you make a transaction with fiat currency, these are refundable and reversible. This is not the case for cryptocurrencies and in cases where an individual buys a crypto coin such as Bitcoin in exchange for fiat currency, they could ask their bank for a refund. This would result in the seller receiving absolutely nothing and for this reason, cryptocurrency exchanges employ different methods to avoid this type of fraud. For example, Coinffeine, a very well-known decentralised P2P Bitcoin exchange, requires the two involved parties to make a deposit before the trade is initiated. This deposit is held in the same way as a security deposit, ensuring that no scam will take place. Once the transaction has been initiated, processed and logged onto the blockchain without any issues, the deposit is returned back to the payer. Another startup also known as LocalBitcoins even allows the two parties to meet in person. Whilst, of course, there are geographical constraints, the option is still there for those that wish to avail themselves of it.
Advantages of P2P exchange
Whilst a single point of control does offer quicker trading solutions, it also means that there are often fees to pay for the convenience. There is also the issue of attack or failure of this central point which would result in the working and trading of the entire network. By removing the need for a single point of authority, a decentralised P2P exchange can provide high resistance to transaction censorship. Even if a part of the network is required to shut down its operations, the rest of the network can function without it. This means that there is no point of control that can be pressurised resulting in the shut down of the whole network.