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P2P Crypto Exchange The Beginner’s Guide to Crypto Trading

October 26, 2022

Cryptocurrency trading, be it the sale, purchase or exchange of any given digital asset, takes place through exchanges hubs of market activity that provide a wide range of instruments to suit the needs of a range of market players. Most exchanges, despite operating in the market, are known as centralized, since they are considered to be financial operators and thus have to comply with international standards and regulations on Anti-Money Laundering, financial safety, and they also apply mandatory Know Your Customer procedures. These factors affect not only the security of the exchange, but also impact on their operation as a whole in light of both speed and the perception on the part of users.

The main kinds of such hubs available on the market the centralized and the decentralized. In essence, both types cater to the same purpose the sale and purchase of various digital assets. However, the differences between them are rather striking and deviate far beyond the possibility to sell Bitcoin or store some tokens.

The type of services that apply a central approach give more opportunities that extend them beyond the functionality of just trading platforms that they give their participants the chance to sell or buy Bitcoin. The term signifying such platforms has now become synonymous with a sprawling ecosystem that includes many different applications that are aimed to serve the interests of all participants. Modern services used for crypto trading, like Binance, host anything from native wallets and launchpads for projects, to NFT asset collection storage facilities. Users can make use of many payment methods on such services, since most of the leading ones have long connected internationally accepted payment gateways like MasterCard and VISA. The availability of such a payment method gives trading venues the instruments needed to onboard users from the conventional economy quickly and provide the allure of easy entry into the new economy.

Cryptocurrency exchanges that have a central authority must operate a legal entity and are thus held liable before their users. The reason is that they are custodial and retain the private keys of their users’ wallets. In essence, that means if the exchange is hacked and the funds are stolen, it will have to compensate its users for their loss. In the scenario that a user loses their access to a wallet, the exchange will also help them recover it. The convenience of centralized exchanges comes with solid security and excellent liquidity levels, which are attractive thanks to their versatility and user-oriented forms of operation. However, the speed of operation, liquidity, and convenience of such venues comes at a price centralized exchanges are not as secure as many users would want them to be. The reason is the presence of a centralized authority that involves the weakest of all links in the chain the human factor, which can be exploited by hackers. Another, less noticeable factor, is that such players are not line with decentralization and actually operate as intermediaries in the market, charging a commission for processing and forwarding transactions.

Decentralized exchanges, on the other hand, apply no requirements imposed on users. Such services never comply with international regulations on Anti-Money Laundering and do not require their users to pass Know Your Customer procedures. This fact means that those who resort to the use of such exchanges are completely anonymous, the amounts they inject and their identities cannot be traced, and their privacy is fully maintained. Decentralized exchanges may not boast such levels of liquidity or convenience as their counterparts, since they are not as popular and have some additional drawbacks. One such drawback is the lag time, which results in slippage. In essence, it is a time difference between the time the user of an exchange with no central authority placed an order and when their operation is actually hashed into the blockchain by a miner. The difference counts only the moment of hashing, which can mean a difference in price between the moment of issuance of the order, resulting in potential losses. The upside is that decentralized exchanges have excellent security, since there are no central operating entities, there is no human factor involved, and no single point of access.

But no matter which exchange users opt for, they can always count on finding the P2P exchange option on either. It is the P2P exchange that makes cryptocurrency operations worthwhile in the first place, letting users enjoy the concept of direct interaction with others at lower commissions.

P2P Crypto Exchange Your Gateway Into Crypto Usage

P2P trading stands for Peer-to-Peer trading, or the direct interaction of the parties to an operation that entails no involvement of any intermediaries. Such an approach allows not only for purchase and sale operations, but also paves the way for Peer-to-Peer lending and a whole range of interesting use cases for digital currencies.

Every single service that comes to the market has some manner of P2P option to cater to the needs of users seeking direct interactions in their trading. Binance, the biggest player on the market with billions of dollars in daily turnover, has a P2P venue called Binance P2P, all despite being a fully centralized and regulated venue. The P2P exchanges operating in the market all function using the same principle that allows them to proudly boast that they have no central authority in a sort of way.

In essence, a P2P crypto exchange is just a venue where users come together with their demand and their supply in an effort to negotiate a price. The price is set by the users based not on an order book, but individual offers made by users. Since every user has a realistic price they want to get for their assets, they sign up to P2P crypto venues and post their offering, taking into account any possible commissions and gas fees.

Once the offer, be it the sale, purchase or lending of some amount is put up on the listing of a P2P exchange, the user will have to wait for a matching user to express interest. Once the user is found, whether in anonymous or de-anonymized fashion, the users enter into communication and start negotiating a price. The moment the users reach a consensus, a smart contract is formed, which oversees the execution of the terms prescribed in it.

The best part of P2P exchange is that there are no intermediaries involved, since all P2P operations are conducted within a decentralized environment, in stark contrast to the other counterpart with a legal entity, which involves oversight on the part of a hosting intermediary.

Though the choice seems rather blunt, some platforms can issue escrow smart contracts. These rare, but rather reliable instruments, act as guarantees of execution. The escrow smart contract serves as a repository of the funds in question of the transaction and ensures their release to the destination address only upon confirmation of the requirements, or the activation of a Multisig mechanism multiple signature. In this case, the platform acts as a guarantee provider, thus adding an extra layer of trust to the transaction, while charging a tiny percentage of the sum the parties have pledged as a commission for its services. Such services are rare, but they are ideal solutions for users of P2P exchange operations who have large amounts they wish to pledge to a transaction, but do not trust the counterparty entirely.

Key Takeaways

The P2P exchange mechanism is certainly in a short list of the most surefire ways of guaranteeing the safety of means of transacting, since it does not involve any intermediaries and allows users to leverage the full capabilities of the blockchain. With its direct interaction facilitating methods and utter detachment from such a factor as liquidity availability on the broader market at large, the P2P exchange is a function that can be found on the venues that apply no centralized method of oversight is ideal for those who have a severe lack of trust in centralized platforms.