There are two types of bitcoin exchanges in use: centralized and decentralized exchanges. The regular bitcoin exchange involves the use of an order book to confirm buy and sell orders between people. However, both parties involved in the transaction don’t need to know each other. This provides a certain degree of anonymity and privacy protection.
P2P exchanges enable participants of the market to carry out trades directly with each other without needing a third-party. A peer-to-peer transaction means that you have the data of the person you’re conducting business with. The information you have on that person could include the cryptocurrency wallet address, forum username, and IP address.
In general, the peer-to-peer cryptocurrency exchanges are clear examples of the decentralization philosophy.
How Does A P2P Decentralized Exchange Work?
A decentralized peer-to-peer exchange depends entirely on the software that powers it. Plus, these exchanges are also developed by a P2P Exchange Development company looking to solve the issue of centralization in most cryptocurrency exchanges.
All aspects of the exchange are operated using this software without the need for a third party’s interference. The decentralized transactions are verified via cryptography. Hence the need for intermediaries is unnecessary.
Rather than matching transaction orders in an order book, P2P decentralized exchanges link the people behind the orders. What this means is that when a matching sell and buy order is found, the exchange connects the seller to the buyer, allowing them come to an agreement without needing a third-party.
Components Of P2P Cryptocurrency Exchanges
The peer to peer interconnectivity is an integral part of the exchange process. The individual peer, which is basically a computer system on the network, is most time considered as a node.
These interconnected peers on the network make their resources available to the other participants. Resources like their computing power, disk storage, bandwidth etc. are utilized on the decentralized network.
The peer to peer network requires certain components and configurations before they can be interconnected. These components are mainly;
- Local Area Network (LAN): This is the network interface adapter for each of the peer or computer. For optimal performance, the same manufacturer or producer of the local area network should be used.
- Cabling: This are connectors that should be work with the network card.
- Drivers: This is the software driver that fits with the network card.
- Network Protocol: For the peer to peer connection, a common network protocol has to be used.
- Named Peer: The different interconnected nodes have to be uniquely named in order to differentiate nodes that are interconnected and those that are not.
System Specifications Required
Each computer system interconnected through a peer to peer connection automatically becomes a file server. Luckily, these exchanges on computers with Windows, Linux, and Mac operating systems.
The main requirement for a computer system to join the peer to peer network is an internet connection and the peer to peer software. The peer to peer software used nowadays employ hybrid software such as Napster, Open Nap, IRC, BitTorrent etc.
Advantages of P2P Exchanges
All the benefits of decentralized cryptocurrency exchanges are as a result of their independence (no single company calls the shots). A single point of authority offers advantages in speedier transaction times. However, it could also affect the entire system with its vulnerability because there are no backups.
The following are the advantages of P2P exchanges, achieved by erasing the vulnerability peculiar to a single point of authority.
Transaction censorship resistance
Individuals operate regular cryptocurrency exchanges – they are prone to the ever-changing government policies and restrictions. While P2P exchanges can’t be affected by government interference, because no central point of authority can be targeted. Even if some parts are compelled to cease operations, work still goes on with the other parts of the system.
Cost of operations
Regular exchanges are run by people, who need to be paid for their services. P2P exchanges are operated by software, so the cost of operations is lesser than that incurred by regular exchanges.
Recently, governments around the world have had success in enforcing AML and KYC regulations on cryptocurrency exchanges. This policy compels companies running those exchanges to collect all the information they can on their users. However, according to hackernoon, this government regulation is only put in place to ensure individuals are authorized to use a service, meaning that trades can still be carried out privately.
P2P exchanges do not keep cryptocurrency for their users – they only connect traders, allowing them to carry out trades directly. The absence of a third party to keep your coins means nobody can steal or lose them – intentionally or otherwise.
Future Scope of P2P Cryptocurrency Exchanges
The p2p exchange has started to disrupt the traditional market has it has recorded notorious growth since its inception. With the ability to cut off middlemen and the central administrator, this fact coupled with the introduction of lending tools like Affirm and Zopa, there has been different and increased number of trading and interested parties in the cryptocurrency exchange.
Currently, there is still third party maintenance that is being carried out on the digital ledger. The future is not too far as platforms like LocalCoinSwap. They have been able to create a p2p platform that is totally independent of any central dependencies.
With over 1000 cryptocurrencies being traded on a daily, there is a growing need for faster and more secure exchanges. Plus, with the continuous introduction of more coins, exchanges are going to be overwhelmed by the number of coins being traded. However, P2P exchanges reduce a bulk of the work by letting individuals transact directly with each other, saving time and effort.
With the immutable digital ledger and the continuously developed smart contracts, the efficiency and the accuracy of the transaction will be instant and accurately carried out on the different P2P cryptocurrency exchange platforms.
The P2P cryptocurrency exchange has shown its advantages over the traditional exchange with features like the security of funds, instant transaction time, low transaction rate, and so on.
The total removal of any third party interference in trade and the immutable digital ledger, the P2P cryptocurrency exchange is very open and transparent in its dealings.