P2P exchanges allow market participants to trade directly with each other without any reliable third parties to process all transactions.
Regular cryptocurrency exchanges are enterprises that serve as mediators among their users and make a revenue by charging fees. On the contrary, interactions between counterparts in peer exchanges are directed exclusively by preprogrammed software, without the need for human intermediaries.
This alternative approach has a number of comparative advantages, as well as disadvantages. In general, cryptocurrency exchanges between peers are vivid examples of the decentralization philosophy.
How did the P2P exchanges evolve?
For most of Bitcoin’s existence, online exchanges served as the main gateways to the world of cryptocurrencies. Seeing how a very small number of stores, both online and physical, accept cryptocurrencies as payment, there is a natural need for users to have some kind of interface between real-world economies and Bitcoin.
Online exchanges such as Bitstamp, BTC China, Kraken and others have been satisfying that need as the most popular place to trade Bitcoin and other cryptocurrencies for fiat money and vice versa.
The disadvantage is that, unlike Bitcoin itself, these exchanges are run by companies. This means that they have staff, supervise and manage all interactions among their users, serve as arbitrators in cases of disputes and charge fees for doing all that.
Seeing how that produces a lot of disadvantages, some members of the Bitcoin community have set out to interrupt the market by producing a new solution: decentralized peer exchanges, which are not run by people, but by software.
You may be thinking about how transactions are carried out in markets or P2P exchanges.
Well, first, let’s summarize how a “regular” cryptocurrency exchange works. People looking to sell Bitcoins specify the quantity and price at which they would like to sell them. All of those requests, known as “orders,” are placed in a common book, called “order book.”
When another person wants to buy Bitcoins, he looks for a satisfactory offer in the order book or, if he cannot find it, he creates his own “purchase order”, specifying the terms of the agreement as he wishes. Whenever possible, the exchange matches purchase and sale orders by price and processes transactions.
Now, Bitcoin transactions can take a long time, at least five to 10 minutes, and up to several hours. Fiat money transfers usually take even longer; In some cases, international payments may take several days to complete. To accelerate the negotiation process, the exchange serves as a reliable intermediary: it liquidates all transactions immediately, even if the actual transactions are not yet complete.
To eliminate the need for a third party, P2P exchanges work differently.
Instead of matching the orders in the order book, they match the people behind those orders. That is, every time matching purchase and sale orders are found, the exchange software does not immediately process the exchange, but instead connects the buyer with the seller, allowing him to make the deal without any intermediary.
Even so, third parties may be involved as arbitrators in case of possible disputes, but the human participation of the default exchange is not required.
Here, as with Bitcoin itself, the software is only perfectly capable of linking operators to each other in a decentralized manner.
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