What is P2P exchange
P2P exchange is the exchange of cryptocurrencies and fiat money directly between users without the participation of intermediaries. All the work of combining the applications of the seller and the buyer is performed by the software.
On P2P sites, most of the basic work that people do on centralized exchanges is done by software. Therefore, the services of decentralized P2P exchanges are usually cheaper than the services of centralized cryptocurrency exchanges. Since there is no need to spend additional funds on staff, administration, support work, and server maintenance. All information about users and customers of exchanges is distributed decentralized among all users of the exchange. It is not stored on a single server, and therefore cannot be an object for hacker attacks and hacks. From this point of view, decentralized exchanges are much safer than centralized ones.
Users carry out all the relationships and arrangements directly among themselves without the participation of an intermediary on the part of the exchange administration. There is no administration on a decentralized exchange as such. All disputes are usually resolved by an external arbitrator – a person or a company with a proven reputation. The arbitrator is paid extra for the work, since he is not an employee of the exchange.
Why were P2P exchanges created
According to there are more than 1800 cryptocurrencies and tokens in the world and more than 12800 cryptocurrency exchanges, cryptocurrency exchange sites, exchangers and multi-currency wallets with exchange functions. At the same time, the daily turnover of all exchanges is about 12.8 billion dollars. Thus, making simple mathematical calculations, we can conclude that, on average, the turnover of one exchange is about 1 million US dollars. But it is not so. The fact is that the main trading, and therefore the main liquidity is concentrated in the exchanges included in the TOP-100. The share in the auctions of other exchanges is very small.
To better understand how strongly the major exchanges dominate, here is the data from the same https://coinmarketcap.com/. The daily trading volume of Exchange No. 1 – Binance is $ 1.2 billion, Exchange No. 10 Bibox – $ 160 million and Exchange No. 100 Bithesap about $ 2 million. Thus, almost all the money traders are concentrated in the 100 largest exchanges. And this is a tidbit for hackers and other scammers. For this reason, hacking at any of the exchanges, which is in the first hundred, can dramatically collapse the course of all cryptocurrencies. And information about hacks of new cryptocurrency exchanges appears almost every week. If a top ten exchange is hacked, then the consequences of such a hack on the industry can affect for months.
The main problem with almost all cryptocurrencies is the lack of security. No one can guarantee you the safety of your funds. The main idea of Bitcoin is decentralization. The largest cryptocurrency exchanges monopolized the entire market. All traders’ money is concentrated on exchange wallets that are stored on servers. Every day, numerous hackers from around the world check these servers for security. And exchanges are not always able to repulse them and save the money of their users.
But even this is not the main problem. Large amounts of traders are concentrated on the wallets of certain exchanges, that is, in the hands of the management of exchanges. And this is a human factor. It is difficult to say how these people decide to dispose of such huge sums of money, whether they come in one fine day to quit everything and with all the money go with impunity. Indeed, in most cases it is not known who is behind a particular exchange. Monopolization leads to permissiveness. And this is already scary and dangerous for the entire industry as a whole.
But this is far from all the problems. State authorities may block the accounts of exchanges and the accounts of traders. How many such examples. Leaving money on accounts in exchanges, no one guarantees their safety to the trader. If the money is not stolen by hackers, or the administration of the exchange, they can be frozen by the state.
To solve all these problems, decentralized exchanges were created. Traders on decentralized exchanges have private keys to their wallets. All information is distributed decentrally, and is not stored on specific servers. No one can freeze your accounts. No need to go through KYC procedures and comply with anti-money laundering requirements.
Benefits of P2P Exchanges
● Security of funds storage. Typically, each user has a private key to his wallet. The exchange administration does not have access to the user’s wallets. All safety of funds lies with the user himself. Therefore, it is important that the computer, or any device from which the user logs on to the exchange, is protected from viruses. The user must carefully store passwords and not give them to anyone. Usually, if decentralized exchanges are hacked, this is the fault of the users themselves, not the exchanges. Naturally, the losses associated with such hacks are much smaller than with hacks from centralized exchanges and are not able to significantly affect the cryptocurrency rate.
● Data storage security. Hacking exchanges, hackers steal not only the money of customers, but also data about them, transaction volumes, and personal data of users. Many centralized exchanges carry out mandatory verification and compliance with anti-money laundering legislation. Thus, hacking the exchange, hackers receive complete information about the person, his passport information, information on the movement of funds, as well as data on his wallets and bank cards, and even information about where the user lives. In the case of decentralized exchanges, KYC requirements are not implemented, all user data is stored in a decentralized way, it is impossible to crack. Decentralized exchanges are more secure.
● No need to go through KYC procedures. Many traders for various reasons do not want to go through the KYC procedure. Often exchanges do not work with traders from certain countries. Such traders themselves can not go through the KYC procedure and start trading on the exchange. Everything can be traded on decentralized exchanges and there is no need to go through mandatory KYC procedures and comply with anti-money laundering requirements.
● The administration of a decentralized exchange cannot freeze the accounts of traders. Often, centralized exchanges themselves freeze user accounts and prevent them from withdrawing money. In this case, sometimes they do not even respond to user requests. Exchanges have access to the accounts and money of traders and often act with them at their own discretion. A trader in this situation remains completely powerless and may lose his money at any time. The developers and the administration of decentralized exchanges do not have access to the accounts of traders and cannot block them or appropriate the money of traders.
● State authorities cannot freeze the accounts of traders on a decentralized exchange. On a centralized exchange, not only the exchange administration itself can freeze the accounts of traders, but also the authorities of various states and government bodies. Authorities can also freeze the accounts of the exchange, thereby terminating its work. On a decentralized exchange, authorities do not have access to user accounts and cannot freeze them.
Disadvantages of P2P Exchanges
● The main problem of all P2P exchanges is the lack of liquidity, a small number of traders and a small trading volume. Execution of the order sometimes has to wait several days. And if a person wants to sell or buy a little-known cryptocurrency or token, then the execution of the order can not wait. P2P sites have small trading volumes, this scares off many traders, since they need the transaction to be carried out quickly, and not within a few days. And if there are usually no problems with the main cryptocurrency pairs and the seller often finds a buyer, if he has set real market prices, then in the case of the sale of “rare” cryptocurrencies or tokens, the wait can be very long. In fact, due to the small number of traders at such sites, they are poorly suited for trading little-known and not popular assets.
● There are a lot of decentralized sites, they are fragmented and cannot gain a clientele sufficient to maintain the liquidity of the exchange.
How transactions are made through P2P
Working on a decentralized exchange is like working on a centralized one. The seller generates a sell order, indicating the cryptocurrency, quantity and price. The buyer either executes an already existing order that suits him in all respects, and if there is no such order, he independently forms his purchase order, which also indicates data on the cryptocurrency, its quantity and price. If the data of the seller and the buyer coincide, then the order is considered executed.
Unlike centralized exchanges, which use their own liquidity and on which orders are often executed instantly, a decentralized exchange of order execution has to wait a while. This is due to the fact that in most cryptocurrencies, confirmation of payments must be waited for some time and payment is not carried out instantly. Therefore, decentralized exchanges are suitable for those who are in no hurry and are able to wait a certain time.
It should also be noted that the number of traders on decentralized exchanges is much less than on centralized ones. Therefore, if you want your exchange to be completed faster, you need to choose the most suitable of the existing orders and execute it, and not create a new one. This is also not entirely convenient, since you have to adapt to other people’s conditions.
P2P fraud protection
P2P sites do not use their own liquidity. Therefore, even if the seller found his buyer, you need to wait some time for the execution of the order, since payments in cryptocurrency are not made instantly. Because of this, fraud is possible. The fact is that payments in cryptocurrency are almost impossible to cancel, but payments in fiat money can be canceled. Therefore, in order to avoid fraud, many exchanges require users to leave collateral payments on the sites. There is also a user rating. If the user carries out a fraud and receives a complaint, then the security deposit is blocked by the exchange and an independent arbitrator enters the case.