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A P2P exchange is a decentralized exchange that enables direct transfers between users. Unlike centralized exchanges, no middlemen oversee the transfers, which means users negotiate prices, set their terms, and complete the transfers themselves.
P2P exchanges can be good places to find more obscure coins, but they also offer a more secure and private way to transfer any cryptocurrency. These exchanges use smart contracts and escrow, which means transactions are complete when certain conditions are met and help prevent fraudulent transactions.
P2P Exchanges Explained
There are dozens of P2P exchanges online, including some from big names like Binance and Paxful. They can provide exchange services to users who want additional privacy, and the best P2P crypto exchanges can be used by traders in jurisdictions that otherwise struggle to find exchanges that will accept their trades.
Crypto expert Kane Pepi highlights the fact that UK users can’t deposit British Pounds on Binance, for example, but they can still use Binance’s P2P platform without the same concerns. As the cryptocurrency market continues to face regulatory challenges in certain countries around the world, the use of P2P exchanges will become increasingly beneficial.
How Do They Work?
When using a P2P platform, buyers and sellers can add desired trades. They highlight the cryptocurrency they wish to trade, the amount of that currency, and the exchange rate they’re offering. The platform will then determine anybody who matches the desired trade and display a list of results, typically starting with the one that offers the most favorable exchange.
The person adding the trade can choose the other party they wish to deal with and then message that party via the system. If the two parties agree to continue with the trade, a smart contract is established on a blockchain network. The buyer puts money into escrow and only when both sides have met the smart contract terms are the funds released to both sides and the smart contract completed.
How Do They Differ From Centralized Exchanges?
Although the end result of using a P2P exchange has the same final outcome as using a centralized exchange, the two types of platforms have some inherent and important differences.
There is no central body that manages a P2P exchange. The platform connects traders, but it is not responsible for completing trades. This means the process is more manual with P2P exchanges. However, the lack of involvement means that there is no customer service or assistance on P2P exchanges, but there is also less risk of hacking as money is not kept on the exchanges themselves. Buyers and sellers set the prices they are willing to accept and, as such, peer-to-peer networks rarely offer the same trading features, like live charts, that centralized exchanges provide.
Pros Of P2P Exchanges
Most centralized exchanges require that users provide KYC, or Know Your Customer, details. This means providing personal and even financial details to the exchange. In some cases, these details may be reported to third parties, although most exchanges fight to ensure they do not have to supply these details.
Users set the prices they are willing to accept and if another user is willing to accept those prices, the deal will go ahead. With centralized exchanges, you can only deal at the current value.
When new coins are launched, they do not launch directly onto platforms like Coinbase and Binance. It can take some time before they are found on these major sites. By that time, the prices of these currencies have generally increased, even following the news that they will be listed by the exchanges themselves. As such, investors can miss out on a lot of potential profit. P2P exchanges allow the dealing of virtually any cryptocurrency, even before they are listed on centralized exchanges.
Centralized exchanges do perform some essential roles that users come to expect, including acting as intermediaries and also facilitating trades. In exchange for these services, they charge fees. Fees on centralized exchanges can soon add up. P2P exchanges facilitate direct trades and may not take any fees for trades completed, which makes them a cost effective alternative.
Money is not held on P2P exchanges, and the trades themselves are conducted away from the platform. There is a lot less chance of the platform being hacked, and even if a hacker does gain access to servers, they won’t be able to access users’ funds or financial details.
Cons Of P2P Exchanges
Centralized exchanges do provide additional services. They facilitate trades which means users don’t have to communicate with one another to buy or sell cryptos. This makes the process easier, especially for those who just want to complete a trade at the current exchange rate and move on.
P2P exchanges can have liquidity issues because buyers and sellers are dependent on finding other buyers and sellers who are willing to trade at the desired price. This can be especially true when trading less known coins or trying to get prices that do not match the current exchange.
While hacking and theft are easier to avoid using P2P exchanges, fraud is still possible. Traders can help avoid this potential risk by choosing platforms that require escrow payments and setting up smart contracts for trades. But even these methods do not completely eradicate the threat of exchange fraud, so users do need to exercise some caution and do their own research.
Conclusion
Centralized exchanges are commonly used by people who want to trade in and out of cryptocurrency, and who wish to trade cryptos for other cryptos. They are convenient, have high levels of liquidity, and because the platform itself deals with the trades, it means users have some level of protection against fraudulent activity. However, they can be hacked and crypto can be stolen from exchanges.
P2P exchanges offer improved protection against theft while also providing greater privacy and facilitating the trading of more obscure coins and tokens, including those that have not yet been listed on any major exchanges.