‘Peer-to-peer’ (P2P) or ‘decentralized’ exchanges are operated and maintained exclusively by software.
P2P exchanges allow the participants of the market to trade directly with each other without any trusted third party to process all trades.
‘Regular’ cryptocurrency exchanges are companies, which serve as intermediaries between their customers and make a profit by collecting fees. Conversely, the interactions between counterparties on peer-to-peer exchanges are directed exclusively by pre-programmed software, with no requirement for human middlemen.
This alternative approach has a number of comparative advantages, as well as downsides. Overall, the
peer-to-peer cryptocurrency exchanges are vivid examples of the decentralization philosophy.
How are trades performed on P2P exchanges?
The exchange software is used to automatically connect buyers and sellers with each other, based on the terms they prefer.
First, let’s sum up how a ‘regular’ cryptocurrency exchange works. People looking to sell Bitcoins specify the amount and the price they’d like to sell them at. All those requests, known as ‘orders’, are placed in a common ledger, called the ‘order book.’
When another person wants to buy Bitcoins, they either look for a satisfactory offer in the order book or, if none can be found, create their own ‘buy order’, specifying the terms of the deal as they like. Whenever possible, the exchange matches buy and sell orders by price and processes the trades.
Now, Bitcoin transactions can take a long time - from five to 10 minutes at the least, and up to several hours. Fiat money transfers usually take even longer; in some cases, international payments may take several days to complete. In order to speed up the process of trading, the exchange serves as a trusted intermediary: it settles all trades immediately, even though the actual transactions might have not yet been finished.
In order to remove the need for a third party, P2P exchanges operate in a different way.
Instead of matching orders in the order book, they match the people behind those orders. That is, whenever a matching buy and sell orders are found, the exchange software does not immediately process the trade, but instead, it connects the buyer with the seller, allowing them to conduct the deal without any intermediaries.
Still, third parties may be involved as arbitrators in case of possible disputes, but no human involvement from the exchange is required by default.
Here, just like with Bitcoin itself, the software alone is perfectly capable of matching traders with each other in a decentralized manner.
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