Considering the fact that cryptocurrencies can never be used for mainstream transactions, the only possible way to make a big profit from crypto assets is through cryptocurrency trading on exchanges.
However, most exchanges go against some of the most basic principles on which the entire technology backing crypto assets were built. The blockchain technology is designed to be decentralized, anonymous, immutable, and extremely secure.
A crypto exchange, however, compromises on all these values because a standard crypto exchange is typically centralized. One of the ways in which this disadvantage is being countered is through peer to peer exchange development.
A peer to peer crypto exchange effectively counters the challenges posed by centralization. It is run by software and not by a set of people. This is one of the biggest reasons the demand for p2P crypto exchange development is on the rise.
To understand the awesomeness of a peer-to-peer crypto exchange, it is important to find out how the standard exchange works and how a peer-to-peer exchange provides traders with a few advantages, both active and passive.
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The functioning of a standard exchange
A standard crypto exchange is typically a centralized crypto exchange that enables trading of cryptocurrencies by specifying the amount and the price of the orders. The amount and the orders are placed on a common lecture that is known as an order book. The buyers visit these order books to look for orders that match their requirements.
The corollary of the same order process can be created from the buyer side as well. If the buyer is not able to find an order that matches their requirements, they can create their own buying orders that will be sought after by sellers.
Every exchange has a matching engine and is considered to be the heart and soul of any crypto exchange. The exchange uses a matching algorithm to match the buy and sell orders by using parameters such as prices, and they process the trade.
Centralized exchanges are relatively easy to use and have an intuitive user interface. The ease of use also attracts quite a lot of users/traders, and it enhances the liquidity – one of the biggest selling points for any exchange, literally and figuratively!
The disadvantages of the centralized exchange
One of the biggest disadvantages of a centralized exchange is that it consumes quite a lot of time, and in addition to that, it involves a lot of intermediaries. Any early crypto advocate would state with confidence that the number of intermediaries proportionally increases the cost of the process, and it holds completely true in case of a standard exchange.
In addition to acting as an intermediary facilitating the trade and transactions, the company also serves as an arbitrator to handle any disputes arising in the trade but for a fee.
Breaking in the decentralized exchange
A decentralized exchange, instead of acting like a Facebook group, acts more like a Tinder for crypto traders. It is quite understandable when said that P2P exchanges have completely transformed the entire process and perception of crypto exchanges.
Just like a standard exchange, a P2P also has a powerful matching engine. However, instead of matching orders in the order book, a peer-to-peer exchange essentially matches the crypto traders who make those orders.
Therefore, the exchange does not immediately process the trade. It only connects the buyers and sellers and enables them to directly contact the trade without involving any intermediaries. The absence of intermediaries eliminates the cost associated with them.
The peer-to-peer exchange utilizes a smart contract-based escrow solution to facilitate transactions between traders. Using the escrow method might not be essentially fast, but it keeps up the security of the transaction and ensures trust without imposing a huge cost to be paid for the intermediaries to ensure trust and security.
However, even if the intermediary costs are slashed, there will still be a third party involved to act as an arbitrator to resolve disputes between the buyer and the seller. However, since the buyer is directly connected with the seller and exchange does not have much to the trade, the possibilities of disputes are quite low. It is to be remembered that the arbitrator expense is not always mandatory.
The advantages brought about by a P2P exchange
A centralized financial system to the blockchain is what a standard exchange is to a decentralized exchange. They offer highly secure transactions with high resistance to transaction censorship. If developed, deployed, and realized properly, it is extremely cost-effective and private. Although centralized exchanges provide advantages like ease of use, faster transactions, and enhanced liquidity, it is extremely vulnerable to attacks.
Since peer to peer cryptocurrency exchanges does not rely on any third party or intermediary, they reach the core features of the blockchain like immutability and decentralization. Therefore, it enhances the privacy of your transaction and keeps the identity of users anonymous.
The uncompromising degree of decentralization ensures that there is no need for any intermediary and its associated costs. Therefore, the operation costs are almost close to 0, making P2P exchanges extremely cost-effective.
While the decentralized exchange does not miss out on the KYC details, it keeps them extremely secure within the blockchain database. This presents a fine confluence of two advantages – on one side, the authenticity of the counterparties is not compromised, and at the same time, the identity of the transacting parties is kept anonymous. This keeps the chances of fraud relatively nominal without any compromise on the anonymity.
Unlike centralized exchanges where the authority is confined to a few handfuls of people, it is a huge community of people who oversee all the transactions on the decentralized exchange. If need be, they also can act as arbitrators in settling disputes between the buyer and the seller.
The escrow smart contract presents an effective method for ensuring trust – both transacting parties are required to lock a certain amount the smart contract as crowd before the trade, and the funds are released from the smart contract escrow only upon successful completion of the trade.
In addition, P2P exchanges also bring the usual advantages of any crypto transaction like keeping it global and time agnostic. P2P exchanges designed to operate from any corner of the globe with a good internet connection and are open 24/7/365.
With so many advantages, it is only natural that an aspiring crypto entrepreneur would want to embark on a journey of peer-to-peer exchange development.
Developing P2P crypto exchange
Developing a P2P exchange involves putting together a lot of components that should be designed to flawlessly work with each other in tandem.
One of the most important components of any exchange is the matching engine. In the case of a P2P exchange, the matching engine should be robust and high in performance. It should not have any latencies and should be maximum insufficiency. The matching engine search as a cornerstone for the proper functioning of the P2P exchange ecosystem.
A decentralized exchange is innately secure. However, to enhance the possibilities of defending compromises, your exchange should have the strength and multilayered security. Simple security mechanisms like the SSL implementation and a two-factor authentication would go a long way in ensuring the security of your exchange.
However, decentralized a P2P exchange might be, it still requires that KYC/AML formalities be completed. This ensures the interest of your investors is protected. Requiring KYC/AML formalities is bound to increase the magnitude of trust your trader’s place on your exchange.
P2P exchanges elevate the experience of a cryptocurrency exchange software, which is, by itself, quite a revolution. However, it is quite possible that the magnitude of coding and business understanding involved might serve as deterrents for you from developing an exchange from scratch.
A perfect solution to this challenge is the presence of white label solutions. You can get in touch with blockchain app development companies that specialize in crypto exchanges, and they will take care to not only create but also customize your decentralized crypto exchange and help you kickstart your crypto business in the shortest possible time.