When I hear the word decentralized, BitTorrent thwacks my mind immediately. I spent my childhood on a peer-to-peer network of BitTorrent. I was too naive to figure out how peer-to-peer network worked. I didn’t know that clients didn’t need a central server to manage the file sharing. Instead, it was a fully decentralized peer-to-peer file transfer system.
But just after the flooring of bitcoins in the market, the idea of P2P network and decentralization became relatively clearer to a lot of people. The basic character of the decentralized system is that they are operated by the people or nodes instead of central authority.
Why is Cryptocurrency Trading Required?
The only way by which cryptocurrencies can gain traction in the market is by allowing themselves to be traded by the people. Any trade barrier would lead to their failure. And if cryptocurrency doesn’t attain success as a mode of exchange, it will have zero utility in the market with no intrinsic value.
And to make cryptocurrency trading a paradise for traders and investors, Encrybit is about the launch the new age Cryptocurrency Exchange Platform. “Improved” and “Secured” are the two words to be focussed on.
How to Trade Cryptocurrencies?
Just as stocks or forex are traded by the traditional exchange systems, cryptocurrencies also need exchanging platforms. In a traditional stock or forex exchange, there are brokers (verified and unverified) who allow people to trade commodities or currencies by collecting a certain amount of fees. But how does a decentralized exchange system separates itself from the conventional exchanges?
The decentralized exchanges are operated by the set of programs and protocols set in the network. This unconventional method of exchanges authorizes its participants to trade directly without wanting to trust the third-party or brokers. There are some regular cryptocurrencies which are exchanged similarly to stock exchanges. The point is, they are not the decentralized system because they don’t run on pre-programmed software but human middlemen.
The Evolution of Cryptocurrencies Exchange
To make something new as a medium of exchange, especially something like cryptocurrencies, a gateway is a must. A very tiny group of people accept cryptocurrencies as payment. There is got to be some sort of interface which allows humans to trade or pay bitcoins or other cryptocurrencies.
Some online platforms like Binance, Coinbase, Bitstamp, etc, have proved their significance by being important gateways of exchange. They allow the secure purchase, selling, and storage of various cryptocurrencies. They also allow the flipping of one currency into another and also into fiat currencies and vice versa.
The Darker Side Of Exchanges
The worst part about using these exchanges is that they are run by the companies. We don’t know who they are. They allow us to exchange and store our valuables but they charge for it. More importantly, we don’t know who runs it, we trust them like we trust brokers in traditional exchanges. They have humans who manage all the interactions and they can be manipulators. They could be anyone. Possibly frauds who would just disappear tomorrow. When you store your money and details in these exchanges, you partially nod them for using your funds. This basically kills the purpose of blockchain technology which promises to keep the decentralized system.
A Technical Stroke?
Lesser the human influence, more the decentralized system. In order to truncate all the disadvantages of such exchanges, Bitcoin and some other cryptocurrencies community have devised a new solution, i.e., decentralized peer-to-peer exchanges. These exchanges are run by the software and not by the humans.
How Are Trades Carried Out On Decentralized Exchanges?
How do you normally buy something from the stores? You go and select your products and when your requirements are met, you exchange your currencies against them.
How conventional exchange works?
In the conventional exchanges, people who try to sell commodities or forex generate their sale orders. These sale orders are put in the common ledger which is called an order book. These order books can be accessed by everyone in the network. The buyer could skim through all the sale orders and try to fit the offer as per his suitability. If the buyer fails to get the satisfactory offer, he could generate his own purchase order which states his offer.
Regular exchanges sometimes may take a lot of time for clearance. It may possibly consume days to clear a transaction. In such cases, to speed up the trade, forex or stock exchange acts as the trusted entity and exacts the completion of the trade even before the clearance of transaction takes place. That’s one of the prominent features of the centralized system which the decentralized system visions to achieve. The motto of the decentralized system is to minimize the human work and maximize the auto-generated work.
How P2P exchange works?
In order to remove brokers and third-parties, it leaves all the work on the nodes participating in the trade. Traditionally, once you generate the sell or purchase order, you forget about them and the automatic trading engine automatically matches your order with the optimized buyer.
But peer-to-peer model leaves a lot of manual work on the users. Instead of matching the orders, this exchange system matches the people. Sell/purchase order in the network won’t be picked up by the system. A buyer would have to click on the link and notify the seller that he is interested in buying the sale order and in return the seller will have to keep on checking if any buyers have shown interest in purchasing the released sale order.
Although the software is alone of matching the buyers and sellers without the need of third-party, it loses its vitality when it dissipates the important resource like time. The clearance of bitcoin might take 5 minutes to hours. Since there is no intermediary trustee, the rate of the transaction becomes too slow. Now, this makes the complete procedure a tedious and boring job.
Advantages Of P2P Model Exchange
The buzz around the decentralized system is not a facade. It exists, in reality. And here are the reasons:
- Transaction Censorship: The decentralized system allows everyone to access the same copy of ledgers. Regular exchanges are run by humans. They are susceptible to getting hacked or manipulated. Authority control can intervene and tamper the ledger. Moreover, they can freeze your funds. P2P system doesn’t have the central authority to control and there are almost no chances of tampering. Even if the system is hacked, the person has to either hack 51% of the nodes to change the ledger of each account or take that 51% of his confidence. Now, that sounds impossible.
- Cheaper Cost Of Operation: Again, the influence of people in regular exchange would mean extra spending. On the other hand, P2P exchanges are run by the software. The software doesn’t demand the transaction or brokerage fees. The transactional fee is optional in trading cryptocurrencies. It is optional when a user wants its transaction to be validated by the miner urgently.
- Privacy Sustenance: The central exchange system asks every minute details about the enroller. The government has been enforcing KYC regulations which mean that they have all the details. In the case of P2P, the government can’t apply brute force to KYC process. So, all the transactions can be conducted anonymously.
- Secure Channel: The P2P exchange is secure because it doesn’t store the cryptocurrencies for its users. It just makes the sellers and buyers meet. This minimizes the counterparty risk.
Disadvantages Of P2P Model Exchange
There a lot of disadvantages linked to the cryptocurrencies trading. They are:
- Lower Liquidity: The cryptocurrencies are new to this world. Plenty of risk instruments affect the liquidity of P2P currencies. Cryptocurrencies are generally news or event-driven and rates may immediately fall, unlike products in general trading. This makes the currencies volatile and people start considering them as non-liquid entities.
- Execution Risk: As mentioned earlier, this is the point where decentralized system lags. An intermediary body allows you know your position in trade but P2P exchange doesn’t guarantee the completion of trade at the specific time. The transaction might take time to fill or it may demand high prices and you could do nothing.
- Front Running: Generally, you can cancel the sale order in the centralized system. Even P2P system allows you to cancel the sale order, but another problem which occurs while canceling is Front Running.
Since every trade is happening on-chain, miners have a complete visibility of your sale orders. Let’s say you submitted an order yesterday and today is not just a good deal and you want to cancel the order, but because you have signed the order, a miner can actually execute your order. The process is called front running when you wish to cancel the order but miners execute the signed copies of your order.
- Manual: Unlike traditional exchanges, P2P exchanges let the buyer and seller meet but leaves too much for them to conduct the trade. This makes the process less intuitive.
The Final Call
There are merits and demerits attached to P2P exchanges but the only direction in which it is shifting is the progressive direction. Cryptocurrencies community are trying every possible way to make the exchange intuitive and faster.
Yogesh Trivedi is a Consultant at Encrybit.io. Yogesh started consulting companies for Cryptocurrency in 2015 and also encouraged many bitcoin and blockchain businesses. Encrybit.io, a CryptoExchange, is his upcoming venture which will escort users about lucrative measures in dealing with Cryptocurrency. He will also advise for marketing and investment benefits with this emerging technology.