P2P exchanges allow market participants to trade directly with each other without any reliable third parties to process all transactions.
Regular cryptocurrency exchanges are enterprises that serve as mediators among their users and make a revenue by charging fees. On the contrary, interactions between counterparts in peer exchanges are directed exclusively by preprogrammed software, without the need for human intermediaries.
This alternative approach has a number of comparative advantages, as well as disadvantages. In general, cryptocurrency exchanges between peers are vivid examples of the decentralization philosophy.
How did the P2P exchanges evolve?
For most of Bitcoin’s existence, online exchanges served as the main gateways to the world of cryptocurrencies. Seeing how a very small number of stores, both online and physical, accept cryptocurrencies as payment, there is a natural need for users to have some kind of interface between real-world economies and Bitcoin.
The disadvantage is that, unlike Bitcoin itself, these exchanges are run by companies. This means that they have staff, supervise and manage all interactions among their users, serve as arbitrators in cases of disputes and charge fees for doing all that.
Seeing how this produces many disadvantages, some members of the Bitcoin community have decided to interrupt the market by producing a new solution: decentralized peer exchanges, which are not managed by people, but by software.
You may be thinking about how transactions are carried out in markets or P2P exchanges.
Well, first, let’s summarize how a “regular” cryptocurrency exchange works. People looking to sell Bitcoins specify the quantity and price at which they would like to sell them. All of those requests, known as “orders,” are placed in a common book, called “order book.”
When another person wants to buy Bitcoins, he looks for a satisfactory offer in the order book or, if he cannot find it, he creates his own “purchase order”, specifying the terms of the agreement as he wishes. Whenever possible, the exchange matches purchase and sale orders by price and processes transactions.