Unlike a centralized exchange where a group of individuals controls and manages the platform, a Peer-to-Peer exchange is governed by software. It connects the counterparties directly to set up a trade. As a result, it creates a very flexible yet secure environment to trade cryptocurrencies.
In a centralized setup, the exchange acts as an intermediary between the counterparties. While the platform makes a profit by charging a trading fee, it exposes users’ assets to hacks and adds to the overhead costs. On the contrary, while using a peer-to-peer exchange, the user does not need to depend upon a third party with their assets or trade. In fact, the P2P exchange uses a smart contract-driven escrow mechanism to ensure that the trade occurs in a trustless, transparent and decentralized environment.
However, to ensure total decentralization, the following aspects need to be considered before P2P exchange development.
Decentralized Platform Model
A P2P exchange directly connects the asset buyer and seller. In fact, the actual trading or exchange of assets does not happen on the platform. Thus, the exchange has no control over the trade or assets involved in a trade. Such a decentralized setup can be established using smart contract escrows. It serves as a programmed intermediary service. This requires the assets involved in a transaction to be locked until the trade is settled and protects the platform users’ assets from fraudulent counterparties.
Think of a P2P exchange like a Craigslist. With the kind of anonymity and privacy, they tend to attract a lot of spammers. Through reputation management, a P2P crypto exchange development company can make sure that the counterparties can trade with reliable traders of their choice always.
Multi-sig Crypto Wallet
Whenever users sign up on a P2P exchange, they must have a multicurrency and secure wallet assigned to them. This ensures that the funds are always in their control and are readily available for trade on the platform. A multi-sig wallet becomes a necessity as it provides significant protection against hacks.
Multiple Payment Options
Centralized exchanges offer very limited payment options. At the most, it’s the fiat, crypto, credit/debit card, or PayPal. A P2P exchange is more flexible. Therefore, the platform development company must ensure to maximize the payment options without denting the security of the platform. These payment options could range vary from making bank transfers to using gift cards or making payments in person.
The matching engine of a P2P exchange must be fast. That’s because the platform needs to connect the traders directly. If the matching engine is slow, the buy/sell orders will keep piling up.
Security vs Decentralization
One of the most important attributes of a crypto exchange is to maintain complete security of user data and funds. Instead of offering such a flexible trading environment, the P2P exchanges are developed in a way that the security cannot be compromised. It is achieved by:
· Two-factor authentications (2FA)
· SSL certificate
· Google authenticator
· DoS protection (Anti-Denial of Service)
· DDoS protection (Anti-Distributed Denial of Service)
How does a P2P exchange prevent fraud in a decentralized environment?
A P2P exchange can become a honeycomb for fraudsters because of the absence of a central authority. That is why the platform must offer provisions to control frauds.
In such a flexible set-up, disputes are bound to happen. Thus, the P2P owners establish an arbitrator. He helps settle disputes between the counterparties.
A P2P exchange is not regulated by any government body. That’s because it does not handle the transactions and acts only as a platform that connects buyers and sellers. Thus, it does not require to comply with KYC/AML verification. However, to make sure the platform on-boards users who do not indulge in unlawful activities, the P2P exchange can ask for KYC/AML compliance.
How does a P2P exchange make money?
Just like centralized exchanges, P2P exchanges charge some sort of transaction fees. However, the fees here are pretty less compared to the centralized exchanges. Along with that, the buyers and sellers can advertise their postings and the platform can charge a fee for the ads.
In recent times, decentralized P2P exchanges have witnessed an increased inflow of users. This is because some of the governments tried to clamp down the centralized exchanges. With the widespread acceptance of P2P exchanges, the opportunity for growth for P2P operators has increased.
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