What Is a P2P Crypto Exchange and How Does It Work?

Anyone planning to buy and sell crypto has a few options. They might decide to create an account with a centralized exchange like Binance or Coinbase. But the other option is using a peer-to-peer (P2P) crypto exchange. 

P2P crypto exchanges are growing in popularity because they have no central authority and give users unlimited control over their crypto assets.

In this guide, we’ll cover the basics of peer exchanges to help you properly scale your business. 

What Are P2P Crypto Exchanges?

A P2P crypto exchange is a decentralized platform that allows people to trade without any intermediaries. It’s different from a traditional crypto exchange because there’s no central authority involved.

Buyers can facilitate trades with each other on their own terms. The key benefits of P2P crypto exchanges are its decentralized nature and unlimited control for users. 

Since P2P crypto exchanges are decentralized, they’re very similar to the design of cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH): No single authority owns these exchanges. 

All transactions are made across a secure blockchain network, which efficiently transfers digital assets. Whenever a transaction is processed, anonymous individuals (called miners) verify and approve them.

This keeps blockchain networks in constant operation, which fuels P2P cryptocurrency exchanges. It also eliminates the need for a central authority to manage these operations, giving total autonomy to users.

P2P Exchanges vs. Conventional Crypto Exchanges

Let’s explore the major differences between P2P and conventional exchanges in greater detail.

Centralization

As discussed above, the main difference between P2P and conventional crypto exchanges is their stance on centralization. P2P exchanges are decentralized, while traditional crypto exchanges are powered by central authorities. 

For example, Binance operates a trading platform for users who want to buy and sell cryptocurrencies. Binance sets the rules of the trading platform. They can set whatever trading fees they want, and the platform can be affected by their state of business. 

Decentralized exchanges, like P2P exchanges, are completely different. These exchanges don’t have governing bodies. 

However, there is a caveat here. Traditional crypto exchanges like Binance can offer remediation for users who file a dispute with a particular transaction. For example, if your account gets hacked and is charged for transactions you didn’t approve of, you can contact Binance’s customer support team. With a P2P marketplace, this solution is almost never available. 

Control

Another difference between these two types of crypto exchanges is control. Traditional crypto exchanges have user fund limitations. But with a P2P exchange, you can use a wide variety of payment methods, such as PayPal, debit cards, bank account transfers, credit cards, fiat currencies, and cryptocurrencies. 

A traditional exchange acts as a liaison between the buyer and seller, meaning the payment methods you can use are up to them. Meanwhile, P2P crypto exchanges allow users to set their own trade orders.

This means that user-friendly P2P exchanges give more flexibility and control to users, while conventional crypto exchanges manage their own order books and typically restrict this kind of unmitigated access. 

Privacy

P2P exchanges are extremely secure. Backed by a blockchain network, they can better withstand the onslaught of hackers than traditional exchanges. 

Conventional crypto exchanges store all their data — including users’ personal and financial information — on their servers. If these servers are compromised, a hacker can steal user data. 

Because of this, many investors are wary about entrusting their assets to traditional exchanges. On the other hand, P2P exchanges are decentralized, meaning user data is stored securely on an anonymous blockchain network. 

Liquidity

Liquidity is an important factor for any financial institution. Markets with high liquidity improve investor confidence since they know they can quickly liquidate their assets into cash if needed. 

As a result, crypto exchanges rely on liquidity pools to drive high trading volume, reduce slippage, and decrease market volatility. 

P2P exchanges benefit heavily from increased control and deep order books. These exchanges also serve worldwide audiences, meaning they can easily attract investors from across the world who want more control over their funds. 

How Do P2P Crypto Exchanges Work?

P2P crypto exchanges work much differently than traditional crypto exchanges. Here are all the steps a person will have to follow to create an account and begin trading. 

1. User Registration

To begin, the user will need to create an account with the P2P exchange. It’s highly recommended that they create a secure password to enhance account security. 

Once they create and verify their account, the user will have access to all the features the exchange has to offer.

2. Creating and Listing Offers

Sellers can easily list their cryptocurrency offers with trade details. All offers are housed on the platform in marketplace style. Buyers can search for offers they’re interested in and view the details before purchasing. 

Once the user is ready to make a sale, they can create an offer through the exchange’s user interface (UI).

3. Initiating Secure Trades

A buyer can search through the P2P trading platform for offers that pique their interest. Once they shortlist their offers, they can initiate trade requests. (Some P2P exchanges allow users to refine their search criteria to conveniently find suitable deals.)

4. Ensuring Safe Transactions

The most important part of the selling process is the point of transaction. P2P exchanges execute payments across a blockchain network. This ensures payment processing procedures are secure and anonymous. 

Moreover, the buyer’s funds are held in escrow for safety. Not only do P2P exchanges protect buyers and sellers from buyer’s remorse, but they also keep them safe from hackers and scams. 

5. Buyer-Seller Interaction

This is the point where a deal gets done. P2P exchanges have a communication portal that allows buyers and sellers to communicate with each other before and during a transaction. These exchanges enable direct messaging so both parties can coordinate trade details. 

6. Confirming and Releasing Cryptocurrency Funds

Once both parties agree to the terms of a sale, the buyer’s funds are released from escrow. Simultaneously, the seller will release the cryptocurrencies to the buyer. 

This process is instantaneous and relies on blockchain technology. Since P2P crypto exchanges don’t have a central authority, the payment is verified by miners, who each receive a percentage of the sale. 

This is called crypto staking. 

These miners all work together via a smart contract to process your transaction and make sure you have sufficient funds available. 

7. Building Trust With Feedback

Buyers and sellers interact with each other regularly on P2P exchanges. The more efficient and stress-free the platform, the better ratings and feedback it’ll receive — significantly impacting trust-building within the P2P trading community. 

Benefits of P2P Crypto Exchanges

Now that you have a clear understanding of what P2P platforms are and how they work, let’s take a look at the advantages they offer to traders and investors:

• Low fees: P2P exchanges usually don’t require any transaction fees. Since there’s no central authority involved, sellers and buyers can often interact directly with each other with zero fees. 
• Faster cryptocurrency trading speeds: P2P transactions are typically faster than conventional exchanges. Credit card transactions happen instantly, while bank transfers can take a few days. 
• Privacy and security: P2P exchanges use industry-leading security protocols like two-factor authentication (2FA) and Know Your Customer (KYC) to improve investor confidence and reassure them that their funds are secure. 
• Worldwide reach: P2P exchanges cater to people all over the world. This opens the door for investors to make international trades. These exchanges don’t have a governing body, which can make them more exempt from legal restrictions in other countries. 
• Diverse payment methods: P2P users can take advantage of a wide range of payment methods. Both buyers and sellers can use the payment options that best serve them. 
• Active community involvement: P2P exchanges often have vibrant communications that share crypto trends and news. Users can digest these resources to make intelligent trades on the market. 
• Trade order versatility: P2P users can set their own trade orders. With greater control over the order book, investors can make offers on their terms. 

Ultimately, P2P crypto exchanges make it possible for buyers and sellers to broker their own deals. This is ideal for experienced crypto traders or people with a high net worth. 

Scale Your Crypto Exchange Effectively With AlphaPoint

Overall, a P2P crypto exchange presents opportunities for investors to structure attractive deals with sellers from across the world. These platforms are also decentralized, much like cryptocurrency itself. This is an advantage to people who are cautious about central authorities imposing regulations in the crypto market. 

If you’re running a crypto exchange and want to expand your operations into P2P, AlphaPoint can help. We provide a wide variety of white-label solutions to help you scale your business without committing to time-consuming and expensive development work. 

Request a demo today to try AlphaPoint for yourself.