Cryptocurrency Trading: Traditional Centralized Exchange Vs. P2P Trading Platform
For new traders, cryptocurrency trading can seem a bit overwhelming. They wonder how they are supposed to choose which currencies to invest in, which exchange to use, or even just which type of exchange to use. Ultimately, it comes down to personal preference, but people who are new to trading likely don’t know what their preference is yet, so here’s a guide to two main types of cryptocurrency exchanges to help you get started!
Cryptocurrency Trading On A Traditional Centralized Exchange
Traditional centralized exchanges have been around almost as long as cryptocurrencies, hence why they are called “traditional” exchanges. Some traders choose to trade on traditional centralized exchanges because they just like using a type of exchange that is familiar and has been tested over about a decade. However, that is not the only reason that people still gravitate toward using a traditional exchange. A benefit of going the traditional exchange route is the assistance you get from the exchange during the trading process. A traditional exchange helps to make sure that trades go smoothly, which is one reason why a lot of beginners like using them.
It sounds nice, right? You get to trade while being directed during the process. However, this positive also presents the negative aspects of trading on a traditional exchange. First of all, traditional exchanges are impersonal because you are not trading with another person directly, rather, the exchange is in a sense directing the trade for you. The second downside of trading on a traditional exchange is that the process is centralized since the exchange is involved in the trading process. In a traditional exchange, the exchange acts as the middleman in each transaction. Unfortunately, this means that the trade is not completely trustless because the traders are still required to trust that the third party involved in the trade is credible.
Also, traditional exchanges require KYC, so all traders are required to present their personal information such as their name, place of residence, identification numbers, etc. in order to trade. This means that those who do not have access to the required personal information or do not want to provide it for privacy reasons cannot trade on traditional exchanges.
If you wish to trade on a traditional exchange, unfortunately not all local currencies are accepted, so it is difficult for those whose local currency is not accepted to trade on one. In addition to this, there are limited choices regarding accepted payment methods.
Still, for people who are looking for a little extra help from their trading platform and are OK with it having direct access to their assets, a traditional exchange can be a great option.
Cryptocurrency Trading On A P2P Trading Platform
On a P2P trading platform, traders trade directly with another person, and there is theoretically no requirement for a middleman to be involved in the trade. For this reason, P2P trading platforms are more decentralized than traditional exchanges, however, the degree of decentralization varies among P2P trading platforms and depends on the type of escrow that they use.
In most P2P trading platforms, the escrow is designed to protect the buyer and seller by having a third-party hold the object of value (in this case, the cryptocurrency). Although more decentralized than traditional exchanges, the object of value is still held by the third party (the P2P trading platform) in an exchange wallet. The escrow works because it allows the buyer to be certain that the seller deposited the object of value, even if they have not received it yet. After the buyer has paid the seller for the object of value, the seller releases the escrow and the object of value is transferred to the buyer.
If you think about it, in a P2P trading platform where the transaction is not completely controlled by the third-party and instead is conducted person-to-person, without the escrow, there would be no way to protect the buyer and seller from having their assets stolen by the other party in the trade. However, although the escrow adds an extra degree of security to P2P trading platforms, in most cases it also includes a level of centralization because the funds are temporarily held in an exchange wallet.
At CryptoLocally, we used smart contracts to upgrade the escrow used by other P2P trading platforms. By using smart contracts, we were able to develop an escrow where users can trade among themselves without having to deposit their funds in an exchange wallet. Instead, assets are directly sent to the smart contract address. This creates a truly decentralized trading experience while maintaining the extra security provided by an escrow.
P2P exchanges evolved because the original Bitcoin exchanges had limitations. There was a need for users to have some sort of interface between Bitcoin and real world economies through Fiat currencies. Online exchanges were developed to fulfill the need for a place where Bitcoin and other cryptocurrencies could be traded for Fiat money. However, the problem with these exchanges was that unlike Bitcoin itself, they were run by companies that had staff to oversee and manage interactions between users. Due to the disadvantages of these exchanges and their move toward centralization, members of the Bitcoin community set out to disrupt the market by producing peer-to-peer exchanges that were more decentralized and were run by software rather than company staff members.
Besides a greater level of decentralization, a P2P exchange, also known as a P2P trading platform, has other advantages as well.
Since traditional exchanges are run by people, they are vulnerable and can easily be regulated by governments. P2P exchanges can avoid government interference because they don’t have a central point of authority that could be coerced into assisting with government regulations. If some part is forced to cease operations, the rest of the exchange would be unaffected by this.
P2P exchanges are also inexpensive to operate, so if any fees exist, they are quite small comparatively. Fees on traditional exchanges are very expensive.
AML and KYC restrictions cannot be imposed on P2P exchanges, so some P2P exchanges allow users to trade without going through the KYC process. There is no need to provide personal information such as name, place of residence, identification numbers, etc.
Traditional Exchange or P2P Trading Platform?
If you are trying to decide between trading on a traditional exchange or a P2P trading platform, it is worth considering that P2P trading platforms were created as a response to the downsides of traditional exchanges. They were designed specifically to solve the common problems associated with traditional exchanges.
However, you aren’t limited to choosing just one type of exchange for all of your trades. Why not try using both? There are positives associated with each one, so by using a traditional exchange and a P2P trading platform, you’ll be sure to experience all of the benefits, rather than just some of them.
