The continuous growth of cryptocurrencies is a journey that has had multiple roadblocks along its way. Not only are technical difficulties bound to happen, but there are also several problems that are exterior to cryptocurrencies themselves, including a lack of clear regulatory guidelines and security issues caused by independent, centralized services.
Hacking and regulation
During the course of this year, we’ve witnessed these two major problems disrupt the cryptosphere at a concerning scale. Last year, we saw a hack that cost Bitfinex over $70 mln and, in 2017, the sudden closure of BTC-e. We’ve also seen the power that regulatory entities can have over the crypto ecosystem, with countries like China banning ICOs and even cryptocurrency exchanges altogether.
The lack of regulations and recent attempts to create a regulatory framework that, willing or unwillingly, penalizes companies and individuals in the space may be but a passing problem. However, the security issues that have plagued cryptocurrency trading platforms and online wallets since the inception of crypto are not. From the infamous Mt. Gox disaster to the recent Bitfinex hack, time has shown us that centralized services will always have flaws and that hackers will always have ways to find and exploit them.
There is no problem too big for the developing community and, sure enough, a solution is already available. Decentralized exchanges (DEX) allow their users to buy and sell cryptocurrencies with no third party involved. These decentralized platforms are not new. Platforms like Waves DEX, BitShares, NXT, CounterParty, and many others have been around for a while. These exchanges all leverage Blockchain technology in order to provide users with a trustless trading experience.
With promising tests being conducted on atomic swap technology by projects like Komodo, the Altcoin Exchange and many others, the prospect of fully decentralized exchanges seems to be getting closer to reality every day. There is, however, another solution that has been around for awhile now. The predecessors of decentralized exchanges themselves, peer-to-peer exchanges allow users to buy and sell cryptocurrencies directly from each other using out-of-band payment methods.
Today, we’re going to take a deep look at p2p exchanges in order to find out if there is still a place for these platforms once decentralized exchanges “take over”, which may not be too far ahead.
Peer-to-peer exchanges offer multiple advantages when compared to their fully decentralized peers. Let’s take a look:
Starting with the fact that made us ask this question in the first place, peer-to-peer exchanges are becoming more popular every day. Despite the recent progress made by decentralized exchanges, users are still more likely to resort to platforms they find simple and familiar (we’ll talk more about this in the next section). Data from Coin.dance shows us just that:
When looking at the CNY volume data from LocalBitcoins, we can see two accentuated spikes right around the time when the People’s Bank of China cracked down on cryptocurrency exchanges for the first time, and then again when the latest move forced exchanges like BTCC to stop providing trading services in the country indefinitely:
However, one must also wonder if these exchanges are immune to government action. Centralized exchanges are much more versatile in complying with the law and defending themselves against hacker attacks.
“We have fiat”
Fiat. No matter how much you love Bitcoin and crypto in general, cash is still king and there is really no easy way of getting around it. Although decentralized exchanges allow users to exchange cryptos for cryptos, the system is pretty much closed off from fiat currencies. Although some projects like Waves and Bitshares offer fiat-pegged tokens, turning these tokens into actual money (and vice-versa) is no easy task and requires the user to trust a centralized gateway.
Peer-to-peer exchanges like LocalBitcoins and Paxful allow users to quickly set up an account and buy cryptocurrencies without the need to make a fiat deposit. Instead, payment is done directly to the user in the agreed payment system, and the Bitcoin is then released from escrow to the buyer. This allows users to retain a certain amount of privacy when compared to centralized gateways.
Although users can only purchase Bitcoin in most P2P exchanges, the upcoming Qvolta platform will feature a wider selection of cryptocurrencies, including Bitcoin, Ether, Monero and others, ensuring users can have direct access to different investment vehicles within the cryptosphere, and also giving them the ability to safeguard their privacy through the use of privacy-centric coins like Monero.
Simple and intuitive
Decentralized exchanges are still in their infancy and, while there’s still much to be done, there seems to be a huge discrepancy when comparing the ease-of-use in centralized exchanges with the lack thereof in decentralized ones. While Blockchain projects have made incredible advancements and provided simple graphic interfaces, some confusion is bound to happen for less-than-tech-savvy users.
Downloading and installing the software, creating and backing up a wallet, and many other additional steps may deter average users from taking advantage of the benefits provided by DEX’s. Peer-to-peer exchanges, however, are as simple as they are convenient. Users are only required to visit the website, create an account, and they can start buying/selling coins.
Some will even feature a mobile application for iOS and Android, an important step for cryptocurrency mass adoption given mobile phone ownership rates are high among the unbanked population, those who can benefit the most from cryptocurrency use and investments.
No proxy tokens
This is a problem that may be solved with the rise of atomic swap technology, but current decentralized exchanges require the trader to use what is known as a “proxy token”. These tokens are used in order to allow Blockchain-based DEX’s to trade cryptocurrencies that exist outside of their respective Blockchain.
Waves, for example, uses proxy tokens like “wBTC” and “wETH” to facilitate the exchange of these assets. However, the practice adds one extra step and requires user to trust centralized gateways that store the base asset in order to ensure a 1-1 peg is maintained. While this is not a deal breaker for some users, it can deter others from using the service.
Yes, peer-to-peer exchanges are not only empowering users by providing easy and safe access to the cryptosphere, but they are also creating additional revenue sources for those who wish to take advantage of them. For sellers, it’s common to sell Bitcoin for inflated prices when dealing with revertible payment methods like PayPal and others, given that there’s a risk factor involved. However, if this risk can be managed by the seller, the P2P exchange can become his new workplace, with personal account systems where users can create offers for their preferred exchange rate according to the tariff they have purchased.
Additionally, users can also earn an income through affiliate programs that are created by these exchanges. LocalBitcoins offers an affiliate system, as well as Qvolta. Referral programs can help the entire ecosystem, allowing users to earn extra cash for inviting friends, thus bringing in more people and creating a larger variety of options for buying and selling coins.
Not all is perfect, though. Peer-to-peer exchanges still have some fundamental problems that can hamper their growth in the future. Including their centralized infrastructure that relies on web servers to host the platform itself, a property not shared with Blockchain-based decentralized exchanges.
P2P exchanges are also not 100 percent safe, and scams are bound to happen. Malicious actors take advantage of the refundable payment methods in order to keep purchased coins and the fiat spent on them. This same factor has also led some sellers in P2P markets to start asking for ID verification before making a deal, a less-than-optimal practice when it comes to privacy and security.
So, the question still stands. Can decentralized exchanges replace peer-to-peer exchanges completely? From what we’ve seen today, the popularity of P2P exchanges are not declining, and the advantages they offer are not currently achievable by Blockchain-based DEX’s, at least with the technology currently available.
As the tech is tuned, decentralized exchanges may indeed become more popular among cryptocurrency users. However, we believe that P2P exchanges will be here for a while and will most likely coexist with fully decentralized ones, even if centralized trading platforms become extinct, acting as a sort of middle ground or gateway to a fully decentralized ecosystem.
- Frisco d’Anconia, Guest Author