Two types of bitcoin exchanges are in use: peer-to-peer, decentralized and regular. On the one hand, there are the regular centralized exchanges, which use an order book to match buy and sell orders between people. However, neither the buyer nor the seller has any idea who the other party is, and this provides all users with a certain level of anonymity and privacy protection.
This is the most commonly used form of exchanging local currency to and from its digital counterpart in the form of bitcoin. However, bitcoin was originally created to enable peer-to-peer transactions. Unlike other familiar peer-to-peer technologies you may be familiar with, such as torrent applications, in the Bitcoin domain, peer-to-peer means a one-on-one relationship.
A peer to peer transaction means that you have data related to the person or entity you’re interacting with at all times, rather than interacting with several different peers, as in the case of torrents. The information you have on that person can range from a bitcoin wallet address to their forum username, location, IP address, or can even involve a face-to-face meeting.
P2P Exchange Benefits
Many decentralized cryptocurrency exchanges are hosted on decentralized servers. This means that all of their servers aren’t located within a single location and are often spread out around the world. Some servers can even be truly decentralized by existing solely in the cloud. This method of hosting can make decentralized exchanges much harder to hack than traditionally hosted exchanges, thus making user data and funds more secure.
Not Restricted by Law
Not being restricted to one physical location, decentralized cryptocurrency exchanges are much harder to regulate or even shut down. This can be good news for users of Bitcoin and other crypto coins who live in countries where cryptocurrency is illegal.
Most decentralized exchanges do require the creation of an account before you can begin trading. However, unlike more centralized exchanges which need to confirm users’ identities via various forms of official government ID, most decentralized exchanges allow anyone to create an account under any name they choose with very little or no approval process. This can be admittedly bad for governments and the finance sector but it is a feature that is becoming more attractive to those citizens who are weary of Big Brother tracking their every move.
Centralized exchanges store all of the crypto funds placed on their exchanges which can potentially make them vulnerable to hackers. Decentralized exchanges on the other hand often leave ownership of cryptocurrency in the hands of their users and simply act as a place for peer-to-peer trading.