Peer-to-peer (P2P) trading involves decentralized transactions where two users swap cryptocurrencies directly with each other.
What Is P2P Trading?
Peer-to-peer (P2P) trading involves decentralized transactions where two users swap cryptocurrencies directly with each other. Both buyers and sellers interact without the involvement of a third party.
P2P trading is based on the concept of previous generations of P2P networking. For example, digital file-sharing is a popular P2P technology. With file-sharing networks, users create digital copies of files, with each user keeping their copy as files get duplicated.
Today, peer-to-peer goes beyond this simplified origin and expands into a sharing economy where users can transact with each other. P2P trading consists of a transfer of digital data (minus any transaction fees) from one user to another. It also prevents the duplication of data.
One type of such trading platform is a P2P decentralized exchange (DEX), such as AtomicDEX, in which users can trade cryptocurrencies like ETH for BTC (or vice versa). NFT marketplaces, like OpenSea, are another type of P2P trading platform where a seller sells a piece of unique digital data (i.e. a piece of artwork) to a buyer who pays an agreed-upon amount of a specific cryptocurrency (i.e. ETH).
While one might think that all DEXs are P2P, most of them actually use a different technology called automated market makers (AMMs).
With AMM DEXs, liquidity providers (market makers) collectively supply funds to smart contracts, called liquidity pools. Each trader (market taker) taps into the liquidity pool to fill their orders. AMM DEXs are permissionless, meaning anyone can become a liquidity provider or trader without having to go through an approval process. However, their biggest disadvantage is that they rely on complex smart contracts which hackers may exploit to steal funds from liquidity providers.
In contrast, P2P DEXs, like AtomicDEX, use atomic swaps — a type of trading technology in which each order is a direct wallet-to-wallet transfer between two users. Because P2P DEXs don’t have centralized liquidity pools, they generally are more trustless and have fewer attack vectors compared to AMM DEXs.
P2P trading also enables users to trade cryptocurrencies across multiple blockchain networks — making it a key technology that supports efforts to expand trustless blockchain interoperability.
Author: Kadan Stadelmann, CTO of Komodo, a leader in blockchain interoperability and atomic swap technology.
Kadan Stadelmann is a blockchain developer, operations security expert, and Chief Technology Officer of Komodo, an open-source technology provider that offers all-in-one blockchain solutions for developers and businesses. Komodo works closely with organizations that want to launch their own custom decentralized exchanges, DeFi platforms, and independent blockchains. Its flagship technology and end-user application is AtomicDEX – a mobile and web-compatible non-custodial multi-coin wallet and atomic swap-powered DEX rolled into one dApp. Kadan strongly identifies with Komodo’s open-source vision and ideology. His dedication to the Komodo project is founded on an unwavering desire to make the world a better place. In addition to cryptography, blockchain technology, and development, Kadan is interested in literature, mathematics, astrophysics, and traveling.
