P2P technology predates crypto. If you’re a 90s kid you may remember Napster. That was the first P2P music-sharing platform. Since then, the underlying technology has moved into and assumed an important role in the financial world. Wary and tired of centralized intermediaries, people have taken to using P2P to transfer virtual digital assets. This technology, therefore, plays a big role in P2P crypto trading.
This is where you get to learn all about it and how exactly it works.
What is P2P trading?
Peer-to-Peer (P2P) literally means from one person to another. P2P networks are those networks of computers where each computer acts as a client as well as a server. P2P crypto trading is one of the most interesting applications of this type of network.
So it works like UPI payments? Nope. Remember, with UPI payments, while you and your favorite grocery store are transacting, the funds get transferred only because there is a payment merchant and a bank involved. That means there are still some centralized intermediaries with UPIs.
P2P trading in cryptocurrencies is a little different. Here, you can select your buy or sell price and find a person willing to meet you at that price with no centralized third parties mediating the transaction. There is, however, a decentralized mediator in the form of an exchange.
There are no charges. And since there are no centralized intermediaries, there are no commissions either. Besides, you don’t have to risk losing your funds due to someone else messing up.
The transfer of funds without a centralized intermediary is called a P2P transaction or exchange.
While the whole trading process is simpler with P2P, you would need to provide some form of identification.
How does Peer-to-Peer trading work in crypto exchanges?
In P2P crypto trading on exchanges, everything is taken care of via smart contracts. These contracts execute themselves when all the predefined conditions are met. So, when two parties with decentralized accounts enter an agreement on a crypto exchange, the smart contract is what ensures that the transfer of funds is done on time. Once all the boxes are checked, so to say, ownership is transferred and the transaction is completed.
Exchanges use P2P in the following cases:
- To exchange one crypto with another (This is possible on decentralized exchanges like UniSwap.)
- To directly buy crypto with fiat
- File sharing
P2P trading strategies
If you’re ready to begin your P2P crypto trading journey, here are two ways you can get started.
1. Arbitrage trading
You can use the price difference between crypto exchanges to your advantage with arbitrage trading. The short-term price difference between exchanges can be caused by volatility, regulation variations, or liquidity issues
2. Setting up a high-demand or high-convenience payment method
On P2P exchanges where fiat payment options aren’t usually available, you can set up a platform where people can buy crypto from you. You can either sell your crypto at a premium or levy commissions. Either way, at scale, you could use this method to make money.
What are the advantages of P2P crypto trading?
There are a lot of advantages to trading peer-to-peer:
- P2P is a global service. That means you are not limited by your geographic location. You are free to trade worldwide and work with any currency.
- This type of trading, usually, can’t be shut down by governments. Since there’s no central authority to handle such transactions, there’s no limit on how much you buy or sell, or with whom.
- There are no commissions or trading fees with P2P.
- Multiple payment methods mean that you can choose the one that comes with the least overhead costs, thus increasing your bottom line margins.
What are the disadvantages of P2P crypto trading?
P2P crypto trading is great in so many ways. But there are some cons too. Here are a few:
- Fraudulent transactions are always a possibility with P2P. With no centralized intermediary, the authenticity of the transactor cannot be always ensured during a transaction.
- Trading is not instant because the matching of buyers and sellers takes time. Without a mediating third party, finding optimal transactional pairs can get tedious.
Conclusion
Today, P2P technology is not used only for crypto trading. Moving beyond purely internet-based services, P2P also finds a place in activities that range from the construction of open-source software to file sharing. In time, the technology could is expected to be used in the broader fintech space as a whole.
FAQs
How does crypto P2P work?
Crypto P2P (Peer-to-Peer) transactions involve direct exchanges of digital assets between individuals without intermediaries. Participants can transact directly using digital wallets, with transactions recorded on a decentralized blockchain network, ensuring transparency and security.
How do you make money from P2P crypto?
You can make money from P2P crypto through trading, arbitrage, peer-to-peer lending, staking, and mining, but it involves risks and requires knowledge of the market and relevant regulations.
Is P2P safe for crypto?
P2P crypto transactions can be safe if conducted with proper precautions. It’s important to use reputable platforms, verify counterparty credibility, secure your private keys, and stay vigilant against potential scams or fraud.
How do you do P2P trading?
To engage in P2P trading, find a reputable platform, create an account, deposit crypto, browse listings or create your own, negotiate terms, execute the trade, and ensure secure transfers.
