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Decentralized Exchange working explained

Peer- to-peer or decentralized exchanges work purely dependent on a software.
Peer- to-peer or decentralized exchanges work purely dependent on a software.

Peer- to-peer or decentralized exchange

Peer- to-peer or decentralized exchanges work purely dependent on a software. All their computations are operated and maintained by this. There is no requirement of a trusted third party to establish trust and facilitate a trade directly between two willing parties in the market. No such processing of trade or maintenance of records needs to be done by this third party, all transactions occur based on trust established by cryptographic methods.

Like any other place, a cryptocurrency exchange is where buyers and sellers conduct their purchases and transactions. For eg, a Bitcoin seller uses the exchange’s address to deposit his or her bitcoins. One can then use their balance on this exchange to sell their bitcoins for other coins, dollars and other digital assets. On the other hand, a person or party looking to buy anything on this exchange would deposit his or her money with the exchange and this balance would then be used to buy bitcoins from the sellers. This way, it facilitates a direct merchant-customer relation, without a government authority or centralized bank having to meddle in between. Significantly reducing any sort of processing fees, transaction fees, additional extra charges, and processing time for transactions to settle, these exchanges are steadily gaining popularity among people and more and more people and institutions, and even the government, is looking to explore this whole new technology based upon the concept of blockchain. China has already added blockchain technology into its 13th 5 year plan.

Evolution of peer – to – peer exchanges

Owing to how very few online and physical stores and outlets actually accept cryptocurrencies as a legal form of payments for their products or services, online exchanges have been the primary source of transactions in the world of digital currency. Cryptocurrency exchanges serve as an interface for people to connect cryptocurrencies and the economies of real world.

Unlike Bitcoin, online exchanges are themselves run by companies thus making its existence a complete redundancy. The company’s staff oversees and manages transactions between the users and collect fees for their services. This is the reason why a decentralized peer to peer exchange idea was formulated and now these exchanges are not run by people but a software, and the network is maintained by a group and dedicated volunteers all over the world.

Prevention of fraud in decentralized exchange

Fiat money transfers are refundable however, transactions concerning cryptocurrencies are non refundable, irreversible and irrevocable. As a result, one might buy a cryptocurrency like bitcoins, in exchange for their fiat currency and then ask their financial institution like banks for a refund. This ultimately would leave the seller with absolutely nothing. In order to eliminate the chances of such fraudulent activities, different methods are used by different cryptocurrency exchanges. Coinffeine, a very popular decentralised peer to peer bitcoin exchange requires the two willing parties to make a deposit before a transaction between the two is initiated. This deposit can be understood as a security deposit one pays to ensure the owner that no scam would take place. If the transaction is initiated, processed and logged onto the blockchain uncontested, without any issues, this deposit is returned back to their payer. Another Bitcoin startup company known as LocalBitcoins actually has the option for the two willing parties to meet in person. Although this limits trading options because of geographical limits, one can ensure that a transaction has been made earnestly and honestly before parting ways.

Advantages of peer to peer exchange

Although a single point of central control provides faster trading solutions, it also incurs for additional service charges and and serves as a single point of complete system failure. Any attack or failure at this central point would affect the working and trading of the entire network involved. Eliminating the requirement of such a single point of authority, a decentralised peer to peer exchange provides high resistance to transaction censorship. There are not vulnerable or obligated to the interference of the government or a centralised financial institution. Even if a particular chunk of the network is forced to shut down its working, the remaining chunk can keep making trades and transactions without any system or network failures. There is virtually no point of control which can be pressurised or dealt with to shut down the operation of the entire network.