The world is on a cryptocurrency frenzy, with many people adopting cryptocurrencies by the day. According to bitcoin.com, over 3.5 million crypto wallets were downloaded in July 2020 alone. Since the creation of Bitcoin by Satoshi Nakamoto utilizing the Blockchain technology, some additional 1,500 cryptocurrencies, popularly called altcoins have been created. Cryptocurrencies are a decentralized electronic method of payment, thus no central authority has control over it. Cryptocurrency transactions are usually facilitated by an exchange which relies solely on a peer to peer system of payment, though a few people use the OTC. This article aims to look at the importance of a peer to peer system in an exchange.
Peer to peer system of exchange happens when different users put their different sell and buy orders of cryptocurrencies on a cryptocurrency exchange platform, thus generating an order book. Users put in varying sell and buy prices based on prevailing market prices and speculations, a complex algorithm then matches these buy and sell orders automatically. It is important to note that the cryptocurrency market operates literally on the principles of free-market economy, i.e. cryptocurrency prices are not calculated by any computer or any person, they depend solely on the market forces, the volume of trade, and importantly rate of adoption. This is because many cryptocurrencies have their supply capped at a particular limit and, according to economic principles, an increase in demand without a corresponding increase in supply will lead to a price increase of that particular commodity, for instance, the world’s most popular cryptocurrency; bitcoin, has 18.5 million of its volume already in circulation, with only about 3.5 million remaining to be mined and is worth, and has increased over 1000% since 2012. The peer-to-peer exchanges allow individuals to move currencies from their accounts to the account of others without having to go through a financial institution. P2P networks rely on digital transfers, which in turn rely on the availability of an internet connection, and of course, the whole world depends on the internet right now.
Any creation of a new digital currency as well as the recording of transactions between parties is managed through a network of computers that are not maintained by government authority and are thus maintained by the collection of computers in the network. In cryptocurrency exchanges, these distributed ledgers can confer a security advantage, with transactions recorded on every peer’s network, it is very difficult to overwrite or falsify ledgers in a cryptocurrency exchange.
To get a better understanding of the importance of the peer to peer system in an exchange, let's quickly examine another popular form of exchange, the OTC will suffice. The Over the Countertrade is a system where people decide to buy cryptocurrencies outside the traditional exchanges, without going through the order books. This can be for a varying number of reasons, for increased anonymity, to avoid price slippage, and to avoid disrupting the market price. Given that OTC trades happen away from the traditional exchanges, not appearing on the order books, they should - in theory - not affect the price of cryptocurrencies at all. However, if there is a large buyer (or seller) making inquiries in the OTC market, even if he has no real intention to buy, the word may get out, and prices on exchanges may be affected. In the broader picture, the P2P is the backbone of the crypto exchange world. As more people continue to adopt cryptocurrency around the world, the peer to peer system has proven itself to be a very important factor for cryptocurrency exchanges.