Peer-to-peer exchanges are marketplaces where people can trade crypto directly with each other.
Paxful is a bitcoin peer-to-peer marketplace that stands out for having a pleasant user experience and a vast array of payment methods.
LocalCoinSwap is a peer-to-peer multi-custodial trading platform that provides both custodial and non-custodial trading for Bitcoin, Ethereum, and other cryptocurrencies.
LocalCryptos is a marketplace allowing you to buy Bitcoin and Ether from your own non-custodial wallet. Messages between seller and buyer are end-to-end encrypted.
LocalBitcoins is a Bitcoin custodial peer-to-peer exchange that has been around since 2012. It has an excellent reputation and a large geographical footprint.
Peer-to-peer exchanges are marketplaces where people can trade crypto directly with each other. They provide a technical platform on which buyers and sellers can settle trades on their own terms. Unlike traditional exchanges, they don’t process any fiat payments or hold users funds in custody. This light setup allows them to operate in virtually any country and be subjected to much less regulation than normal cryptocurrency exchanges.
1. Sign-up for an account (this will generate you a crypto wallet)
2. Search through the list of offers and filter by payment method, location etc.
3. Find an offer that you’re happy with and choose the amount you want to buy
4. After the seller puts the crypto in an escrow account you have to transfer the money to the seller using the payment method you agreed on
5. Once the seller confirms payment, crypto is released from the escrow and sent to you
6. In case of disagreements a dispute can be opened
In traditional finance, an escrow is a financial arrangement where a trusted third party holds and regulates payment of the funds required for a given transaction between two parties. Any marketplace like Amazon or Ebay utilizes escrows to regulate transactions between sellers and buyers. Normally escrow accounts are held at a bank or similar financial institution.
Peer-to-peer exchanges utilize smart contracts to build escrows that work without a trusted third party. Instead, the cryptocurrency from the seller goes straight into a smart contract on the Blockchain which is programmed such that it releases it only once the seller confirms payment.
Flexible payment methods
Peer-to-peer exchanges support most payment methods.Where centralized exchanges support bank transfers and credit cards at most, peer-to-peer exchanges allow sellers to define how they want to be paid. This allows users to buy crypto with PayPal or even digital gift cards.
Over the recent years, governments around the globe have been successfully enforcing AML and KYC regulations on cryptocurrency exchanges. This oversight forces the companies running those exchanges to collect as much info on their users as possible: names, places of residence, ID numbers and more.
Peer-to-peer exchanges are subject to less regulation because they only “facilitate” transactions instead of being the counterparty of each trade. This allows users to sign-up providing less information. Moreover, peer-to-peer exchanges allow buying crypto with cash and other privacy preserving payment methods like gift cards, which unlike credit cards or bank transfers can’t be traced back to their owner.
So you can buy Bitcoin with cash, buy Bitcoin with gift card, buy bitcoin with a prepaid card or even without ID. It all depends on the seller.
All advantages of peer-to-peer exchanges arise from not processing payments. Without a need for banking relationships, peer-to-peer exchanges can’t be censored by any government. This is why peer-to-peer exchanges have flourished in countries like Venezuela or Argentina where governments try to crack down on crypto and forbid centralized exchanges. Most often, peer-to-peer exchanges are not even physically present in the countries they operate in.
P2P exchanges do not hold Bitcoins for their users - instead, they connect traders, allowing them to conduct deals directly. Not having to entrust your coins to a third party makes the process much safer. If nobody holds your funds but you, then nobody can steal or lose them - intentionally, or accidentally.
P2P exchanges aren’t better than the regular ones in every regard - longer trade times, less intuitive user experience and lower liquidity are some of their comparative disadvantages. Lower trading volumes are caused by comparatively smaller user bases and longer deal cycles than on regular cryptocurrency exchanges.
Longer deal cycles, on the other hand, are likely a disadvantage that will take a while to fix, if ever. They are caused by the manner in which the trades are conducted - with traders having to wait for actual Bitcoin and fiat transactions to complete before a trade is concluded.
This last issue, coupled with the lower liquidity, means that P2P exchanges are not at all in demand with, for example, professional traders, who need fast transactions to make timely deals. In their current state, these exchanges can only be useful to people interested in the specific advantages they offer - namely increased resilience, privacy, security and freedom of payments.
Peer-to-peer exchange providers use different solutions to prevent fraudulent activities.
Typically, they have a reputation-based system where sellers have ratings like on Amazon. Most peer-to-peer exchanges also indicate the number of trades a seller has completed as well as whether or not the seller has gone through an ID check, verified their email, phone number etc.
Once you found a seller and agreed on a deal, it is important you only transfer the money (bank transfer, paypal etc.) once you’re being notified that the seller has transferred the crypto assets into the escrow contract. Once the money is in the escrow you are safe to transfer the money. After you have done the payment, you mark it as ‘paid’ and once the seller marks it as ‘received’ the escrow releases the funds to you.
If a dispute does take place, the exchange hears both sides, looks at chat history and resolves it.
As a seller, things are a bit more complicated due to the fact that most fiat payments are refundable. Because of that, a buyer may send their fiat payment, receive your Bitcoins, and then request a refund from their bank, and leave the seller with nothing. That’s why it’s important that you read the best practices described by the exchange for the payment method of your choice.