Note from the Author: The following article refers to traditional Bitcoin <-> Fiat currency exchanges. Examples such as LocalBitcoins and Bittylicious are not included, as they already exist. The number of true peer-to-peer exchange platforms is still fairly low, which is what is being addressed below.
Bitcoin – No Middleman Involved, Except For Exchanges…?
Traditional Bitcoin exchanges are a bit of an odd creature in the world of digital currency and decentralized solutions. Bitcoin itself is a decentralized payment method, which focuses on enabling peer-to-peer transfers of value without using any intermediary or third party service. Satoshi Nakamoto wants to put the end user in full control of their finances at any given time.
However, most people use Bitcoin exchanges that embrace the “old” financial model: customers send funds to the exchange – either in fiat or BTC – which is then held in the company’s wallets or bank account. Granted, customers can trade with other users on the exchange directly, as buy and sell orders are being matched with one another.
When the customer wants to withdraw funds, though, it has to pass through the Bitcoin exchange’s wallet or bank account once again. It is clear that most Bitcoin exchanges are in fact money transmitters, rather than peer-to-peer exchanges. After all, Bitcoin exchanges have to make money somehow, and there is no way to do that without holding customer funds and taking a cut for every transaction processed.
For a long time, this business model has remained unchanged, as there has been no clear need or desire by customers to fix things when they aren’t broken. But once these Bitcoin exchanges stepped up their identity verification process and started asking for additional documents, the Bitcoin community showed the first signs of unease.
Running a Bitcoin exchange anywhere in the world is not an easy feat, as there are multiple regulatory and legislative requirements to take into account. Additionally some countries or states may require Bitcoin exchange operators to obtain specific licenses, a tedious and costly process. All of those investments have to be recouped somehow by the Bitcoin exchange, which is why there is a fee for every transaction.
That being said, the story remains the same: Bitcoin is all about a peer-to-peer transaction with no third party involvement, and it looks like the Bitcoin exchange scene will have to adapt their business model.
Decentralized Peer-to-peer Exchanges Using Blockchain Technology
True peer-to-peer platforms, such as LocalBitcoins and Bittylicious, have seen great success in recent years. The reason for that success is quite simple: there are no fees involved, and users can directly exchange Bitcoin and fiat currency with each other using the same payment methods they would use on traditional Bitcoin exchanges.
There is something to be said for conducting peer-to-peer Bitcoin exchanges, though. Granted, not all of these trades will take place in person, as walking around with pockets full of cash can attract unwanted attention. But having direct contact between buyer and seller is the way business should be done, especially now that blockchain technology is playing an ever-increasing role of importance in the world of technology.
Having no middleman or third party controlling user funds, both in BTC or fiat, leaves the customer in control of their finances at any given time. This is exactly what Satoshi Nakamoto envisioned when Bitcoin was released: everyday people establishing a market of supply and demand on their own accord, without any outside involvement.
Plus, there is another upside to peer-to-peer Bitcoin exchanges compared to their traditional counterparts. Platforms such as LocalBitcoins offer a reputation system, which gives future customers an idea of the other person’s previous trading experiences. Reputation in the Bitcoin world is transparent for everyone to see, and one wrong move can tarnish years of building up credibility.
What are your thoughts on traditional versus decentralized Bitcoin exchanges? Let us know in the comments below!
Images courtesy of Mitigation Partnership, Jamie McIntyre, and QWealthReport