It doesn’t matter if it’s baseball cards, electronics, or money, if you’ve ever traded directly with another person, you’ve completed a peer-to-peer (P2P) swap. In a P2P system, you aren’t required to trust third parties in order to process transactions, as they are conducted directly between individuals. This concept is playing an important role in cryptocurrencies where P2P token swaps are removing the need for financial institutions and centralized exchanges (CEX) to act as intermediaries. Instead, this decentralized approach makes P2P swaps directly from a bitcoin wallet efficient and trustless.
P2P token swaps are a form of decentralized trading done in a non-custodial manner, meaning, users never give up control of their assets and trades execute in real-time. This is made possible thanks to a few important pieces of technology:
Smart contracts - Digital code that carries out trades by users and are open-sourced so they can be verified by anyone
Cryptography - A way of securing funds in the trading process while also keeping trades anonymous
Liquidity providers - Entities that provide constant liquidity to the protocol so that users can make swaps
One of the major innovations in P2P token swaps is trading across blockchain networks. Historically, since tokens exist on a single blockchain they could not be swapped for tokens on another decentralized network except through a third-party, most often, a centralized exchange.
However, using smart contracts and cryptographic authentication, users can now make P2P token swaps across blockchain networks. For instance, users can trade tokens across the Bitcoin (BTC) and Stacks (STX) blockchains by interacting with LNSwap, a Trust Machines product, and their decentralized trading protocol from a bitcoin wallet.
Why use P2P swaps?
P2P swaps are a major improvement over their centralized trading counterparts and provide a safer, better experience for users through some key features.
Unlike in traditional markets where a custodian holds your tokens, P2P swaps allow you to secure your funds in your own wallet. This completely eliminates custodial risk or the risk that the custodian holding your assets will lose them.
Interacting with traditional financial institutions requires users to release personal information to a centralized entity. This is not only unnecessary, it creates the risk of having personal data compromised. Decentralized P2P swaps can be done without revealing your personal info, so your data remains private and is not at risk of being leaked. On a P2P platform like LNSwap, personal data is not tracked and users can trade using enhanced privacy.
Trading which occurs on CEXs can be censored based on user geography, identity, or any other reason by the exchange. Not so for decentralized P2P swaps which are free from censorship by a controlling entity or company.
Decentralized trading platforms use open source code which gives anyone the ability to see what is going on under the hood. This allows users and other developers to verify that the protocol is working in exactly the way it is intended, and decide for themselves if the protocol is secure.
Imagine you want to make a trade from your bitcoin wallet. Using a CEX you would first need to send your bitcoin to the exchange, make the trade, and then send the new token back to your wallet. This is not only cumbersome, but can also come with added fees for depositing and/or withdrawing tokens from the CEX.
Trading in a P2P swap is much easier and can usually be completed in one easy step. With LNSwap, you can trade bitcoin directly from any Bitcoin wallet. And because LNSwap uses the Lightning Network, transactions are settled almost instantaneously for negligible fees.
P2P swaps vs. Centralized trading
P2P swaps on Bitcoin
As the Bitcoin network has grown, so too has the desire for users to make P2P trades across the industry’s largest and most powerful network. This has led to the creation of P2P trading protocols like LNSwap that uses Bitcoin as a settlement layer.
LNSwap gives users the ability to complete secure P2P, non-custodial trades between the Bitcoin and Stacks blockchains. With the introduction of STX, XUSD, and other tokens, bitcoin holders can use P2P swaps to trade in and out of these digital assets. Additionally, by using the Lightning Network, fees can be drastically reduced, allowing P2P trades that are more affordable than ever before.
The future of bitcoin trading
P2P token swaps are the best way to engage with blockchain networks, and specifically Bitcoin, as they were originally intended: as decentralized, trustless networks without the need of centralized entities. This decentralized environment creates a more secure and seamless way for users to trade tokens.
With the implementation of Taro on Lightning, users can issue new digital assets, like stablecoins, and send them across the Bitcoin blockchain. Because of their compatibility, users will also be able to swap newly minted assets between Bitcoin and Stacks. The result of utilizing Taro in conjunction with Stacks expressive smart contracts could be an even bigger market for bitcoin P2P swaps in the future.
Decentralized Trading - Atomic Swaps and Submarine Swaps
Blockchain networks don’t communicate well with one another. This model siloes digital assets and can make it difficult to conduct decentralized trading across networks. Fortunately, atomic swaps and submarine swaps are two methods of crypto trading that allow for trades across blockchains and their layers.