Why Peer-to-Peer Trading is a Fit for Blockchain
We’re taking a unique approach to solving the design challenges of decentralized Ethereum token trading. Where many designs are based on order books, we’ve determined through research and exploration that facilitating a peer-to-peer trading ecosystem will suit the blockchain best.
As we’ve previously outlined the limitations of decentralized order book designs, we’d like to take a closer look at why our peer-to-peer trading protocol is a great fit for blockchain.
What is peer-to-peer trading?
The term peer-to-peer, often P2P, is one popularized by file sharing many years ago. It simply describes a computer networking architecture where every peer can act as a server for others, and every peer has equal privileges and potency. By nature it is decentralized and supports direct interactions between individuals instead of passing communications through a central server or middleman.
In the trading context, going peer-to-peer means buying and selling assets directly with each other rather than working through an intermediary or third party service. Many markets are already peer-to-peer: Foreign exchange, corporate bonds, and even penny stocks. These are transactions between individuals in markets that cannot be optimized by order books.
We’ve found that token trading on the blockchain cannot be optimized by order books given scalability, privacy, and fairness limitations. Ethereum, as a decentralized, peer-to-peer computing platform without centralized command and control, certainly welcomes peer-to-peer trading as a philosophical fit. Further, as we’ve found in our own research and development, peer-to-peer is a great technical and usability fit as well.
To excerpt some of the points from our whitepaper:
Peer-to-peer is scalable
Orders are transmitted between individual parties and are “one and done” as opposed to orders on a public exchange with no guarantee to completely fill. This makes cancels on an order book a regular occurrence, whereas peer-to-peer orders are likely filled because they are provided to parties that have already expressed interest. Additionally, peer-to-peer supply and demand matching can be solved through lightweight peer discovery as opposed to expensive algorithmic matchmaking–regardless of whether on or off chain.
Peer-to-peer is private
Once two parties have found and chosen to trade with each other, no third parties are required to negotiate. The communication between these parties remains private for the duration of the negotiation, removing the opportunity for other parties to act on order request behavior. Only when the order is submitted to be filled will it become public knowledge.
Peer-to-peer is fair
Because orders are created and transmitted directly between two parties, no outside participants can have an advantage. As long as they are working with multiple independent parties, participants can get prices that are comparable to or better than what they would achieve on an exchange. Additionally, those pricing orders can do so aggressively without fear of being taken advantage of by automated, low-latency trading strategies.
Peer-to-peer is easy to use
For everyday use, simply being able to browse tokens and select a seller to make a purchase is a clean interaction. As the role of tokens in the Ethereum ecosystem broadens from speculation to utility, this sort of user experience will become more commonplace as well. Check out our protocol demos to see this in action.
From protocol to ecosystem
While it began as a thought experiment, our design has developed into a protocol that we welcome you to inspect and critique. Swap builds on that single trade interaction between a buyer and a seller to introduce new components that facilitate peer discovery and trade pricing. Stepping beyond the specification, our goal today is to build a peer-to-peer trading ecosystem that serves the needs of the larger crypto community and helps drive business and application development throughout.