Non-custodial exchanges are more difficult to use than custodial exchanges, but they allow users to perform private P2P crypto trades (including trades on coins that aren’t listed on custodial crypto exchanges), eliminate third-party risk, and maintain decentralisation. Users must utilise non-custodial wallets to use non-custodial exchanges.
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What is a P2P transaction?
P2P refers to peer-to-peer where
- Every kind of exchange is between peers
- No central body is in charge of controlling the exchange
P2P transactions in crypto refer to the transactions of cryptocurrencies between two wallets.
How were digital P2P transactions born?
Peer-to-peer sharing has its roots on the Internet. P2P music or file-sharing networks such as Napster acquired a lot of traction at first but eventually ran into legal complications due to copyright issues. However, BitTorrent trackers continue to exist in several jurisdictions, albeit their use has decreased due to legal restrictions imposed by a variety of legal regimes.
Today, peer-to-peer (P2P) sharing is a big topic once again, but this time it involves one of the most crucial human inventions: money. People can use blockchain technologies to make cryptocurrency transactions without the requirement for a central authority. Similarly, as we’ll explain below, we believe that, like the internet, these transactions are on their way to becoming less decentralised.
How are transactions made in the crypto world today?
A user needs to have a wallet in order to send or receive any type of cryptocurrency. The user either allows the exchange to take control of the user’s wallet and transact on his or her behalf. This is known as a custodial exchange, in which the user retains control of his or her wallet and completes transactions alone. This is accomplished through the use of a non-custodial wallet or exchange.
What is a custodial exchange/wallet?
The majority of consumers nowadays use custodial exchange platforms like Binance, Kraken, or Coinbase. The platform is in charge of maintaining the security of the wallets and keys.
- User Interface that is Simple to Use (UI)
- Staking your cryptos in a savings account and earning interest gambling are just a few of the complicated trading options and features available (e.g. by betting on the short term increase or decrease of a parity)
- The risk posed by a third party. The exchange, for example, could fail or carry out incorrect or fraudulent transactions). Both of these incidents occurred in crypto exchanges and other custody systems, like banking.
- Due to third-party risk, there is a lack of anonymity.
- Only the coins on the list are allowed to be traded.
What is a non-custodial exchange/wallet?
A non-custodial exchange platform is one where the user has complete control over their wallet. People who have their own wallets have complete control over their cryptocurrencies, passwords, and keys, and their passwords, keys, and coins are not held by a central entity. Mobile apps, desktop programmes, and browser extensions are all examples of non-custodial exchanges.
What types of non-custodial wallets exist?
Different types of crypto wallets can be connected from non-custodial exchange platforms. Wallets can be categorized into 3 segments:
A physical device that can store data up to the size of its disc. To access these wallets, you must first log in with your username and password.
With a private key login, these can be accessed from any device with internet access. Web-based non-custodial exchange systems include Metamask, Brave Wallet, and Binance Smart Chain, among others.
Wallet Connect is a non-custodial exchange that allows users to rapidly build a wallet and send money to other wallets by scanning a QR code.
What are the benefits of using a non-custodial exchange?
- Anonymity: Because there is no KYC process, users can remain anonymous as long as they do not link their wallets to their identities.
- Reduced 3rd party risk: The coins are in the hands of the users, and no one else has custody of them. The wallet’s provider, on the other hand, poses a risk because malicious code could be incorporated into the app. Because a huge number of people review the code’s integrity, open-source wallets lessen this danger. However, as we have seen numerous times, open-source is not without flaws.
- P2P transactions: Users can participate in ICOs, buy unlisted currencies, or use platforms like uniswap or pancakeswap that include lottery and interest-bearing features.
What are the downsides of using a non-custodial exchange?
Can you imagine owning millions of dollars in crypto investments (the majority of your personal wealth) and then forgetting your wallet’s password? It happened to a lot of people. Because you can always contact your exchange platform to restore your password, using custodial exchange platforms reduces the chance of losing your money.
How do non-custodial exchanges keep the crypto world decentralized?
Crypto trading, like the internet, has mostly moved from the P2P model to a centralized model where most users have accounts in custodial exchanges like Binance, Coinbase or Kraken. With more revenues, these exchanges launch improved features and invest in marketing to further grow their businesses. So there is a feedback loop at work that minimizes the decentralized nature of crypto trading. Non-custodial wallets are one way to keep crypto trading decentralized.
Which one should you choose, custodial or non-custodial exchanges?
Custodial exchanges are simple to use and feature-rich, but they come with a higher level of third-party risk. If you like these characteristics, you can keep using them or look for the finest custodial exchange for you.
If you would like to
- To gain access to more crypto coins, buy them directly.
- Trading anonymously
- Reduces third-party risk.