Peer-to-peer, or P2P for short, refers to the exchange of data or assets between two or more parties without the involvement of a central authority overseeing the transaction. P2P transactions have been utilized by computers and networks for over 30 years, with one of the most notable examples being file sharing.

In 1999, a peer-to-peer file-sharing application named Napster gained notoriety for the illegal sharing and distribution of MP3-encoded audio files. Because the service was decentralized, when a user downloaded a file, such as a digital audio file, it was not retrieved from a single server managed by the company. Instead, the file was downloaded from another user's computer that was also running the Napster software.

In the realm of cryptocurrencies, peer-to-peer refers to the direct exchange of digital assets. Similar to Napster's file sharing, these transactions can occur without requiring any party involved to provide identification.

Bitcoin and various other cryptocurrencies designed as P2P transaction systems initially aimed for anonymous transactions without the need for a financial institution acting as an intermediary. The introduction of Bitcoin established a system and network that utilized encryption and blockchain technology to facilitate secure transactions between two parties.

When it comes to cryptocurrency exchanges, there are both centralized and peer-to-peer exchanges. Centralized exchanges, as previously discussed, are heavily regulated in many regions, necessitating that users provide personal information to verify their identities, which ultimately helps trace their transactions.

On the other hand, P2P exchanges, also known as decentralized exchanges (DEX), typically do not require the parties involved to verify their identities. Privacy is preserved, and transactions occur directly between two parties without any intermediary processing any part of the transaction. There is no centralized exchange or order book matching traders to orders; instead, traders are paired with one another.

This trading model renders transactions censorship-resistant, cost-effective, private, and secure. However, the absence of user transparency may foster illegal activities on P2P exchanges, potentially prompting regulators to impose additional restrictions and regulations.

P2P exchanges often experience lower liquidity and trading volumes, which can impact trading times, leading to longer transaction durations. To mitigate fraud, P2P exchanges employ various methods to enhance security compared to other exchange types.

For instance, some platforms require both parties to make deposits that are returned after a trade is successfully completed. Reputation systems and arbitrators are also utilized in case disputes arise from a trade. The LocalBitcoins exchange even allows its members to meet in person to conduct their transactions, maintaining the structure as much as possible.