Custodial, Non-Custodial, and Peer-to-Peer Crypto Marketplaces

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Centralized versus Decentralized Exchange (source:blockgeeks.com)

Introduction

Cryptocurrencies (crypto) are a relatively new type of currency evolving rapidly in an increasingly tech-driven economy. They do not have an actual physical form, but rather exist in a blockchain on a server. They are not backed by banks or other traditional lending institutions, and transactions are highly encrypted to keep personal information private.

Crypto can be purchased, sold, or swapped on different types of cryptocurrency exchanges or on peer-to-peer marketplaces, like LocalCryptos. Once crypto is purchased, it is important to understand how this digital asset should be properly stored and how it can be securely transported or moved.

What is a Cryptocurrency Exchange?

A cryptocurrency exchange provides a platform for purchasing, trading, or swapping cryptocurrencies. There are generally two types of crypto exchanges: a Centralized Crypto Exchange (CEX) and a Decentralized Crypto Exchange (DEX). There is also a hybrid exchange which will be referred to as a Peer-to-Peer crypto marketplace, such as the non-custodial platform offered by LocalCryptos.

What is a Non-Custodial Cryptocurrency Exchange?

Most decentralized crypto exchanges operate as non-custodial exchanges. As the name implies, a non-custodial cryptocurrency exchange does not hold the user's coins or tokens. The service handles the buy, sell or exchange transaction but requires users to have their own crypto wallets to hold the keys to their assets.

What is a Peer-to-Peer Crypto Marketplace?

A peer-to-peer marketplace allows individuals to purchase certain types of cryptocurrencies directly from sellers located anywhere in the world. Such a marketplace is different from cryptocurrency exchanges which operate to automatically pair a willing buyer with a willing seller and then handle the funds and coins being exchanged between these two parties.

A peer-to-peer marketplace is a matchmaker between one peer (the seller) and another peer (the buyer). It, therefore, avoids a middle man or third party (like a decentralized crypto exchange). Such a marketplace merely provides a platform for sellers and buyers to communicate and trade in a secure and trustless way.

To enable this peer-to-peer relationship, this marketplace is structured as a non-custodial platform. This means that the platform does not take “custody” or possession of the seller’s crypto but merely deposits these into an escrow fund. These funds can then be sent directly to a smart contract on the blockchain.

That is, participants will trade from their wallets which means they are always in control of their private keys. Unlike a CEX, the participants can create a web wallet or can utilize their wallet. Typically, a peer-to-peer marketplace will support several wallets such as Metamask, Fortmatic, WalletConnect, and Portis.

The non-custodial nature of the marketplace also means that the marketplace does not take control or does not store any crypto on the platform. Instead, the private key, and hence the crypto remains stored in a remote wallet, is entirely under the users’ control. Even if the marketplace platform's security is somehow compromised, the users' funds and crypto remain unaffected and securely stored.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.