There are two types of BTC exchanges, centralized and peer-to-peer. They both work quite differently from each other. I will divide the answer into two sections and cover each type and how they work differently. Let’s get started!
Centralized Bitcoin exchanges are controlled and owned by a specific group. They have complete control over the exchange. Centralized exchanges operate much like a bank or private firms. They provide a simple, fast, and user-friendly Bitcoin buying, selling, and trading experience for basic.
Buying, selling, and trading Bitcoins in a centralized exchange is conducted under a set of rules. These rules are made by the owners of the exchange. On centralized exchanges, you are bound by the BTC price, as well as fees and processes, set by the owner of the exchange.
How Peer-to-Peer Bitcoin Exchanges Work
Peer-to-peer BTC exchanges such as LocalBitcoin reveal the true potential of cryptocurrencies. They work on the principle of decentralization (where individuals have complete power and autonomy) and allow users to do business with other individuals on the platform.
Similar to a classified marketplace, peer-to-peer bitcoin exchanges allow each trader to buy, sell and trade bitcoins with other users. In a peer-to-peer platform, there is no middle party (other than software) between two traders.
Peer-to-peer BTC exchanges focus on P2P systems rather than giving control to specific individuals. Furthermore, on a peer-to-peer BTC exchange, your transactions are not monitored by any third party or government.
The four pillars of peer-to-peer bitcoin exchanges are freedom, security, safety, and anonymity.