This is an editorial opinion by Okada, a mechanical engineer and contributor to the peer-to-peer bitcoin exchange RoboSats.
Buying your first bitcoin has changed a lot since the beginning of trading on forums or Internet Relay Chat (IRC). Big exchanges are emerging and now, they have perfected the art of attracting newbies by demystifying the buying experience with a smooth and, frankly, user interface.
Over time, regulators have forced exchanges to collect user data to verify personal credentials. Exchanges like this – we’ll call them “verified” exchanges (VEXs) – have custody of your funds and have tools you can use to track funds linked to your identity. The reader should already be aware of the advantages of self-custody, a topic worthy of detailed exploration.
The convenience of mainstream VEXs such as Coinbase and Binance has effectively undermined end-user expectations of a private, peer-to-peer (P2P) alternative when buying bitcoin. Consequently, they are reluctant to use alternatives despite their immeasurable benefits.
To clarify, we define exchanges according to the requirements for users to provide identification information, not whether they are centralized or decentralized in nature. Centralized exchange (CEX) can be used privately, P2P as long as there is no information about the user and no funds are held.
Centralization does not have to sacrifice the privacy of end users if the exchange only performs the role of a blind matchmaker and, if closed, can only be relaunched by cloning an open source repository. Therefore, the typical “VEX” label is more appropriate than mistakenly referring to all low-privacy CEXs.
For full disclosure, the author contributes to the open-source, P2P exchange RoboSats, but this article does not endorse just one P2P exchange; rather, it is an endorsement to use any private, P2P exchange.
Anything is better than using VEX!
Note: In many jurisdictions, using a P2P service is no different than eBay or Craigslist. It is your responsibility to know your jurisdiction’s stance.
Problems With Exchange Verification
Obviously, the problem with VEX is the lack of privacy. Users are required to submit their own identity information like a driver’s license or passport which will continue to link the purchased bitcoins to the user.
To reiterate, the user’s real name is forever associated with bitcoin and all downstream transactions. If he withdraws the bitcoins from the identification exchange and uses a mixing service, the public ledger can make this clear and the authorities can associate his actions with criminal activity, regardless of the user’s intentions.
In addition to leaving a digital paper trail, emails, passwords, phone numbers and fiat bank credentials can be exposed because bad actors can access the information through hacking or exchange employees who are not satisfied with the leakage of the user’s personal information. Or, as evidenced by the fact that if a new exchange collapses like FTX, they risk losing their bitcoins because they don’t have their private keys.
Many buyers and sellers use this privacy-invasive exchange mainly because they have a lot of liquidity in their local currency and their good mobile apps make buying and selling bitcoins a trivial task. What’s more, they have built an addictive casino aimed at increasing user retention with each confetti-filled, dopamine-inducing trade.
Unfortunately, many owners and operators of VEXs rabidly advocate for the “adoption-friendly” regulations by collecting customers’ data under the guise of protecting honest users, but, the collection of sensitive user data in the first place is ripe for exploitation by cybercriminals. The simple solution is to avoid VEX altogether.
Why Use Private, P2P Alternatives?
Consider the second-order effect of using, and thus supporting, the anti-privacy exchange. How you buy and sell bitcoins will have an amplifying effect on that exchange and the larger Bitcoin network.
When you use VEX, you expand the practice of invading privacy and lend credence to its normalization. Talking to your wallet has never been more relevant than when you buy bitcoins with your hard-earned fiat.
If using a P2P exchange, then you contribute bitcoin or fiat liquidity to the platform and thereby expand the available liquidity directly so that more users can benefit from a privacy-oriented exchange instead of relying on VEX.
The result of supporting VEXs will limit the fiat on-ramp and lead to the failure of the core ideology of Bitcoin as a permission, P2P, electronic cash system; on the other hand, supporting P2P exchanges will strengthen the permissionless nature of Bitcoin and create a stronger privacy network for anyone to use freely.
The following section looks at the expectations for P2P exchanges for some users who are used to VEX.
In this author’s experience, the biggest “complaint” from VEX users about P2P exchanges is the lack of liquidity available for some currencies and fiat payment methods. Every P2P exchange is launched with low liquidity and only grows if the user base increases.
That is the origin of any P2P exchange; they don’t have a sudden, wide liquidity on the move and without anyone bothering to contribute liquidity, the P2P exchange will cease to exist. Without a marketing budget, they can do nothing but bring in more users with word of mouth advertising.
In the case of RoboSats, we have seen that many new users will only check the order book at specific times and very often assume weak liquidity, but do not realize that the orders that cannot be executed expire within 24 hours and successful trades are not visible. Trade turnover is quite high and orders are taken quickly. Interestingly, behind the lack of liquidity is a very liquid market.
Thus, a distinction must be made between liquidity available directly on VEX and high turnover liquidity on P2P exchanges. In the same vein, VEX makes classic dollar cost averaging a breeze while P2P exchanges usually take extra elbow grease. More precisely, this can be seen as a comparison between high-time preference stacks with VEX and low-time preference stacks with P2P exchanges.
In short, P2P exchanges get better with more liquidity and users.
Privacy Always Comes at a Premium
Buying and selling bitcoins on private, P2P exchanges usually involves a premium. Users accustomed to the VEX lifestyle may hesitate to pay above the bitcoin-to-fiat market rate for fear of getting fewer satoshis for fiat. On the contrary, it is the users who value it privacy does not take the problem of paying extra for their anonymous bitcoins.
In P2P markets where supply and demand are unbalanced, premiums are used to buy and sell orders to incentivize anonymous peers to provide liquidity to the market. If you buy bitcoins in a currency or payment method that is not convenient for the seller then, by raising your premium, you may attract people who are willing to go out of their way for more satoshis. You have to make it worth your while.
If selling bitcoin, you can earn more fiat when using P2P service than using VEX. From the seller’s point of view, the order premium is an opportunity for profitable arbitrage that also incentivizes sellers to part with the bitcoin they want for the fiat they don’t want.
From one perspective, the market rate on VEX can be seen as a discounted version of bitcoin that will invade your privacy with the “benefit” of more satoshis in your stack, while the market rate on P2P exchanges can be seen as the real bitcoin market. evaluation that users pay to truly secure their wealth and protect their personal privacy.
Of course, but wanting to do private bitcoin transactions has absolutely nothing to do with criminal activity, as MPs are so desperate to preach; rather, it is only to protect yourself from criminal activity against wealth and, potentially, life. If you do multisig because you take the $5 lock attack seriously, then you should also transact bitcoin privately. The idea that your life is in danger by revealing your identity may be extreme, but it’s not a far-fetched radical fantasy.
Privately purchased bitcoins will always carry a premium because the market will value more than privately purchased bitcoins with the ability to reveal your personal finances.
Small But Effective Customer Service
No exchange is perfect and it applies to both VEX and P2P exchanges. No matter how streamlined or “easy” the platform seems, users can still run into problems. When you’re in trouble, there’s nothing more comforting than knowing there’s a real human being there to help.
Unlike typical customer service employees, developers and volunteer contributors are often more willing to solve problems and issues because they have ambitions and a desire to make users happy with the platform.
In addition, P2P platforms are more likely to provide appropriate solutions for issues that occur more often than not outside of the platform’s control, such as third-party wallet issues or Lightning Network limitations.
In this author’s observation, the response time, positive attitude and general help of P2P exchanges surpass VEX where users are resigned to terrible and incompetent customer service departments.
Bring the right expectations to a privacy-focused Bitcoin exchange
By exploring some of these warped expectations, we hope readers will adjust accordingly when using the various privacy-focused exchanges available. While, ideally, expectations should not be adjusted, users should recognize the empty reality when using small, lower volume exchanges that focus on privacy through MediaWiki and operate on a relatively miniscule budget.
VEX such as Coinbase and Binance have spent years building their brand by building user trust (for now) and with the help of “crypto educators” encourage beginners to buy various tokens and coins for the first time on verified exchanges, “because it’s easy. “or, more likely, because they were paid for the product.
You probably bought your first bitcoin on VEX because you were told it was easy or you didn’t know the private alternative; well, you probably don’t realize the disastrous implications of linking your real-life identity to a stack of bitcoins until much later in your journey down the rabbit hole.
Don’t worry, it’s never too late to start working towards a more secure and personal future. Keep your bitcoins bought on VEX separate from your personal bitcoin stack and stop giving VEX to your business.
Ultimately, P2P exchanges will have to work hard to compete in the same league as VEX. However, without peers liquefying the order book, there would be no private, P2P exchange at all. The best we can do is reason with users to respect privacy and set expectations when using P2P exchanges instead of high volume verification exchanges, before privacy.
So, spread the word!
This is a guest post by Okada. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.