This is Okada’s opinion editor, a mechanical engineer and contributor to the RoboSats bitcoin exchange.
Buying your first bitcoin has changed dramatically since the early days of trading on forums or Internet Relay Chat (IRC). Big exchanges have sprung up and today they have perfected the art of attracting newcomers by obfuscating the buying experience with flawless and frankly mind-blowing user interfaces.
Over time, regulators have pressured exchanges to collect users’ data to verify their personal credentials. Exchanges like this – we’ll call them “verification” exchanges (VEX) – protect your funds and have tools at their disposal to track your funds linked to your identity on the chain. The reader should already be aware of the benefits of self-monitoring, a topic worthy of its own detailed study.
The convenience of major VEXs like Coinbase and Binance has effectively shattered end-user expectations of private, peer-to-peer (P2P) alternatives when buying bitcoin. As a result, they are reluctant to use alternatives despite the immeasurable benefits to be gained.
To clarify, we define exchanges by their requirements for users to provide identifying information, regardless of whether they are centralized or decentralized in nature. Centralized exchanges (CEXs) can operate privately in P2P when they do not have any information about their users and do not hold funds.
Centralization does not have to sacrifice end-user privacy if an exchange only acts as a blind player, and if it shuts down, it can be restarted simply by cloning an open-source repository. Therefore, the distinctive label “VEX” is more appropriate than incorrectly referring to all CEXs as having weak privacy.
For full disclosure, the author contributes to the open source P2P exchange RoboSats, but this article does not support just one P2P exchange; rather, it is an endorsement for use in any private, P2P exchange.
Anything is better than using VEX!
Note: In many jurisdictions, using a P2P service is no different than using eBay or Craigslist. It is your responsibility to know the position of your jurisdiction.
Problem with Authentication Exchanges
Obviously, the problem with VEXs is the complete lack of privacy. Users are required to provide self-identifying information, such as a driver’s license or passport, which permanently links the purchased bitcoin to that user.
To repeat, it is the user’s real name forever associated with that bitcoin and all downstream transactions. If they withdraw that bitcoin from an identity exchange and use mixing services, the public ledger can clearly show that, and authorities can link that action to criminal activity, regardless of the user’s intent.
In addition to leaving a digital paper trail, their email, password, phone number, and fiat bank credentials can be exposed, as bad actors can obtain this information through hacking or through disgruntled exchange employees leaking users’ private information. Or, as evidenced by recent exchange crashes like FTXs, they risk losing their bitcoins because they don’t actually own the private keys.
Many buyers and sellers use these privacy-intrusive exchanges primarily because they have great liquidity in a large number of local currencies, and their mobile apps make buying and selling bitcoin a trivial task. What’s more, they’ve built addictive casinos aimed at increasing user retention with every confetti-filled, dopamine-inducing trade.
Unfortunately, many owners and operators of VEXs favor “friendly for adoption” regulations by collecting their customers’ data in the name of protecting honest users, but the collection of sensitive user data in the first place is ready for their exploitation. cybercriminals. A simple solution is to avoid VEXs altogether.
Why Use Private, P2P Alternatives?
Consider the secondary effects of using and thereby supporting anti-privacy trade-offs. How you buy and sell Bitcoin will have a reinforcing effect on those exchanges and the larger Bitcoin network.
When you use VEX, you reinforce and normalize the experience of privacy invasion. Talking to your wallet has never been more convenient than buying bitcoins with your hard-earned fiat.
If you’re using a P2P exchange, then you’re contributing bitcoin or fiat liquidity to that platform, thereby instantly boosting existing liquidity so that more users can benefit from privacy-focused exchanges rather than relying on VEXs.
The result of supporting VEXs will limit fiat on-ramps and cause the failure of Bitcoin’s core ideology as a permissionless, P2P, electronic money system; on the other hand, supporting P2P exchanges will reinforce the permissionless nature of Bitcoin and create a more robust privacy network for anyone to use freely.
The following sections look at the expectations for P2P exchanges for some users accustomed to VEXs.
In this author’s experience, the biggest “complaint” of VEX users about P2P exchanges is the lack of readily available liquidity for some currencies and fiat payment methods. Every P2P exchange starts with low liquidity and grows only when the user base grows.
This is the origin of any P2P exchange; They don’t have sudden, massive liquidity to begin with, and if no one bothers to contribute liquidity, P2P exchanges will cease to function. Without a marketing budget, they can do nothing but attract more users through word-of-mouth advertising.
In the case of RoboSats, we found that many new users will only check the order book at that moment and often accept poor liquidity, but they don’t realize that unfilled orders expire within 24 hours and successful trades are invisible. Trade turnover is actually quite high and orders are received relatively quickly. Interestingly, behind the apparent lack of liquidity is a highly liquid market.
Thus, a distinction must be made between readily available liquidity in VEXs and high turnover liquidity in P2P exchanges. Likewise, VEXs facilitate classic dollar cost averaging, while P2P exchanges usually take a little extra elbow grease. Rather, it can be seen as a comparison between high-time-preferred stacking with VEXs and low-time-preferred stacking with P2P exchanges.
In short, P2P exchanges improve with more liquidity and users.
Privacy Always Comes at a Premium
Buying and selling bitcoins on a private, P2P exchange usually involves a fee. Users accustomed to the VEX lifestyle may be reluctant to pay above the bitcoin-to-fiat market rate for fear of getting fewer satoshis for their fiat. Rather, users who value it privacy has no trouble charging extra for their anonymous bitcoins.
In P2P markets where there is an imbalance between supply and demand, rewards are used to incentivize anonymous peers in buy and sell orders to provide liquidity to the market. If you’re buying bitcoins in a currency or payment method that’s inconvenient for the seller, you can attract someone willing to go out of their way for more satoshis by increasing your premium. You have to value their time.
If you sell bitcoin, you can earn more fiat in return when using P2P services compared to using VEXs. From the seller’s perspective, the order premium is a profitable arbitrage opportunity that encourages sellers to part with their desired bitcoins for unwanted fiat.
From one point of view, the market rate on VEXs 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. the assessment that users pay to truly secure their wealth and protect their personal privacy.
It should go without saying, but wanting to make private transactions with bitcoin has nothing to do with criminal activity, as lawmakers desperately promote; rather, it is only to protect yourself from criminal activity against your wealth and potentially your life. If you’re multisig because you’re serious about the $5 key attack, then you should also be doing private transactions with bitcoin. The idea that your life is on the line by exposing your identity may sound extreme, but it’s not a far-fetched, radical fantasy.
Privately purchased bitcoin will always carry a premium because the market will value it more than bitcoin purchased with the ability to expose your personal finances.
Small but Effective Customer Service
No exchange is perfect and this applies to both VEX and P2P exchanges. No matter how streamlined or “flawless” a platform may seem, users can still run into problems. When faced with problems, there is nothing more comforting than knowing that a real person is there to help.
Unlike your typical customer service person, volunteer developers and contributors are often willing to go out of their way to solve problems and issues because they have more ambitions and a desire to ensure that users enjoy the platform.
Moreover, P2P platforms are more likely to provide tailored solutions because emerging issues are more likely to be outside the platform’s control, such as issues with certain third-party wallets or Lightning Network limitations.
In this author’s observation, the response time, positive attitude, and general helpfulness of P2P exchanges far exceeds that of VEXs, where users are resigned to terrible and incompetent customer service departments.
Bringing the right expectations to privacy-focused Bitcoin exchanges
By exploring some of these broken expectations, we hope readers will adjust their expectations when using the various privacy-focused exchanges available. Ideally, while expectations don’t need to be adjusted, users should recognize the simple realities of using smaller, lower-volume exchanges that focus on privacy over profit and operate on relatively small budgets.
VEXs like Coinbase and Binance have had years to build their brands by building user confidence (for now) and encouraging newbies with the help of “crypto gurus” to buy their first token and coin assortment on validation exchanges, “because it’s easy. ” or more likely because they get paid for these products.
You probably bought your first bitcoin on VEX because you were told it was easy or because you were unaware of private alternatives; likewise, you probably didn’t learn the disastrous consequences of associating your real-life identity with your bitcoin stack until your trip down the rabbit hole.
No need to worry, it’s never too late to start working towards a more secure and personal future. Keep bitcoin bought on VEXs completely separate from your personal bitcoin stack and stop giving your business to VEXs.
Ultimately, P2P exchanges will have to work incredibly hard to compete in the same league as VEXs. However, without peers liquidating order books, there would be no private, P2P exchange. The best we can do is justify users’ privacy values and adjust their expectations when using P2P exchanges instead of the aforementioned high-volume, privacy-related verification exchanges.
So spread the word!
This is a guest post by Okada. The views expressed are entirely their own and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.