Understanding P2P Bridges
A P2P bridge is a functionality found in decentralized exchanges (DEX) that facilitates the direct exchange of the same cryptocurrency between two blockchain protocols without the involvement of intermediaries.
Enabling Feeless Peer-to-Peer Trading
P2P bridges promote blockchain interoperability by enabling peer-to-peer trading on a 1:1 basis, eliminating the need for blockchain validation fees (gas fees) or platform transaction fees.
For instance, a bridge allows traders to swap USDC on the Ethereum blockchain for USDC on BNB Chain, or vice versa.
Seamless Cross-Blockchain Asset Mobility
The primary advantage of blockchain bridges is their ability to simplify the movement of crypto balances across different blockchains.
Users facing challenges with high gas fees on the Ethereum network for DeFi applications often utilize bridges to transfer their cryptocurrencies to blockchains with lower fees.
Once on the new blockchain, users can access various decentralized applications (dApps) that may be exclusively available on that particular blockchain.
Facilitating Efficient Cross-Blockchain Trading
Many bridges employ automated market makers (AMMs) that rely on liquidity pools.
Trading on AMM bridges differs significantly from P2P bridges.
Liquidity providers (market makers) contribute cryptocurrencies to a liquidity pool for a specific trading pair and earn interest from trading fees whenever a user executes a trade.
Traders (market takers) withdraw funds from the liquidity pool to fulfill their orders. AMMs alleviate liquidity concerns for market takers, minimizing slippage issues.
However, AMM liquidity pools have some known challenges.
Smart contract vulnerabilities can enable hackers to drain significant amounts of funds locked in liquidity pools, and market makers often experience net losses due to impermanent loss.
Empowering Direct Wallet-to-Wallet Trades
P2P bridges like AtomicDEX utilize a different approach to address the issues associated with AMM bridges.
P2P bridges utilize atomic swaps, which involve direct wallet-to-wallet trades between two peers through specially designed smart contracts for decentralized exchanges.
When an order is received, the exchange software connects the buyer and seller directly, allowing them to transact via the bridge.
Decentralized Trading
Like traditional centralized exchanges, P2P bridges connect market makers and takers through order books.
However, they benefit from eliminating third parties from the trading process.
Users can trade directly from their non-custodial wallets, ensuring true ownership of their funds before, during, and after using a P2P bridge.
The primary advantage of P2P bridges is their enhanced security compared to AMM bridges and centralized exchanges.
On the downside, P2P bridges generally have lower trading volumes than AMM bridges or centralized exchanges.