Decentralized applications and trading platforms are gradually gaining traction in the global cryptocurrency market. This week, two days since its debut, peer-to-peer (P2P) Ether marketplace LocalEthereum completed nearly 100 over-the-counter (OTC) Ether trades.

“In its first two days, localethereum helped traders complete nearly 100 over-the-counter exchanges worth a total of ~$US60,000. While this number looks slim next to high-frequency exchanges, it’s a terrific start and the trading volume continues to grow rapidly as more jump on board,” revealed the LocalEthereum development team.

The Benefits of Decentralized Exchanges and Protocols

As noted by experts such as Coinbase co-founder and former Goldman Sachs trader Fred Ehrsam, decentralized exchanges are particularly useful for circumventing impractical anti-money laundering (AML) and Know Your Customer (KYC) policies, as well as increasing security measures for their users.

By nature, hackers cannot target decentralized applications like EtherDelta and LocalEthereum which operate using public blockchain networks because they do not rely on third-party service providers or intermediaries. Governments cannot possibly demand data from EtherDelta and LocalEthereum due to their decentralized structures and non-custodial platforms.

Apart from their significant improvement in privacy, decentralized exchanges provide maximum security for users, as private keys and sensitive information of traders are not stored or managed by the platform and its developers. Instead, users have full control over their private keys and funds, preventing the possibility of security breaches and theft of funds.

Fred Ehrsam summarised some of the benefits of decentralized exchanges in a recent Medium post:

“There are a few obvious benefits to decentralized exchanges. First, they allow you to remain in control of your funds. So no risk of the exchange being hacked or going insolvent. This can lead to higher liquidity, as users may be willing to leave orders open on the orderbook for longer when counterparty risk is gone. Second, they create global order books. Decentralized exchanges are borderless and can serve anyone from any country. Third, they are low friction. No signup required, just trade.”

The Limitations of Decentralized Applications and Growing Popularity of P2P Exchanges

There exists a clear tradeoff between flexibility and security for both blockchain networks and distributed platforms. Decentralized applications and exchanges prioritize security and privacy, and consequently, they inevitably have to face scalability issues.

Currently, EtherDelta, the most popular and successful decentralized application using Ethereum, is accountable for 14 percent of the Ethereum network’s transactions. Still, many users have continually expressed their concerns over the platform’s inefficiency in settling trades and facilitating transactions.

At this stage of Ethereum development, it is simply not possible to have a seamless and high-performance decentralized cryptocurrency exchange due to the amount of capacity it requires. As Ethereum scales and new scaling solutions like Plasma are integrated in the future, developers behind decentralized cryptocurrency exchanges will be able to focus on flexibility and performance.

In the short-term, it is more realistic to see P2P and OTC platforms operating using Ethereum, rather than high-frequency exchanges. The recent Byzantium hard fork has provided efficient scaling with faster transaction processing, allowing platforms like LocalEthereum to process transactions at a faster rate, with improved security and privacy measures.

“We’re seeing a growing number of traders using Chinese Yuan, which is currently the most frequently-traded currency. Other popular currencies so far have been GBP, AUD, USD and RUB. In the first two days, traders have completed nearly 50 fiat-to-ether trades by bank transfer, 20 by AliPay, 3 for cash in-person, and 5 using PayPal,” explained LocalEthereum.

In a previous interview, Ethereum co-founder Vitalik Buterin stated that it could take two to five years for Ethereum to fully scale. Then, decentralized exchanges and OTC marketplaces such as EtherDelta and LocalEthereum will be able to co-exist.