Transfer of money is possible in different ways like you can transfer your money to your friend, and this can also happen in cash. Another way is that you can make one contract or enter into an agreement with the help of a third trusted party on whom both the parties rely. This third party can be the government or a government-affiliated body whose contractual rule will have to abide by the rules and regulations as specified by the government. Thirdly, you can transfer your digital asset without the involvement of the third trusted party like the government or a regulated bank. As it concludes, Cryptocurrency exchange means “exchange of crypto from one to another,” whereas trustless crypto exchanges mean “transfer or transaction of cryptocurrency without the involvement of the third parties.” Transactions are disclosed exclusively for peer-to-peer with high security without the involvement of the third trusted parties like a central bank or government bodies. There are also third parties who are involved in the transaction and are known as a miner. These miners do not abide by any government laws, so they are unknown to both the parties. No trusted party is required to either of the peers for exchanging the digital assets, so it is called trustless cryptocurrency exchange.
Trustless Cryptocurrency Exchange Mechanism
Cryptocurrency like bitcoin is a public ledger whose transaction can be verified by several miners around the world but is not governed by any central organization.
Let us assume that you have 10 bitcoin in your wallet and you would like to transfer 2 bitcoin to another party against any services or products. Then, ask the wallet address of the person to whom you are transferring the desired amount of bitcoin. It may take a few minutes to complete the transfer successfully as the miners solve the complex calculation to succeed in the transaction. The whole transaction is based on non-editable unique cryptography (PGP is the default option for several websites). There is just unsolved computerized encoded problem which requires to be solved by the miners as soon as possible. None of the parties know who has done the mining for their transaction as there are numerous computers actively involved at their node for providing the solution. You cannot assure that ABC or XYZ will be solving the complex encrypted code for your transaction.
Consequently, those are unknown or trustless to you. You need to be only apprehensive to your successful transaction. You may say that trust is distributed or shared in the blockchain network and not just within one person or party.
Trustless Cryptocurrency Exchange Advantages
- Cost-Effective: Trustless cryptocurrency exchange costs very less as compared to the other transaction because there is no mediator whom you need to pay. Transactions happen from the sender to the receiver, and very nominal fees are incurred for such transaction verification.
- Secured: Since transactions are done peer-to-peer, there are fewer chances of security breakage and are based on blockchain technology which makes the process safe and secured.
- Privacy: This is a unique feature that attracts the customer to use the blockchain-based transaction. Transfer of cryptocurrencies is private and confidential.
- Open Source Ledger: This kind of ledger is open to anyone regardless of the geographical location and accessed by thousands of computer-based nodal center. When anyone wants to transfer the digital coin, he can proceed and miners will validate the transaction.
- Faster Execution: No central party is involved in the buying, selling, or transferring of the crypto assets to the preferred person. Besides, it shortens the time of execution. However, there is only a transaction validation spell which is maximum of 10 minutes.
Trustless nature of bitcoin or altcoins, which makes informal exchanging from one person to the other or from one wallet to others. This transaction utilizes the Proof of Work (PoW) where the users are communicating purely on peer-to-peer format without having any trusted central party but the blockchain system. Concluding that we don’t require a trusted third party in the overall transactions because there is already a well-developed combination of cryptography, P2P network, Proof of Work, Merkle Chains, and Open Source Ledger. On the other hand, blockchain is well versed, verified, secured for all kinds of transaction and doesn't give room for trusting party.