From Fiat to Crypto: The Evolution of Crypto Exchange and Buy Processes

The crypto market is on another bull run, or so the “investors” suggest, with many “crypto trend followers turn investors” making predictions. So, many people are looking to get a piece of that action by buying some coins. 

And seeing how easy it is to do that regardless of the volume at exchanges like https://www.independentreserve.com/au shows how far the industry has come. Anybody could easily log on to a crypto exchange and buy cryptocurrency in a couple of minutes from any location, but it wasn’t always that easy. Here’s a vivid description of the evolution of buying cryptocurrencies to give you an idea of what the good old days used to be. 

Direct Peer-to-Peer (P2P) Purchases and Mining 

The first crypto purchase was between the anonymous entity operating under the pseudonym Satoshi Nakamoto. In a transaction that marked the beginning of the exchange of Bitcoins, Nakamoto sent 10 BTC to the developer and crypto activist Hal Finney. 

However, at this time, Bitcoin had no market value, as there was literally no demand for the coin. However, as demand started to grow, interested individuals started purchasing Bitcoin directly from one another. Interested individuals who had the technical know-how mined theirs, as crypto mining required only a little computational power at the time. 

On October 12, 2009, the first fiat-to-crypto direct purchase occurred between a Bitcoin buying and selling service known as The New Liberty Standard and Sirius A.K.A. Marti Malmi, the second Bitcoin developer after Satoshi. The transaction was effected using PayPal. Another early example of such direct purchases was Laszlo Haynek’s exchange of two pizzas for 10,000 BTCs on May 22, 2010. 

These marked the early examples of peer-to-peer crypto trades. To facilitate more of these trades, Nakamoto founded a forum called Bitcointalk. Although the initial aim of this forum was to host Bitcoin-related discussions, it later started facilitating peer-to-peer trades. 

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Emergence of Fiat to Crypto Exchange Platforms

As awareness and crypto demand grew, the need for fiat to crypto exchanges also increased. This necessity is based on the need for the emerging crypto world to interface with the established fiat systems. 

One of the crudest and earliest forms was Faucet, a website built in 2010 by Gavin Andresen, a Bitcoin core developer. In the same year, the Bitcoin Market was announced on Bitcointalk as one of the platforms where Bitcoin could be obtained. Bitcoin Market helped buyers purchase Bitcoin by sending in their fiat currency through PayPal. The exchange platform then holds the seller’s Bitcoin in an escrow account till they receive the PayPal transfer. 

In the years following this period, more exchanges emerged. Some of them include VirWox, which was an exchange platform for trading Linden Dollars and Bitcoin. Linden dollars were the in-game token of the virtual reality game Second Life. However, one of the most notable ones was Mt Gox. Mt Gox stood for ‘Magic: The Gathering Online Exchange,’ which took the crypto world by storm in 2011 (although it had been in existence before this period).  

Mt Gox. was responsible for handling close to 70% of all Bitcoin transactions as of 2013. Unfortunately, fast-forward to 2014, users started experiencing longer delays on their crypto transactions on Mt Gox, but the platform quickly played it down as mere technical hiccups.

However, little did traders know they were witnessing one of the earliest and biggest crypto hacks in history. A couple of days later, the platform took down its website before documents confirming the loss of 744,408 Bitcoins leaked online. Although the exchange was able to recover 200,000 BTC, the damage done to investor funds and personal information was damning.  Consequently, it was investigated and had to file for bankruptcy. 

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More Centralized Exchanges

Mt Gox’s crash sent a shockwave across the crypto industry. These fears made more centralized exchanges to emphasize compliance and security efforts. Additionally, they provided crypto traders and investors with friendly interfaces, more crypto and fiat trading pairs, and high liquidity. 

As a result, they host a multitude of buyers and sellers in search of trading partners on their platform. Centralized exchanges act as intermediaries between different parties, matching buy and sell orders across different locations. 

However, as we’ve seen with Mt. Gox. security concerns and potential hacks are major drawbacks of this mode of purchasing cryptocurrencies. These risks were also heightened by the fact that users had to put their private keys in the exchange’s keys, consequently giving them access to their funds. Nonetheless, they offered advantages such as advanced trading features, faster transaction times, and customer support.

Decentralized Exchanges

From the early days, many users didn’t like the fact that centralized exchanges had to have access to users’ private keys and funds. So, the crypto ecosystem started seeing the emergence of decentralized exchanges as far back as 2014. They represented a significant evolution of the earlier centralized counterparts in that they do not serve as a central authority between buyers and sellers. Instead, the earliest decentralized exchanges utilized order books to keep records of buy and sell orders. While these early iterations didn’t have to stay in charge of user funds, the order book system had liquidity issues that made the entire process less user-friendly. 

Advances in blockchain technology and developer innovations solved this problem by turning to smart contracts. Consequently, orders were fulfilled using smart contacts, which took stipulated amounts of cryptocurrencies from user wallets and deposited them into their noncustodial wallets.  

Another significant development in the evolution of crypto exchanges was the development of Automated Market Makers (AMM). These decentralized exchanges use liquidity pools in addition to smart contracts to improve the liquidity issue earlier raised and maintain crypto prices when crypto trades are placed. 

Despite these advances, decentralized exchanges were still generally associated with issues like a lack of liquidity, delayed transactions, and poor user experience. 

OTC Crypto Desks

Recently, the crypto ecosystem seems to be experiencing a full circle moment as exchanges are still plagued with issues that arose in the early days of its growth. In 2021, FTX, the world’s largest crypto trading platform, still experienced similar hacking and mismanagement issues to those of Mt. Gox years ago. 

As a result, while the uncertainties about the legitimacy of major cryptocurrencies like Bitcoin are far gone at this point, many investors are still searching for the most reliable means of making purchases. Major market movers do not want to commit their trust or funds to any other exchanges. Instead, they would prefer to trade directly with other traders, as Satoshi Nakamoto structured Bitcoin from inception. Over-the-counter crypto desks are facilitating more and more crypto transactions these days, and crypto might have made a complete revolution. 

Conclusion

In the early days, mining and direct OTC trades were the only ways to obtain cryptocurrencies. Then, centralized exchanges evolved to meet the growing demand. However, they presented security issues, and decentralized exchanges stepped in to facilitate true peer-to-peer trades with the help of liquidity pools and smart contracts. 

Nonetheless, the surging interest in the OTC crypto desk is seemingly echoing the true essence of cryptocurrencies — the absence of a centralized authority!

DISCLAIMER: The information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.