What does peer-to-peer (P2P) mean?

In computer science, a peer-to-peer (P2P) network is defined as a group of devices that collectively store and share files. Each participant ( node ) acts as an individual pair. Normally, all nodes have the same power and perform the same tasks.

In finance-focused technology, the term peer-to-peer typically refers to the exchange of cryptocurrencies or digital assets through a distributed network. P2P platforms allow buyers and sellers to execute operations without the need for intermediaries. In some cases, web pages can also provide a P2P environment that connects lenders and borrowers.

The P2P architecture may be suitable for various use cases, but it became especially popular in the 1990s, when the first file-sharing programs were created. P2P networks currently serve as the foundation for most cryptocurrencies, and make up much of the blockchain industry. However, they are also leveraged in other distributed computing applications, including web search engines, streaming platforms, online marketplaces, and the InterPlanetary File System (IPFS) web protocol.

How does a P2P system work?

In essence, P2P systems are maintained by distributed user networks. Usually, they do not have a central administrator or server, because each node has a copy of the files - acting both as client and server for the rest of the nodes. Thus, each node can download files from other nodes, or upload files to them. This is what sets P2P networks apart from more traditional client-server systems, where client devices download files from a centralized server.

In P2P networks, connected devices share files that are stored on their hard drives. Using software-type applications designed to mediate data sharing, users can query other devices on the network to find and download files. From the moment a user has downloaded a specific file, they can act as the source of the file.

In other words, when a node acts as a client, it will download files from other nodes on the network. Whereas when it works as a server, it will become the source from which other nodes will be able to download the files. In practice, however, both functions can be carried out simultaneously (for example, by downloading file A and uploading file B).

Since each node stores, transmits, and receives files, P2P networks tend to become faster and more efficient as their user base grows. Furthermore, its distributed architecture makes P2P systems highly resistant to cyber attacks. Unlike traditional models, P2P networks do not have a single point of failure.

We can categorize peer-to-peer systems according to their architecture. The three main types of P2P networks are called: unstructured, structured, and hybrid.

Unstructured P2P networks

Unstructured P2P networks do not have any specific organization of the nodes. Participants communicate with each other randomly. These systems are considered robust against high rotation activity (that is, when multiple nodes join or leave the network frequently).

Although they are easier to build, unstructured P2P networks may require more CPU and memory usage, because search queries are sent to as many pairs as possible. This tends to flood the query network, especially if only a small number of nodes deliver the desired content.

Structured P2P networks

In contrast, structured P2P networks feature an organized architecture, which allows nodes to search for files efficiently, even when the content is not widely distributed. In most cases, this is accomplished through the use of hash functions that facilitate searching of databases.

Although structured networks can be more efficient, they tend to have higher levels of centralization and, usually, higher installation and maintenance costs. Other than that, structured networks are less robust against high turnover rates.

Hybrid P2P networks

Hybrid P2P networks combine the conventional client-server model with some aspects of the peer-to-peer architecture. To give an example, they can designate a central server that facilitates the connection between peers.

Compared to the other two types, hybrid models tend to feature improved overall performance. They typically combine some of the main advantages of each approach, allowing them to achieve significant degrees of efficiency and decentralization simultaneously.

Distributed vs. decentralized

Despite the fact that the P2P architecture is inherently distributed, it is important to note that there are various degrees of decentralization. Thus, not all P2P networks are decentralized.

In fact, many rely on a central authority that guides network activity, making them to some extent centralized systems. For example, some P2P file sharing systems allow users to search for and download files from other peers, but are unable to participate in other processes, such as managing search queries.

Furthermore, the degree of centralization of small networks, controlled by a limited user base and with shared objectives, can be considered higher, despite lacking a centralized network infrastructure.

P2P's role in Blockchains

In the early stages of Bitcoin, Satoshi Nakamoto defined it as an "electronic peer to peer cash system." Bitcoin was created as a digital form of money. It can be transferred from one user to another through a P2P network, which manages a distributed ledger called the blockchain .

In this context, the P2P architecture that is inherent in blockchain technology is what allows Bitcoin and other cryptocurrencies to be transferred worldwide, without the need for intermediaries or any central server. Also, anyone can configure a Bitcoin node if they want to participate in the block verification and validation process .

Therefore, there are no banks that process or record transactions on the Bitcoin network. Instead, the blockchain acts as a digital ledger that publicly records all activity. Basically each node contains a copy of the blockchain and compares it to other nodes to ensure the data is accurate. The network quickly rejects any malicious activity or inaccuracy.

In the context of cryptocurrency blockchains, nodes can take on a variety of different roles . Full nodes, for example, are the ones that provide security to the network by verifying transactions with system consensus rules.

Each full node maintains a complete and up-to-date copy of the blockchain, allowing them to participate in the collective work of verifying the true status of the distributed ledger. However, it is worth noting that not all full validation nodes are miners .

Advantage

The peer-to-peer architecture of blockchains offers many benefits. Among the most important is the fact that P2P networks offer greater security than traditional client-server arrangements. The distribution of blockchains on a large number of nodes makes them practically immune to Denial of Service (DoS) attacks that affect numerous systems.

Similarly, since most nodes must establish a consensus before adding data to a blockchain, it is almost impossible for an attacker to alter the data. This is especially true for large networks like Bitcoin. Smaller blockchains are more susceptible to attacks because one person or group could eventually gain control over most nodes (this is known as a 51 percent Attack ).

As a result, the distributed peer to peer network coupled with a majority consensus requirement gives blockchains a relatively high degree of resistance to malicious activity. The P2P model is one of the reasons that Bitcoin (and other blockchains) were able to achieve the so-called Byzantine Fault Tolerance .

Beyond security, the use of P2P architecture in cryptocurrency blockchains also makes them resistant to censorship by central authorities. Unlike standard bank accounts, governments cannot freeze or drain cryptocurrency wallets. This resistance also extends to censorship efforts by private payment processing and content platforms. Some content creators and online merchants have embraced crypto payments as a way to prevent third parties from blocking their payments.

Limitations

Despite its many advantages, the use of P2P networks in blockchains also has certain limitations.

Because distributed books must be updated on each node rather than on a central server, adding transactions to a blockchain requires a great deal of computing power. While this provides increased security, it greatly reduces efficiency and is a major hurdle when it comes to scalability and widespread adoption. However, cryptographers and blockchain developers are researching alternatives that can be used as scaling solutions. Highlights include Lightning Network , Ethereum Plasma, and the Mimblewimble protocol .

Another potential limitation is related to attacks that can arise during hard fork events. Since most blockchains are decentralized and open source, nodegroups can copy and modify the code and separate from the main chain to form a new parallel network. Hard forks are completely normal and do not pose a threat by themselves. But if certain security methods are not adopted correctly, both chains can become vulnerable to repeat attacks .

Furthermore, the distributed nature of P2P networks makes them relatively difficult to control and regulate, not just in the blockchain niche. Various apps and P2P companies got involved with illegal activities and copyright infringements.

In conclusion

The peer-to-peer architecture can be developed and used in many different ways, and it is the core of the blockchain that makes cryptocurrencies possible. By distributing transaction books across large node networks, the P2P architecture offers security, decentralization, and censorship resistance.

In addition to their usefulness in blockchain technology, P2P systems can also serve other distributed computing applications, ranging from file-sharing networks to energy trading platforms.