What is Peer-to-Peer (P2P) and how does a P2P network work?

What is Peer-to-Peer (P2P)?

A peer-to-peer network, also known as a P2P network, is a digital network in which participants (the peers) communicate directly with each other without the involvement of a central party, such as a server or company. These peers can exchange data with each other through the P2P network without requiring a centralized authority.

This is made possible because every computer (called a node) within the network performs part of the tasks, such as storing data, validating information and forwarding messages. The responsibilities are therefore distributed across the entire network.

The concept of P2P is mainly used in distributed ledger systems, such as blockchains. The most well-known example of this is the blockchain of Bitcoin and the cryptocurrency BTC. P2P technology also forms the foundation of other blockchain solutions, such as DeFi applications, Web3 platforms and various decentralized networks.

Example:
You can compare a P2P network to a group of friends. Imagine that you and your friends want to send each other messages, but you do not want to use a group app or a central server. Instead, everyone sends their message directly to the other person’s phone.

There is no WhatsApp, no company in between and no central place where messages are stored. Everyone sends, receives and stores the messages themselves.

That is exactly how a peer-to-peer network works:

• Everyone is equal (every friend can send and receive messages).
• There is no central authority controlling the network.
• Everything goes directly from person to person.

Key Takeaways

• A peer-to-peer (P2P) network is a network in which participants communicate directly with each other without a central party, where each participant (peer or node) plays an active role.
• In a P2P network, all participants are equal and responsible for tasks such as storing, transmitting and validating data, without hierarchy or central control.
• P2P technology forms the basis of blockchains such as Bitcoin and is widely used within crypto, DeFi, Web3 and decentralized applications, but also beyond that, such as in torrents and distributed computing networks.
• The network works by having transactions and data checked and validated by multiple peers, after which consensus is reached and the information is stored and shared.
• P2P networks offer advantages such as decentralization, security and censorship resistance, but also have disadvantages such as technical complexity, scalability issues and increased responsibility for users.

What does Peer-to-Peer stand for?

Peer-to-peer stands for a network in which participants (peers) are equal. All participants have the same rights and permissions and are responsible for the same tasks. They can:

• store data
• send data
• receive data
• perform calculations
• process and validate data

There is therefore no hierarchy like in traditional networks, where a server is in control. The participants themselves are responsible for managing and securely processing data. This makes a peer-to-peer network fair and reliable.

Where and for what are P2P networks used?

Peer-to-peer is currently used both within and outside the crypto market.

P2P within crypto:

• For sending and receiving funds (such as BTC) without the involvement of a bank or other intermediary.
• Transactions on the blockchain are validated and executed by nodes (computers that store data and verify transactions).
• DeFi solutions, such as DEXes, use P2P to allow users to trade directly with each other, without requiring an intermediary party.
• Storing files on thousands of computers simultaneously instead of on a single central server, such as with Google Drive or Dropbox. dApps use this (for example via IPFS), so files remain available even if one or more computers go offline.

P2P outside crypto:

• With file sharing via torrents, such as BitTorrent, you download files from many users at the same time instead of from a single server. Everyone who has part of the file automatically shares it with others.
• Communication networks, such as older versions of Skype, sent audio and video directly between users without a central server, making it faster and more efficient.
• Within distributed computing systems, such as SETI@Home, thousands of computers work together to perform large calculations. This creates one large shared computing network without a central supercomputer.

These are just a few examples of how and where P2P is applied within and outside blockchain technology.

How does a Peer-to-Peer network work?

A peer-to-peer (P2P) network works by connecting all participating members within the network. When a peer performs an action, this information is forwarded to other peers. These peers are responsible for checking the information, storing the data and validating the information. Once this has been done, the transaction is executed and the data (the proof of execution) is stored within the network.

In blockchains, this process works as follows:

• A user sends a transaction, for example sending bitcoin from address A to address B.
• The transaction is sent to multiple nodes that are responsible for verifying the transaction.
• Nodes check the transaction and reach consensus on its validity.
• Valid transactions are then included in a block that is added to the blockchain.
• The new block is distributed to all peers in the network to keep the network up to date.

This mechanism makes blockchains robust, secure and difficult to censor.

Key characteristics of a P2P network

You can recognize a P2P network by the following characteristics:

• Decentralization: There is no central authority, such as a server that manages the network. Instead, tasks are distributed across a network of participants, namely nodes, also called peers.
• Equal distribution of tasks: Each peer generally performs the same functions.
• High fault tolerance: The network has no single point of failure. This means that if an error occurs, the network continues to function. If a node fails or makes a mistake, the network can keep running and correct itself.
• Scalability: The more peers participate in the network, the greater the capacity becomes and the more data the network can process within a given time. In addition, more participants contribute to a higher level of decentralization.
• Transparency: Peer-to-peer networks within blockchain technology are transparent. Everything that happens on the blockchain is publicly recorded in the distributed ledger and can be viewed via a block explorer. This makes the system verifiable and contributes to reliability, as fraudulent behavior becomes visible.

Advantages of Peer-to-Peer

Peer-to-peer networks offer various advantages for developers and users:

• No intermediaries: Users can trade or communicate directly with each other, which can be faster and cheaper than using centralized platforms. In addition, users themselves bear full responsibility and there is no central party that can stop or prohibit transactions.
• Increased security through decentralization: Because data is distributed across many peers, it is more difficult for attackers to compromise the network as a whole.
• No central control or censorship: No one can unilaterally shut down the network or block users.
• Robustness and reliability: The network continues to function even if multiple computers go offline.
• Efficiency: Tasks are distributed across the peers, eliminating the need for large centralized infrastructure. Peers are jointly responsible for data storage, processing and control.

Disadvantages of Peer-to-Peer

In addition to advantages, there are also disadvantages associated with the use of peer-to-peer networks:

• User-friendliness: Setting up and managing a peer or node is often complex and requires technical knowledge.
• Performance issues during high congestion: Blockchains such as Bitcoin and Ethereum can only process a limited number of transactions per unit of time, partly due to block size and block time. During periods of high network congestion, this can lead to slower processing and higher transaction costs.
• Increased responsibility for users: Without a central party, users must take care of security, backups and correct actions themselves. In case of errors, such as sending crypto to the wrong address, recovery is generally not possible due to the immutability of the blockchain.
• Legal and regulatory challenges: Decentralized networks are difficult to regulate, which can lead to legal uncertainty.
• Expensive hardware: In some cases, specialized and costly hardware is required to run a node. For blockchains that use the Proof of Work consensus mechanism, such as Bitcoin, mining is energy-intensive and requires significant computing power and specialized equipment.

Final thoughts

Peer-to-peer networks form the backbone of decentralized technologies by enabling users to communicate and execute transactions directly with each other without intermediaries. The equal role of all participants creates a system that is robust, transparent and difficult to censor, which offers major advantages especially within blockchain technology. At the same time, this form of decentralization requires more technical knowledge and responsibility from users, and performance can come under pressure during periods of high network load. Overall, P2P offers a powerful alternative to centralized networks, provided users are aware of both the benefits and the limitations.