What is Peer-to-Peer (P2P)?

In the field of computer science, a peer-to-peer network consists of a group of devices that can store and share files. Each participant (node) is equivalent to an equal individual. That is, all nodes have the same rights and perform the same tasks.

In the field of fintech, P2P usually refers to the trading of digital currencies or digital assets through a distributed network. A P2P platform allows buyers and sellers to trade directly without intermediaries. Some websites can also provide a P2P trading environment for lenders and borrowers.

The P2P architecture is suitable for various scenarios, but it truly became popular in the 1990s when the first file-sharing program was born. Today, peer-to-peer networks have become the core of most digital currencies, accounting for a large part of the blockchain industry. However, they are also used in various other distributed computer programs, including: web search engines, streaming platforms, online marketplaces, and the InterPlanetary File System (IPFS) network protocol.

How P2P Works

Essentially, a P2P system is maintained by users in a distributed network. Typically, they do not have a central system administrator or server because each node holds a copy of the files—acting as both a user and a server for other nodes. Therefore, each node can download files from or upload files to other nodes. In contrast, client devices in traditional server systems need to download files from a central server, which is the difference between P2P networks and other traditional service systems.

In a P2P network, the shared files of interconnected devices are stored on their hard drives. Software applications are used to transfer shared data, and users can also find and download files from other devices. If a user downloads a specific file, they can act as the source of that file.

In other words, when a node acts as a user, it downloads files from other nodes. But if it functions as a server, other nodes can download files from it. In fact, these two functions can be performed simultaneously (e.g., downloading file A while uploading file B).

Since each node can store, transmit, and receive files, and as the user base of a P2P network grows, it becomes faster and more efficient. The distributed structure also makes P2P systems more resistant to cyberattacks. Unlike traditional models, P2P networks do not have a single point of failure.

Based on their structure, P2P systems can be categorized, with the three main types being: unstructured peer-to-peer networks, structured peer-to-peer networks, and hybrid peer-to-peer networks.

Unstructured P2P Networks

Unstructured peer-to-peer networks do not exhibit a specific node architecture. Participants can communicate randomly. These systems are tolerant of high-frequency activity, meaning that frequent joining and exiting of nodes will not affect the system.

Although unstructured peer-to-peer networks are relatively easy to set up, they require more powerful CPUs and memory because search queries are sent to the maximum number of peers. Especially if only a small portion of nodes can provide the required content, a large number of searches will flood the network.

Structured P2P Networks

Unlike unstructured peer-to-peer networks, structured peer-to-peer networks exhibit an organized architecture that allows nodes to efficiently search for files, even if the content is not widely available. In most cases, searches are performed using hash functions to assist database lookups.

Relatively speaking, structured peer-to-peer networks are more efficient because they exhibit a higher level of centralization and require more initial funding and maintenance costs. Additionally, structured peer-to-peer networks are less tolerant of high-frequency activity.

Hybrid P2P Networks

Hybrid peer-to-peer networks combine certain features of traditional client-server architectures and peer-to-peer architectures. For example, they may establish a central server to accelerate connections between nodes.

Unlike the other two models, hybrid peer-to-peer networks tend to exhibit improved overall performance. They combine the advantages of each approach while achieving efficiency and decentralization.

Distributed vs. Decentralized

Although peer-to-peer structures are distributed, their degree of decentralization varies. Therefore, not all peer-to-peer networks are decentralized.

In fact, many systems require a central authority to guide network activities, making them more or less centralized. For example, some peer-to-peer file-sharing systems allow users to search and download files from other users, but they cannot participate in processes such as managing search queries.

Furthermore, some small networks controlled by a small number of users can be considered highly centralized, even if they lack centralized infrastructure.

The Role of P2P in Blockchain

In the early days of Bitcoin, Satoshi Nakamoto defined it as a "peer-to-peer electronic cash system." Bitcoin emerged as a form of electronic cash. Through a peer-to-peer network, it can be transferred between two users using a distributed ledger, namely: the blockchain.

In blockchain, the peer-to-peer architecture allows Bitcoin and other digital currencies to be transferred worldwide without intermediaries or any central server. Any user who wants to participate in the block validation process can set up a Bitcoin node.

Therefore, there are no banking steps or transaction records in the Bitcoin network. Instead, the blockchain serves as a public electronic ledger that records all transaction activities. Essentially, each node holds a copy of the blockchain and compares it with other nodes to ensure data accuracy. The Bitcoin network can quickly eliminate errors and malicious activities.

Nodes in the blockchain can play various roles. For example, full nodes validate transactions through consensus rules, ensuring network security.

Each full node maintains a complete, updated copy of the blockchain—allowing these copies to collectively verify the true state of the distributed ledger. It is important to note that not all validating nodes are miners.

Advantages

The peer-to-peer architecture of blockchain has many advantages. More importantly, compared to traditional client-server architectures, peer-to-peer networks offer higher privacy. Most nodes are almost resistant to "Denial of Service (DoS)" attacks that harm many systems.

Similarly, since adding data to the blockchain requires consensus from most nodes, it is nearly impossible for attackers to alter data, especially in large networks like Bitcoin. However, relatively smaller blockchains are vulnerable to attacks because an individual or organization often controls a large number of nodes (known as a 51% attack).

Therefore, under the premise of consensus from most nodes, distributed peer-to-peer networks make blockchains more resistant to malicious cyberattacks. The peer-to-peer model is the main reason the Bitcoin network achieves "Byzantine fault tolerance."

Beyond security, the peer-to-peer architecture allows digital currency blockchains to avoid censorship by central authorities. Unlike traditional bank accounts, digital currency wallets cannot be frozen or seized by governments. Personal payment processing and content platforms can also avoid corresponding censorship. Some online merchants have adopted digital currency payment methods to prevent third-party interference with their payments.

Limitations

Despite these advantages, using P2P networks in blockchain has certain limitations.

Since the distributed ledger must be updated on every node, adding transactions to the blockchain requires enormous computing power. While this enhances security, it also significantly reduces efficiency and has become one of the main obstacles to blockchain network scalability and adoption. However, cryptographers and blockchain developers are researching alternative solutions to address scalability issues. Notable examples include the "Lightning Network," "Ethereum Plasma," and "Mimblewimble Protocol."

Another potential limitation is the possibility of attacks during hard forks. Since most blockchains are decentralized and open-source, nodes can freely copy and modify the code and split from the main chain, forming new parallel networks. Hard forks are entirely normal and do not pose a threat. However, without proper security measures, both chains could be vulnerable to replay attacks.

Additionally, the distributed nature of P2P networks makes them relatively difficult to control and regulate. This issue is not limited to blockchain; certain P2P applications and companies are also involved in illegal activities such as copyright infringement.

Conclusion

The peer-to-peer architecture can be developed and applied in many different ways, and its central role in blockchain has facilitated the birth of digital currencies. By distributing the transaction ledger across a large network of nodes, the peer-to-peer architecture offers advantages such as security, decentralization, and resistance to censorship.

Beyond its advantages in blockchain technology, P2P systems can also be applied to other distributed computing applications, ranging from file-sharing networks to energy trading platforms.