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Peer-to-Peer Networks Explained | Binance Academy

What is peer-to-peer (P2P)?

In financial technology, the term peer-to-peer usually refers to the exchange of cryptocurrencies or digital assets via a distributed network. A P2P platform allows buyers and sellers to execute trades without the need for intermediaries. In some cases, websites may also provide a P2P environment that connects lenders and borrowers.

P2P architecture can be suitable for various use cases, but it became particularly popular in the 1990s when the first file-sharing programs were created. Today, P2P networks are at the core of most cryptocurrencies, making up a great portion 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 P2P work?

In essence, a P2P system is maintained by a distributed network of users. Usually, they have no central administrator or server because each node holds a copy of the files – acting both as a client and as a server to other nodes. Thus, each node can download files from other nodes or upload files to them. This is what differentiates P2P networks from the more traditional client-server systems, in which client devices download files from a centralized server.

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

Put in another way, when a node acts as a client, they download files from other network nodes. But when they are working as a server, they are the source from which other nodes can download files. In practice, though, both functions can be executed at the same time (e.g., downloading file A, and uploading file B).

Since every node stores, transmits and receives files, P2P networks tend to be faster and more efficient as their user base grows larger. Also, their distributed architecture makes P2P systems very resistant to cyberattacks. Unlike traditional models, P2P networks don’t have a single point of failure.

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

Unstructured P2P networks

Unstructured P2P networks don’t present any specific organization of the nodes. The participants communicate randomly with one another. These systems are considered robust against high churn activity (i.e., several nodes frequently joining and leaving the network).

Although easier to build, unstructured P2P networks may require higher CPU and memory usage because search queries are sent out to the highest number of peers possible. This tends to flood the network with queries, especially if a small number of nodes is offering the desired content.

Structured P2P networks

While structured networks may be more efficient, they tend to present higher levels of centralization, and usually require higher setup and maintenance costs. Other than that, structured networks are less robust when faced with high rates of churn.

Hybrid P2P networks

Hybrid P2P networks combine the conventional client-server model with some aspects of the peer-to-peer architecture. For instance, it may design a central server that facilitates the connection between peers.

When compared to the other two types, hybrid models tend to present improved overall performance. They usually combine some of the main advantages of each approach, achieving significant degrees of efficiency and decentralization simultaneously.

Distributed vs. decentralized

Although the P2P architecture is inherently distributed, it’s important to note that there are varying degrees of decentralization. So, not all P2P networks are decentralized.

In fact, many systems rely on a central authority to guide the network activity, making them somewhat centralized. For instance, some P2P file-sharing systems allow users to search and download files from other users, but they are unable to participate in other processes, like managing search queries.

In addition, small networks controlled by a limited user base with shared goals could also be said to have a higher degree of centralization, despite the lack of a centralized network infrastructure.

The role of P2P in blockchains

So, there are no banks processing or recording transactions in the Bitcoin network. Instead, the blockchain acts as a digital ledger that publicly records all activity. Basically, each node holds 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.

Advantages

Beyond security, the use of P2P architecture in cryptocurrency blockchains also renders them resistant to censorship by central authorities. Unlike standard bank accounts, cryptocurrency wallets can’t be frozen or drained by governments. This resistance also extends to censorship efforts by private payment processing and content platforms. Some content creators and online merchants adopted cryptocurrency payments as a way to avoid having their payments blocked by third parties.

Limitations

Despite their many advantages, the use of P2P networks on blockchains also has certain limitations.

Moreover, the distributed nature of P2P networks makes them relatively difficult to control and regulate, not only in the blockchain niche. Several P2P applications and companies got involved with illegal activities and copyright infringements.

Closing thoughts

Peer-to-peer architecture can be developed and used in many different ways, and it is at the core of the blockchains that make cryptocurrencies possible. By distributing transaction ledgers across large networks of nodes, 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.

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