In computer science, a group of devices that collectively store and share files is known as a peer-to-peer (P2P) network. Each node in the network acts as an individual peer and has equal power, performing the same tasks. The P2P architecture has various use cases, but it gained popularity in the 1990s with the creation of the first file-sharing programs.
In financial technology, P2P refers to the exchange of cryptocurrencies or digital assets via a distributed network. P2P platforms enable buyers and sellers to execute trades without intermediaries. Furthermore, some websites offer a P2P environment that connects lenders and borrowers.
Most cryptocurrencies use P2P networks, which form a significant portion of the blockchain industry. P2P architecture is also utilized in various other distributed computing applications, including web search engines, online marketplaces, streaming platforms, and the InterPlanetary File System (IPFS) web protocol.
How Does P2P Work?
Peer-to-peer systems are maintained by a distributed network of users, which doesn't have a central administrator or server. Each node in the network holds a copy of the files and acts both as a client and server to other nodes. This allows every node to download files from and upload files to other nodes, making it different from traditional client-server systems where client devices download files from a centralized server.
Using software applications, users can query other devices on the network to find and download files stored on their hard drives. After downloading a file, a user can act as a source of that file and upload it to other nodes. In practice, both functions can be executed simultaneously.
Since every node stores, transmits, and receives files, P2P networks are faster and more efficient as their user base grows. Also, unlike traditional models, their distributed architecture makes P2P systems very resistant to cyberattacks.
P2P systems can be categorized according to their architecture into three main types: unstructured, structured, and hybrid P2P networks.
Unstructured P2P Networks
In unstructured P2P networks, nodes do not have any particular organization, and communication between them happens randomly. These networks are known for their resilience against high churn activity, such as frequent joining and leaving of nodes.
However, since search queries are sent out to the highest possible number of peers, unstructured P2P networks may require higher CPU and memory usage. This can cause network flooding with queries, particularly if a few nodes offer the desired content. Although unstructured P2P networks are easier to build, they may not be the most efficient choice.
Structured P2P Networks
Structured P2P networks offer an organized architecture that enables nodes to search for files efficiently, even when the content is not widely available. This is made possible through the use of hash functions that simplify database lookups.
While structured networks are generally more efficient, they also tend to be more centralized and may require higher setup and maintenance costs. Moreover, structured networks may be less robust when faced with high churn rates.
Hybrid P2P Networks
A third type of P2P network is called a hybrid P2P network, which combines elements of both the client-server model and the P2P architecture. These networks often feature a central server that aids in the connection of peers.
Hybrid P2P networks tend to have better overall performance than unstructured or structured networks. By incorporating the advantages of both approaches, these networks achieve high levels of efficiency and decentralization.
Distributed vs. Decentralized
It should be acknowledged that although the P2P architecture is fundamentally distributed, not all P2P networks can be considered fully decentralized. Some systems still require a central authority to coordinate the network activity, thus leading to a more centralized approach.
For example, some P2P file-sharing networks only allow users to search and download files from other users without providing the capability to participate in other processes like managing search queries.
Moreover, even small networks with a limited user base and shared goals could still exhibit some level of centralization, despite the absence of a centralized network infrastructure.
The Significance of P2P for Blockchain
Blockchain technology relies on the inherent P2P architecture to manage the distributed ledger that powers Bitcoin and other cryptocurrencies. Satoshi Nakamoto defined Bitcoin as a "Peer-to-Peer Electronic Cash System" that enables digital money transfer between users across a P2P network. The P2P architecture allows users to transact without intermediaries or central servers. Anyone can set up a Bitcoin node to participate in verifying and validating blocks.
Transactions on the Bitcoin network are processed and recorded by the blockchain, which acts as a digital ledger. Each node holds a copy of the blockchain and compares it to others to ensure data accuracy, quickly rejecting malicious or inaccurate activity. Nodes can take on different roles in cryptocurrency blockchains, with full nodes providing security by verifying transactions against the system's consensus rules.
Full nodes maintain a complete, updated copy of the blockchain, allowing them to collectively verify the distributed ledger's true state. It is important to note that not all fully validating nodes are miners. The blockchain architecture ensures a decentralized and secure network, eliminating the need for banks or intermediaries to process transactions.
The use of P2P architecture in blockchains provides various advantages. One of the most significant is its enhanced security over traditional client-server setups. With blockchains distributed over numerous nodes, Denial-of-Service attacks that commonly affect numerous systems become almost impossible.
Furthermore, since the consensus of a majority of nodes is required before data can be added to a blockchain, it's complicated for an attacker to manipulate the data, especially in extensive networks like Bitcoin. In smaller blockchains, a person or group could potentially control a majority of nodes, leading to a 51 percent attack.
This is how blockchains, including Bitcoin, were able to achieve Byzantine fault tolerance. The distributed P2P network, combined with a majority consensus requirement, makes blockchains highly resistant to malicious activity.
In addition to enhanced security, the P2P architecture in cryptocurrency blockchains also makes them censorship-resistant by central authorities. Unlike bank accounts, governments can't freeze or drain cryptocurrency wallets. This resistance to censorship also extends to private payment processing and content platforms. Some content creators and online merchants have adopted cryptocurrency payments to avoid having their payments blocked by third parties.
The use of P2P networks on blockchains offers numerous benefits but also has certain limitations.
The main limitation of P2P networks is the significant computing power required to update distributed ledgers on every node, which reduces efficiency and presents a major challenge to scalability. However, developers are exploring potential alternatives to address this limitation, including the Mimblewimble protocol, the Lightning Network, and Ethereum Plasma.
Another limitation arises from hard fork events, where groups of nodes can copy and modify code to create a new, parallel network. If certain security measures are not adopted, both chains can become vulnerable to replay attacks.
The distributed nature of P2P networks makes them difficult to control and regulate, which has led to illegal activities and copyright infringements by several P2P companies and applications. This problem is not unique to blockchain but rather a broader challenge associated with P2P networks in general.
P2P architecture is essential for blockchains and allows for distributed transaction ledgers across networks of nodes, providing security, decentralization, and censorship resistance. Beyond blockchain, P2P systems have various applications for distributed computing, including file-sharing networks and energy trading platforms.