WTF is peer-to-peer?

Decentralization is a concept that’s key to understanding how blockchains work. What are blockchains? Have you ever heard of Bitcoin? Altcoins? Cryptocurrencies? Yes, you have. Now you’re intrigued. Buckle up and join me on this buzzword debunking adventure.

In this article, I’ll explain in simple terms what decentralization is, and give you some examples of what peer-to-peer systems are and aren’t. By the end, I hope you’ll have a better foundation of knowledge about blockchain technology.

Peer-to-peer technology has been around for a while. You might recognize it from the days of Napster, Limewire, or BitTorrent. Today’s open source software projects produce a sort of pseudo-P2P system, and companies like Airbnb and Uber unlock the “sharing economy” to simulate P2P networks. This buzzword is alive and stronger now more than ever, in the form of cryptocurrencies and in talking about “the blockchain”. So what exactly does it mean for a system to be P2P?

A peer-to-peer system is a network in which people (or peers) can communicate and be productive with each other without a central governing body. Let’s break this down by starting with some context on what P2P systems are not.

Non-P2P systems

1. Grocery Stores — individual farmers sell produce to a centralized store, individual customers buy items from the central store
2. Gas Stations — individual cars visit a central gas station to buy and fuel up on gas
3. Schools — individual students and parents flock to a centralized school, and the school’s central management decides things like curriculum and teacher salary that in turn affect individuals
4. Post Offices — individual letters are sent to a centralized office, then organized, transported, and delivered by the centralized organization to individual end recipients
5. Banks — individual customers store and retrieve money in a centralized bank via deposits and withdrawals, then a centralized bank management uses the money to invest back into assets and lend out to people

What all of these non-P2P examples have in common is 1) a centralized unit that acts as a service provider, and 2) individuals that the service provider serves. In other words, in these systems, there’s one leader that takes charge of the system, and a bunch of followers who interact with the leader. There are pros and cons to this structure:

Cons: To the individual consumers, a weakness of centralization is that the service provider (i.e. the bank, store, school), a.k.a. the leader, can abuse its power at any time, by raising prices, setting new rules, and denying education, etc. Centralized systems are also vulnerable to a single point of failure. For example, robbing a bank where all the money is stored in one location may completely destroy the value and trust that thousands of individuals have placed into the bank.

Pros: Sometimes a central authorities is absolutely required in order for an organization to run smoothly. Centralized systems have power concentrated in a focused way, and having a central authority set and enforce swift decisions can be very beneficial.

Now, what are some currently existing P2P systems?

P2P systems

1. Farmers markets — individual farmers and customers agree to meet up in a common space to buy and sell groceries
2. Extracurricular study sessions — individual students meet up at an agreed-upon time and place to study and help each other learn
3. Google Docs — individual collaborators write on a shared document that updates itself as people contribute; there’s no one dictator that decides how the paper should be written

In these examples, individuals decide on a standard mode of operation — a common space, predetermined time, or a virtual document — and operate within the boundaries of that standard by buying and selling or studying together or writing thoughts down. There are no pre-determined leaders or followers. There are just people, peers, individuals, working together to achieve a common goal.

Cons: The changes necessary for keeping the group happy, productive, and healthy might take a long time to manifest because they depend so much on individual transactions propagating through the network.

Pros: The interactions between individuals can happen very quickly, and the group has a lot of freedom to decide how to change as a whole, since there is also no central authority deciding and controlling how things “should be”.

An example of a good P2P system is BitTorrent, a file-sharing software and network. If you want to download a CD on the internet, you don’t need to pay iTunes for their music service. You can ask 5–10 of your peers on the internet to give you bits and pieces of the CD, and to keep the system working, in return, you give some bits and pieces to other people who are asking for the same CD. The BitTorrent system works well because everyone on the system agrees to use BitTorrent to talk to each other, which means there’s no need for a central authority figure to decide what information to store on the internet and who can get what. The pitfall is that illegal copies of CDs are often shared, and it can be hard to limit that sharing without a central authority stepping in and making executive decisions.

So now what?

The idea of making decentralized systems fast and safe to use is key to the cryptocurrency craze that’s currently blossoming. Cryptocurrencies are all about using the power of the internet to create efficient P2P systems where there couldn’t be any before. Bitcoin, the largest and most famous blockchain, is seeking to disrupt the centralized control that banks and other financial institutions have over money — and it’s been doing well! In the past half year: the network value of Bitcoin has increased from $16 billion in March to over $70 billion today. In terms of existing capital in the world, this isn’t much, but it’s still the largest and most successful cryptocurrency in the world right now.

The reason why cryptocurrency prices have been growing so much may be up for debate, as some people think the whole movement is just a bubble while others think these early prototypes have already revolutionized the world. One thing is for sure, and it’s that the peer-to-peer, decentralized nature of the technology allows Bitcoin and other cryptocurrencies to make a bold claim: with the power of the internet, we can make a secure, valuable, and faster monetary system than any that has existed in the world economy thus far. Bitcoin’s short history has enforced some of the advantages and disadvantages of a P2P system. Borderless money and automatic checks on double-spending are baked into the network, but the costs have manifested as slow transaction speeds and electricity waste via mining. Only time and community effort can tell how Bitcoin will perform as a player in the world economy. Just be sure to keep an eye out for how the world evolves towards decentralized systems!

Wait.. I’m still confused, where can I learn more?

• For more background on how “agreement” works and why it’s so important in a P2P network: Blockchain for non-techies, pt 1 — agreement
• Dissecting what “decentralization” is, written by the cofounder of ethereum, Vitalik Buterin: The Meaning of Decentralization
• The best newsletter for current events in the cryptocurrency space (that I’ve found so far): Token Economy
• WTF is money even?! Best YouTube series explanation

Did this overview of P2P systems whet your appetite for understanding cryptocurrencies? Do you have more examples of P2P systems? Please leave a comment or question below, and if you found this read useful, please leave me a couple of claps!

Edit: Made some tweaks to formatting and wording thanks to Matthew Ray Chiang and Gabriel Kaufman.