Peer-to-Peer Networks

With the emergence of Sharing Economy offerings such as AirBnB, Uber and Co., individuals can offer each other services through digital marketplaces. Pure peer-to-peer networks (P2P) such as Bitcoin do not require a centralized platform. Thus, the question arises what P2P actually means and what advantages P2P-networks promise to provide?

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Peer-to-Peer Networks

A peer-to-peer system is a network in which people (or peers) interact with each other without a central controlling body (Hu, 2017).

In a peer-to-peer system (P2P), network participants interact directly with each other and organize themselves decentrally. This means that no middlemen (intermediaries) are needed in such a system. In the sharing economy, services such as AirBnB or Uber have made it possible for private persons to offer their homes or travel services directly to others. As a result, the hotel and taxi market has become more decentralised. However, these are not P2P systems in the strict definition, as the services of the peers are mediated via a centralised platform, which charges a margin for this service.

Examples of peer-to-peer systems are farmers’ markets, student study groups, BitTorrent, or Bitcoin. In contrast, shopping centres, petrol stations, schools, post offices, banks or insurance companies are not P2P systems because intermediaries are involved (Hu, 2017)

The most prominent example of a pure P2P system is Bitcoin. In the white paper “Bitcoin: A Peer-to-Peer Electronic Cash System”, Nakamoto (2008) describes a system that eliminates the so-called double spending problem for the first time and represents a digital means of payment that can function without an intermediary such as a bank.

Advantages of P2P systems

• Freedom (because no central authority is involved)
• Fast interactions between the network participants
• No single point of failure
• Distribution of power

Disadvantages of P2P systems

• High coordination efforts
• Requirements for legitimated and standardized rules
• Hardly compatible with existing legislation
• Inefficient decision making

Decentralisation

In the context of peer-to-peer networks, the term decentralization is often referred to. Since the term decentralization is used in an inflationary and incorrect manner, Buterin (2018) distinguishes between three types of decentralization:

• Political decentralization
• Architectural decentralization
• Logical decentralization

According to Buterin (2018), blockchain systems are politically decentralized. This means that they are not controlled by anyone. Globally distributed network nodes also have a decentralised structure (architectural decentralisation), which means there is no single point of failure. In terms of logic, blockchain systems are highly centralised. The blockchain protocol is the manifestation of the rules according to which the P2P system acts and how the system is structured. As the past has shown, this can lead to challenges. Changes in decentralized system are very difficult to implement, because this requires the coordination of all actors involved. An example of this was the debate about the increasing of the block size of the Bitcoin blockchain, which ultimately led to a splitting of the blockchain into Bitcoin and Bitcoin Cash. For this reason, many researchers are currently working on the governance of blockchain systems.

Sources

Buterin, V. (2018, Juli 24). The Meaning of Decentralization [Blogpost]. Retrieved January 2 2020, from https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274

Hu, A. (2019, April 24). WTF is peer-to-peer? [Blog post]. Retrieved January 2, 2020, from https://medium.com/blockchain-beat/wtf-is-peer-to-peer-4b865d29e44e

Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System [Whitepaper]. Retrieved November 2, 2019 from https://bitcoin.org/bitcoin.pdf

About the Author

Severin Kranz has worked for several years as a consultant in the Fintech sector and in asset management. Since 2015 he has also been intensively involved with crypto currencies and distributed ledger technologies. Through his Master in Business Innovation at the University of St. Gallen, he researches on governance mechanisms of distributed ledger technologies has specialized in business model innovations as well as human-centered innovations through design thinking.

Disclaimer

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