Around 300 million users worldwide use cryptocurrency. And the most popular one, Bitcoin, was created to exchange values directly and anonymously between users with a transaction model peer-to-peer, or other known as Peer to peer network that actually removes the need for a middleman, such as a broker or even a bank.
This model has set the foundation for peer-to-peer technology, blockchain technology to be precise, which powers all cryptocurrencies. These networks date back all the way to the 1980s when they were first brought into action for business purposes.
However, the concept was presented to the public in 1999, when Shawn Fanning created a service for music-sharing, called Napster.
In this article, we will break down the mechanisms of the P2P network, their association with the crypto exchanges, and blockchain technology.
The term peer-to-peer directs to networks of an interconnected computer system, which are decentralized that contains nodes or peers. Because all nodes are equal, and the data exchange of data happens without a central server, each computer or node can act as both a client and a file server.
For example, when a node is acting as a client, it downloads data from other users, and when it’s acting as a server it can download a source. But, to put this in a simple way the peers or computer systems that partake can at once provide and consume resources on the same network.
These mentioned resources can be storage, files, access to a scanner, printer, etc. There is absolutely no possibility of failure and no centralized authority. All nodes that are interconnected can engage in uploading, distributing, and storing files. Transactions are peer-to-peer, and they can take place directly between the two parties that are involved.
How does peer-to-peer work?
To explain this, let’s take each node in a network. They share files with every other node, and they do that without going through an administrator or a central authority.
As we mentioned above, the nodes act as both client and server to other nodes on the network. So, peer-to-peer networks work a little bit differently from our traditional client/server networks, where we are used to clients requesting certain resources from central servers.
There are three types of peer-to-peer networks, and they are categorized by their architecture. There are:
- hybrid peer-to-peer networks
Structured peer-to-peer networks are organized in a way that each node can search and locate specific resources. They use a hash table, which is distributed and which ties each file to a certain peer.
This is what makes it easy for nodes to get values that are assigned to a key. However, because this type is so efficient, it comes with a cost.
Networks that are structured request that nodes memorize a whole list of their neighbor that fulfill certain criteria.
This lack of flexibility actually makes them less efficient in networks that have high churn rates.
The most common and the easiest type of peer-to-peer to set up are the unstructured networks. The nodes in this network are randomly connected and there is no structure that is imposed on them.
So local optimization is possible here. Because all the nodes perform the same function, these unstructured networks are strong and can resist high churn rates, or in other words, peers of high frequencies leaving and joining the peer-to-peer network.
However, the downside of the unstructured networks is that the requesting peer has to practically flood the network with the search query to find as many peers as possible with the desired file.
This flooding uses up a whole lot of memory, and since we said that each peer is not assigned a certain content, there is no assurance that this flooding will help us find the desired file.
Hybrid networks are in fact a combination of traditional client-server and peer-to-peer models. Usually, a hybrid model includes a central server that provides server-client centralized and structured functionality.
For example, it helps nodes find each other, and on the other hand, is made up of decentralized combinations.
Typically, hybrid peer-to-peer models perform better, since they are basically a combination of the best networks, both structured and unstructured peer-to-peer networks.
Peer-to-peer in Blockchain
As the crucial element of the blockchain industry and technology, the architecture of P2P manages cryptocurrency transactions. They leverage the power of P2P blockchain technology, as they can be transferred or exchanged without any central body.
A blockchain is something like distributed archive technology, which can permanently and publicly store transactions. When new blocks come in containing transaction data, they are continuously linked to the previous blocks that are already filled, and in that way, they form a chain of data or, in other words, a blockchain.
Peer-to-peer networks play an important role in blockchain technology because they support a decentralized ledger of transactions. How the chains are not kept at a location that is centralized, the nodes that are present in the network absorb them in some way.
And as a result, each node has a copy of the blockchain, along with information about the transaction, and in that way is securing and validating data that is stored on the network.
Peer-to-peer networks – Benefits and limitations
As we mentioned above, peer-to-peer networks offer efficient transactions and increased censorship resistance, while transforming files and sharing data.
Instead of traditional client/server networks, where information is requested by the client from the centralized servers, peer-to-peer networks allow nodes to directly communicate with each other.
This decentralized design has many benefits, including resilience to failure, improved network efficiency, and privacy.
Although there are several benefits, peer-to-peer networks also have some limitations we must consider when using or designing them.
Benefits of peer-to-peer networks
First of all, let’s mention improved network efficiency. In peer-to-peer networks, nodes improve network efficiency by their participating in forwarding and routing data, without the need for servers or dedicated routers.
The next great thing P2P networks provide is the resistance to failure. These networks are more resilient to failure than centralized networks because the loss of a single node doesn’t affect the entire network at all.
When we talk about privacy peer-to-peer networks are usually considered more privacy-friendly than traditional centralized networks, as there is absolutely no need for any central authority to access or store user data.
Peer-to-peer networks are designed to be scalable. This means that each node or peer can act like a server, preventing any hold-ups that happen in centralized systems when the number of clients escalates.
So, when the number of clients increases in P2P networks, the number of servers equally increases.
When it comes to cost P2P networks are significantly cost-effective because the costs don’t pile up around one authority, but instead are distributed.
Limitations of peer-to-peer networks
Peer-to-peer networks are often slower than networks that are centralized, due to the increased number of movements of data from one segment in the network to the other.
However, that movement is required to reach all nodes. In addition, peer-to-peer networks can be more challenging, and difficult to manage because there is no central authority that is responsible for network operations.
When analyzing the benefits and limitations of peer-to-peer networks, it is crucial to consider the specific use for which a network will be used.
The peer-to-peer network has become cardinal technology for many applications and services, thanks to its decentralized, reliable, and secure framework.
Currently, P2P networks are used in online marketplaces, file-sharing applications, and open-source software. Cryptocurrencies are a huge landmark of the P2P model, issuing incredible security and improved transparency in the financial domain.
All of these developments have reached the next step with the arrival of peer-to-peer crypto exchanges, and it has truly transformed the crypto space into a network that is decentralized by using peer-to-peer technology.
P2P blockchain technology has gathered several applications, mostly cryptocurrencies, with Bitcoin on the top, being the most popular. Blockchain also supports data applications, as mentioned, non-fungible tokens, finance, and gaming.
Eventgouh blockchain technology is still growing and evolving, other businesses are exploring the ways in which a publicly decentralized system can magnify their operations.