> Blog > Blockchain Applications of Peer-to-Peer Networking

Published October 26, 2022

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As you learn more about how cryptocurrency works, you’ll inevitably come across the term “peer-to-peer” (P2P) networking. This is an important concept to understand, as it forms the basis of how most cryptocurrencies function.

So, what is a peer-to-peer network, and how do cryptocurrencies use peer-to-peer networking to facilitate transactions? This article will explore the concept of P2P networking and explain why it may be the key to the future of finance.

What is a Peer-to-peer (P2P) Network?

In the most basic terms, a peer-to-peer network is a decentralized network of computers that can share data and resources without the need for a central server.

If you’re old enough to remember Napster, the music sharing software that gained popularity in the late 1990s, then you may already have a basic understanding of how P2P networking works.

Napster was a computer program that allowed users to share MP3 files directly with one another as opposed to downloading the files from a single site. When you wanted to download a song, the program would connect you directly to someone who already had that song downloaded on their computer, and the file would transfer directly from their computer to yours without going through a central server.

Napster was eventually shut down due to copyright infringement, but the concept of peer-to-peer networking lived on.

You might have even used peer-to-peer networking recently without realizing it. If you’ve ever used Skype, for example, then you’ve used a P2P network. Skype connects users directly with one another, without routing their calls through a central server.

The same principle applies to many other protocols like BitTorrent, which allows users to share files directly with one another, and more recently, cryptocurrencies like Bitcoin, Litecoin and Ethereum, which enable peer-to-peer financial transactions without the need for centralized authorities like banks or payment processors.

Advantages of Peer-to-peer Networks

Peer-to-peer networks offer many advantages over traditional, client server-based networks.
For one, P2P networks are more resistant to censorship and attack because the data is decentralized rather than stored in a single location on a traditional network.

Peer-to-peer networks are often faster and more efficient than traditional networks too. This is because users share data and resources directly between each other, without having to go through a server. The decentralized nature of peer-to-peer networks enables the use of distributed ledger technology, where data is stored on many computers across the network, which can contribute to the network’s security and immutability.

Here are some key features that differentiate peer-to-peer networks from their client server-based counterparts: 

  • Security and privacy: Peer-to-peer networks are considered more secure than centralized networks because there is no single point of failure. They can offer more privacy than traditional networks, as personal data is not stored on a central server.
  • Fault tolerance: If one computer in a peer-to-peer network goes offline, the rest of the network can continue to function as usual. This is not the case with centralized networks, where a single point of failure could bring down the entire system.
  • Scalability: Peer-to-peer networks can scale more easily than traditional networks too. This is because the network is not reliant on a central server, which can become overloaded as more users are added. Instead, users can simply link into the network and contribute to its expansion.
  • Decentralization: One of the most important features of peer-to-peer networks is that they are decentralized. This means that there is no central authority or server that controls the network. Instead, each computer on the network is considered a “peer,” and each peer has an equal say in how the network is run.
  • Transparency: Peer-to-peer networks can be more transparent than traditional networks, as all data may be stored on a distributed ledger that is visible to everyone on the network. This is an important feature of cryptocurrencies, which store transaction data on the blockchain where anyone can take a look.
  • Censorship resistance: Peer-to-peer networks are often more resistant to censorship than traditional networks. Though governments may still be able to block access to certain websites or applications, it is much more difficult to take down an entire peer-to-peer network than a client-server network.

Types of P2P Networks

Types of p2p networks

Peer-to-peer networks typically fall into one of the following three categories: 

  • Unstructured networks lack a centralized server or index of files. Instead, each computer on the network maintains its own list of files and shares them with other computers on the network. The Napster file-sharing network was an early example of this kind of network. 
  • Structured networks organize data using a centralized index of files, and organize those files into “swarms.” Swarms are groups of computers that share a particular file or set of data, and organizing data in this fashion can improve the network’s efficiency. 
  • Hybrid networks combine features of both unstructured and structured networks. The most popular example of a hybrid network is the BitTorrent protocol, which uses a centralized tracker to organize files into swarms, but also allows for unstructured peer-to-peer sharing outside of the tracker.

The Role of P2P Networks in Blockchain Technology

Two peers swapping cryptocurrencies

Blockchain technology leverages peer-to-peer networking to create a distributed database, where each “block” of data is replicated across the network and verified by consensus. This consensus process helps keep the data on the network accurate and safe, as any malicious changes to the data would need to be made on every copy of the database.

The decentralized nature of peer-to-peer networks enables the use of distributed ledger technology, where data is stored on many computers across the network instead of on a single server. This makes the data more secure as there is no single point of failure.

In the context of financial transactions, peer-to-peer networks enable “trustless” systems, where two parties can transact without the need for a third-party intermediary. People can now use peer-to-peer networking in the form of cryptocurrency to transact directly with one another regardless of where they are in the world, and without the need for a bank or other financial institution.

Understanding Peer-to-peer Networks with FTT DAO

FTT DAO is excited about what P2P networking and blockchain technology can mean for the future of finance. Though the technology has already been around for a couple of decades, we’re really just beginning to scratch the surface of what’s possible.

As we transition from centralized systems to a more decentralized world, it’s important to have a clear understanding of this technology and how it works. We hope this article has helped you to better understand peer-to-peer networking, and how it might impact the way we transact with one another in the years to come.

If you’d like to learn more about blockchain technology and the fascinating ecosystem of applications living on it, check out the FTT DAO blog for more educational resources. Follow FTT DAO on Twitter, and follow the FTT DAO YouTube channel to keep up with FTT news and the latest developments in crypto.

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