16. January 2021

P2P systems form the basis of blockchain

A peer-to-peer system is a network of equals. This idea was at the cradle of blockchain and is still dominant today. But there are many manifestations. If you want to understand the Blockchain, you need to understand the advantages, disadvantages and potential of peer-to-peer systems.

Differently structured and organized networks play a central role in today’s economy. And computer systems today are also regularly organized as networks. Whenever more than one computer is built into a software architecture, the question arises how such a network is organized. Basically, several archetypal forms of organization can be distinguished. The emergence of hybrid architectures in particular, which combine elements of purely distributed and centralized systems, makes it difficult to clearly identify peer-to-peer systems.

Purely distributed peer-to-peer systems represent a special type of so-called distributed systems. Here, each individual computer (also called a network node) is connected to other nodes without a central authority that has elevated privileges.

The diagram above shows the ideal type of a purely distributed peer-to-peer system. The term comes from the English “peer” and is usually translated as “colleague”, “peer” or “equal”. This also reflects the system logic within the software architecture. It is a network of equal computers that make their resources available to all other members in the network without a central coordinating body. These resources can be computing power, storage capacity, data or network bandwidth. It is important that all network nodes are equal in terms of their rights and roles in the system and simultaneously provide resources as well as consume them. Thus, the system is self-organizing and non-hierarchical within the system rules.

Advantages and disadvantages of distributed systems

The central advantage of distributed systems is the higher computing power through the combination of many computers, which are thus often superior to even supercomputers in terms of performance. And this also at lower costs, since simple system components are cheaper and also have maintenance-related cost advantages. Reliability is higher because the failure of individual network nodes does not bring the entire system to a standstill. Finally, scalability is also greater, since there is a high capacity for natural growth, depending on the openness of the system.

However, these advantages of distributed systems are also offset by potential disadvantages. Coordination and communication overhead is higher because there is no central “command authority.” Networks bring their own challenges, especially when not every participant is trusted. Network dependency is therefore not only an opportunity, but also a significant burden. The increased program complexity, at best, also impacts security concerns. The fewer restrictions there are on network access, the more difficult the security challenges.

Characteristics of peer-to-peer systems

Peer-to-peer systems allow individual network nodes to send, receive and store data in the context of an application. This enables direct exchanges between peers who can “communicate” and interact directly with each other. No intermediate entity is needed as an intermediary. This changes everything in practice. Traditional intermediaries such as financial service providers, brokers, publishers, notaries, etc. are no longer needed, for example. It is not difficult to imagine that this aspect has the potential to turn our economic and social fabric upside down in the long term.

  • The nodes of a peer-to-peer network thus have complete autonomy. They determine for themselves whether they do something, what they do and when they do it.
  • This autonomy also entails absolute self-responsibility. Censorship becomes impossible. No one restricts a node, but no one protects it either.
  • Once a transaction is made, it is irreversible. Nodes decide for themselves whether to disconnect and go offline or to be active on the network for only one hour per day, thus making their resources available.
  • This does not affect the functioning of the network, it still works. The liberation from dependence on a central authority creates degrees of freedom, but also self-responsibility.

Peer-to-peer systems offer interesting application possibilities

Not every peer-to-peer system is a purely distributed peer-to-peer system and thus corresponds to the ideal type outlined above. Modern peer-to-peer systems often divide their participants differently according to their qualifications and functions. This allows network participants to take on different tasks, thereby gaining efficiency. The opposite of a peer-to-peer system is a so-called “client-server model,” a centralized system in which a server offers its services and the client uses them.

Classic Internet-based applications of peer-to-peer systems away from the crypto-economy include instant messaging, file sharing, collaboration groupware, grid computing. In some cases, they also include web services in general. These often only enrich the applications of peer-to-peer systems. In some cases, these services complement and overlap each other.

Instant messaging enables the direct exchange of information between users via corresponding applications, whereby the users know who is currently available on the network. WhatsApp is a classic application, as is Skype. File sharing enables users to obtain files directly from the local hard drive of another user and combines search algorithms with decentralized data storage methods. Decentralized data storage thus prevents the entire system from coming to a standstill if one node fails. Freenet or Napster are prominent examples of such systems. Collaboration Groupware makes it easier for system participants to work together by supporting their communication and cooperation and also by coordinating workflows between groups of people.

Prominent representatives are, for example, the well-known Lotus Notes and the more recent product Groove from Groove Networks. Grid computing represents a form of computing distributed over many computers, in which a “virtual supercomputer” is created from a cluster of loosely coupled computers. Grid computing is used today in many areas, including commercial ones, such as pharmaceutical research, genome analysis, economics, electronic commerce, financial management, and risk management in construction dynamics. A typical use case for this is Genome@Home, for example.

The music industry has shown what peer-to-peer systems are capable of

When was the last time you bought a CD in a department store? There has been a huge upheaval in the music industry in recent years. Today, we download music via music portals, share MP3 files with friends or use streaming services. Apple now earns more through i-Tunes and other services than through the sale of classic hardware. And Spotify is the talk of the town, especially among the younger generation.

The music industry had a consistently successful business model for a very long time. Artists were signed to record labels. The record labels recorded the individual tracks, produced records, cassettes and CDs, and marketed them. The labels acted as an intermediary between musicians on the one hand and consumers on the other. Napster basically ruined this business model. Traditional music producers were no longer necessary as intermediaries.

Then Napster came along and played a major role in disrupting the music industry in the first decade of the 2000s. Napster used a peer-to-peer approach to search its customers’ computers for MP3 files. If it found such, it reported the IP addresses of the computers to a central server. The offers and search requests of other Napster customers were also received there. Napster then brought together two client computers where the supply and demand matched. The two clients could then contact each other directly and copy and transmit the piece of music. Thus, for a while, Napster as a platform was the fastest growing community on the Internet. The specially designed client-server system eventually proved disastrous for Napster for legal reasons. Napster was a centralized peer-to-peer system. But the disruption of the music industry had already taken place by means of a peer-to-peer system. Today, music largely spreads through platforms and streaming services.

Shawn Fanning, co-founder of Napster once put it this way: “The interesting thing is that you interact with others; you exchange data with any number of people.” Just peer-to-peer. About 15 years ago, I was once on the board of a listed industrial holding company that had a stake in a mechanical engineering company that produced equipment for manufacturing CDs. The business model of this mechanical engineering company also came under massive pressure. CDs are simply no longer in such demand. So the disruption in the music industry triggered via a peer-to-peer system has also radiated to completely different industries.

Peer-to-peer systems and their implementation in blockchain hold great opportunities

It is not only the music industry that is experiencing disruptive changes through peer-to-peer systems. It was just one of the first, as it was particularly vulnerable. Music is intangible, the cost of copying or data transfer is marginal, and a “middleman” in the form of an intermediary is not only expensive, it is also perceived as a censor. So it is with book publishers who reject book manuscripts, although both authors and readers may well be interested.

The biggest player threatened by massive disruption via blockchain-based peer-to-peer systems is the financial industry. And that is completely separate from cryptocurrencies. After all, traditional money is only made up of cash to a small extent. And so it is with most securities. All of that is stored in accounts in the form of bits and bytes. Storing, recording, lending or transferring sums of money or financial instruments means storing or transferring intangible assets. At present, this is still mostly done via intermediaries, be they banks, credit card organizations, stock exchanges, insurance companies, pension funds or similar institutions. In some cases, even the simple transfer of values involves numerous intermediaries. Just think of the purchase of shares or simple foreign transfers.

The great advantage of peer-to-peer systems now is that direct interaction between contracting parties can take place, eliminating intermediaries. This makes settlement safer, faster and cheaper. However, smart contracts via Ethereum are only one possible variant. Also currently centralized blockchains like Ripple, which in its final state will be a distributed peer-to-peer payment system and a currency market. Ripple is also where you see the span of blockchain technology. Ripple already does without “miners” as we know them from the world of Bitcoin, for example. More than 100 banks are currently testing the system or are already partners. Of course, banks will not disappear completely. But entire business processes will be lost, business areas will go to fintechs via outsourcing, and the hallowed halls will be partly emptied of people.

  • As digitalization advances in all areas of life, more and more aspects of everyday life and more and more goods and services will become immaterial. As a result, they are reaping the benefits of peer-to-peer systems.
  • This replacement of the mediating instance is referred to as disintermediation.
  • On the one hand, this poses a serious threat to many business models and companies; on the other, it represents a quantum leap in terms of productivity, transparency and speed.