Conducting digital transactions with a person in remote areas without rendering the services of a third-party warrantor was impossible. The subject matter of this article explains how blockchains have solved this problem in the form of Peer-to-Peer networks.
What is a Peer-to-Peer Blockchain Network?
A Peer-to-Peer (P2P) blockchain network is a direct exchange of cryptocurrencies between two investors in a digital manner. Usually, all types of transactions and transfers of value are facilitated by a centralized entity such as banks.
However, P2P transfers are decentralized concepts that allow traders to swap virtual currencies without relying on intermediaries. In this case, peers are nodes on the network that act as an updated copy of the blockchain ledger.
P2P digital transactions on the blockchain are warranted using a consensus mechanism that verifies the transaction authenticity.
How Does a P2P Network Work?
Every blockchain network has adopted a distinct p2p model based on its infrastructure and functionality. However, at their base, all nodes or peers on a blockchain are interlinked in a decentralized manner at the same level. Nodes may enter and exit independently and work in tandem with each other to ensure network integrity.
Every node is acting both as a client and server for every other node without any centralized hosting. Each node has the ability to download and share blockchain data with other nodes. Furthermore, nodes may share and receive data simultaneously depending upon the interoperability efficiency.
P2P networks work better when many peers are making it easier for new nodes to locate and connect. Meanwhile, transactions on p2p networks are done using escrow smart contracts that act as verifiers for the payer and payee.
Types of Peer-to-Peer Networks
Here are some of the most common types of P2P networks:
In this type of network, nodes have an organized structure allowing them to locate particular files. There is a small degree of centralization present in structured networks by design. The data accessibility in this system is simpler but it is more difficult to setup.
Unstructured networks exist without any defined edifice. It means that the network participants can join and exit at their discretion. At the same time, the communication between the nodes is randomized.
For this system to work, all nodes must remain active and require a high power CPU to support the network operations.
A hybrid network adopts some aspects of the traditional client-server approach. All nodes, in this instance, are listed on a centralized server for accessibility. Tasks delegation is done by distributed network application that appoints clients and servers among nodes based on client-server architecture.
Advantages of Peer-to-Peer Blockchain Networks
- Since p2p networks are decentralized therefore they do not suffer from a single point of failure like traditional client-server models.
- They offer greater resistance to attackers and can remain operational if one or a few nodes are compromised.
- Transactions on p2p networks are permission-less meaning that anyone can participate or exit independently.
- P2p networks can adapt based on increasing or decreasing in total number of nodes.
- P2p networks serve as game-sharing or other file-transferring mediums bringing more utility to the blockchain network.
- P2p networks allow users to perform decentralized transactions with nominal or zero transaction charges.
- P2p trading options at DEXs grant greater price control and payment alternative to traders.
Disadvantages of Peer-to-Peer Blockchain Networks
- Viruses or malware can spread across all nodes in a decentralized p2p network through a one-node invasion.
- P2p networks may be able to distribute copyrighted material without having proper authorization.
- A node can create a hard fork independently requiring other nodes to undertake updates to become compliant with the new governance rules.
- There may be ‘leecher’ nodes who consume the resources created by other nodes while refraining from sharing their resources.
- In some countries, governments are cracking down on P2P networks as a measure to control the cash flow to crypto markets.
- P2p options at exchanges can drain market liquidity which can lead to price inflation and increased trading risks.
- Scammers may exploit the charge-back feature used to apply for the return of cryptocurrencies to the payer, as a way to siphon funds.
P2p networks offer a payment alternative that is secure and free of cost. However, they are not free from associated risks such as loss of funds. It is best to denote a p2p transaction as paid before claiming a repayment to avoid the funds getting released from the escrow smart contract to the receiver wallet.