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Peer-to-Peer Networks and Adaptations

A p2p network

A Peer-to-Peer network (P2P) is an interconnected system of computers regarded as peers, with the capabilities to share information and resources without the need of a central server. Peer-to-Peer networks have been around for decades and range from very simple cases such as an office interconnection between computers allowing them to access and share files without a server to a more sophisticated network like that of bitcoin.

Our interest is in the adoption of peer-to-peer networks in modern day finance. There have been several uses of peer-to-peer networks before its use and adaptation by Satoshi Nakamoto in the invention of Bitcoin. Presented 2008 in a whitepaper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. The peer-to-peer network introduced by bitcoin is a solution to previously invented cryptocurrency with the flaw of double-spending. Previous attempts to create a digital coin using digital signatures to enforce ownership were successful for ascertaining coin ownership. On the other hand they could not allow parties to verify if the owner had previously issued this coin as payment.

The introduction of peer-to-peer and proof of work (POW) system by bitcoin solved the problem of double spending, and eliminated the need of a central authority usually called the middleman. It’s pertinent to note that proof of work does not in itself create a peer-to-peer network, but is a solution to secure the information shared by peers in the network in chronological order thus tackling the problem of double spending, and eliminating the middleman.

Since the use of proof of work by bitcoin that requires intense energy, other systems like proof of stake (POS) have been introduced as alternative solutions. Ethereum switched to a POS in 2022 in an attempt to reduce the energy, increase speed, and as claimed, to improve security of the network.

The need to circumvent the middleman has led to different adaptations of the peer-to-peer system, such as peer-to-peer lending where peers can lend money to other peers in a network without going through a central authority or most popular in the crypto space, a peer-to-peer trading, where peers exchange their coins for fiat equivalent with other peers. Often the popular use of peer-to-peer trading has introduced a more central approach where a central authority runs an escrow for the peers involved. There are several platforms that have attempted to restore decentralization in peer-to-peer trading, however such platforms require more technical know-how and at best require human intervention. Which redefines peer-to-peer trading in a different light from that conceptualized in the bitcoin network. Such adaptation priortize the participation and interaction of peers with one another.

These adaptations have sacrificed decentralization for simplicity and practicality where assets of different natures are traded, say bitcoin for naira. Peer-to-Peer trading can thus be central providing peers a means to exchange value while reducing the role of a central authority to that of an umpire called an escrow.

This approach requires trust in the central authority offering this escrow service. As stated earlier, there are decentralized peer-to-peer platforms with the goal to retain decentralization and or automate the process as much as possible. However, centralized peer-to-peer platforms are more popular given their scalability, simplicity, and low barrier to entry.

While the use of a peer-to-peer network by bitcoin ushered in a new form of payment, elsewhere something disruptive was occurring with Airbnb. The company that would revolutionize tourism, allowing home owners the ability to make money off their houses by short-letting it to guests at an agreed price. The approach used by Airbnb is also widely known as the sharing economy. Interestingly the sharing economy is also referred to as a form of peer-to-peer system.

In my opinion, a peer-to-peer system has the capabilities of transforming and disrupting industries and systems as bitcoin to money, p2p crypto trading to regular on/off-ramps, Airbnb to tourism, etc. Whether these platforms have accompanied with them the extra security of a decentralized ledger like bitcoin, doesn’t make them less disruptive. For each platform, the goal must be on how much control the peer-to-peer system is offering the peers and how much control is being taken from the central authority. In the case of a centralized peer-to-peer trading, the traders take control of setting rates, terms of trades, and method of payment. In the Airbnb case, home owners can set their prices and guests can negotiate a fair price directly with the owner, this changes the usual guest, hotel relationship or interaction.

The peer-to-peer approach employed in the invention of bitcoin is the necessary and practical solution required to circumvent the middleman while tackling double-spending. In tourism, a practical solution employed by Airbnb does not require a decentralized ledger before attaining its necessary function. In a similar way innovators must learn to employ at first, the adaptation of a peer-to-peer system that is both practical and solves the underlying challenges of a system before the pursuit for a “Bitcoin like system”.


Mario Egie

Mario is one of Africa’s leading young techprenuers setting the pace in the crypto & finance industry, Mario has been building software for 6+ years while also holding a U.S. Consulate Fellow entrepreneurship award from the U.S. Consulate General Lagos, and is an Alumni at The Tony Elumelu Foundation.