A Person to Person (P2P) system is a natural way for people to interact in the field of exchange. Digital P2P platforms and applications have gained huge popularity over the past few years, as they are secure, transparent and meet the needs of users. Such platforms allow the exchange of digital assets, while creating a powerful community of people interested in the smooth operation of the platform. Below we will take a closer look at how a P2P system works and why this is a platform of decentralization.
P2P as a native way of exchange of goods
Most of us had a taste of decentralized exchange in our childhood. We exchanged various items with our friends and acquaintances: pokemon cards, stickers or other little valuables, which were important to our social group in those times.
There is no need for rules outside this community: only members of the group can decide on the rules of exchange. Moreover, members independently choose the unit of exchange, which carries a certain value and has an equivalent value. If a certain group of people is interested in such an exchange, then the system starts working.
For example, let’s assume that our community is a group of classmates. And all of these kids know the necessary exchange equivalents. That is, a glitter sticker costs 3 regular stickers, and 1 regular sticker can be purchased for a candy. Thus, exchange rules were formed within the community, according to which everyone can get something. But in order to “log into” this system, you would still have to spend real assets (or your parents’ assets). You would have to buy stickers or candy. Even more: rules of exchange are NOT mandatory. Unit of exchange can be changed from day to day, and members can decline to make exchanges. And there is no third-party to force this exchange.
Borrowing some loyalty points (Frequent-flyer miles) or some gift promo cards works the same way but for adults. You get some digital thing with intrinsic value and can provide or borrow it. Also, you can sell your $100 gift card for $80 or $100, because there is a free market.
Now that a digital asset has appeared, interactions in the community for the exchange of such an asset have changed a little (compared to offline).
Let’s think about a group of users that want to buy bulk of baby diapers abroad.
50 moms and each of them want a 1 year supply of the same diapers (same size). They create a WhatsApp chat.
Eventually, their community begins to attract new users. After a while, the community grew to 500 people who also wanted to buy and sell their assets. Some of them are well-known, some of them “friends of friends”, some of them are no-name accounts. There are no such things as “persons” online, there are some accounts with their IDs.
After this more than 200 moms fund the Diaper Group buy. They receive a huge discount of 80%! Instead of $2000 they fund only $400 per person. And every one of them receives a voucher – when the time comes (In 4 months), they can exchange the voucher for a big box of diapers. But then a pandemic hits, and they receive digital vouchers instead of paper ones.
And of course they will resell their vouchers! But how to prevent double spending? How to make sure that the seller of the voucher didn’t copy and use it before? There is a typical solution: somebody should become a middleman and be a part of every exchange and make a log of every transaction.
But in this way:
- Middleman knows private info and can fake and use vouchers by himself
- Middleman can fake some deals (his friends sell the same voucher for many persons and middleman approves this)
- Middleman can change the rules
And the greater the volume of transactions and the more participants in the system, the greater the risk. There are some complicated ways to fix this, but in the end middelman has more power, more knowledge and can change rules. In other words, in this case, we become a part of a centralized system and lose all P2P benefits.
P2P accounting System: Transparency of actions can replace middleman
Let’s replace middleman with the system, where every community member is a middleman for every other community member. This is very easy: everybody should control every action of every asset in the community.
- A receives a voucher.
- B receives a voucher.
- A sends a voucher for B.
- B sends a voucher for X.
At any moment of time every member of the community knows all the dispositions of each asset in the system. There is no need to “take a look”, “ask”, or “check”. In other words there is no need to trust anybody, because the member already has all the information on his ledger.
Transparency replaces “trust” with “knowledge”
And this is where Blockchain comes into play. The blockchain system is a kind of recording system that allows you to track who and to whom transferred the asset. Each account on the platform attached to the blockchain keeps a record in a separate block about who and to whom transferred the asset. This transaction record is called a ledger.
There are different ways of creating and keeping this ledger. It can be done offline, in classic workbooks. But the key is that every ledger in the system has to be kept exactly the same. And each valid transaction should be added to every ledger in the system.
Cryptocurrency as a core of digital P2P systems
Blockchain fixes interactions and trust problems with transactions, but there can still be problems with third-party assets themselves (like gift cards or loyalty points). Users may use blockchain as a recording of transactions of those third-party assets, but because of their third-party nature, there is a threat that the assets will be double spent or forged (although it will not affect the blockchain recordings). Also, if the assets we are talking about are centralized-issued, they can have mandatory restrictions too, preventing complete freedom of their trade.
To fix this problem, the cryptocurrency was proposed. Cryptocurrency is the digital token created specifically for the digital P2P system. System can control rules of emission and destruction of tokens. There is no way to bring other assets from outside (if it wasn’t formulated in rules before).
Not all cryptocurrency is based on the blockchain, and not every blockchain has cryptocurrency.
But it is the realization of cryptocurrency on blockchain that has introduced a new way of digital P2P interaction. It brought:
- A transparent system, where every actor can monitor what is happening and doesn’t have to trust anyone
- An asset that cannot be forged within a system, which is proven by the blockchain
This environment can be pictured as an enclosed glass box with a lot of hand-size holes and big balls inside: you can hold them, touch them, trade them, but you can’t take them out or put a new one inside.
These balls can’t be doubled. In every moment of time the number of balls equals the number of vouchers for diapers. It is easy to join the system and get yourself one of the balls. There is even no need to know who (in real life) will receive these diapers. And there is no middleman.
Emitting our own assets helps to create a trust zone inside this environment (because rules behind these assets are transparent and open). And this leaves us with three important principles:
- Cryptocurrency, owned and controlled solely by the holder. Nobody can take your crypto-holdings within a system and there is no middleman to burn or double it
- A value of cryptocurrency also emits from its security, discreteness and a direct connection to a user
- The system is permissionless: everybody can connect and participate in trading, obliging the rules
Blockchain = transparency
Blockchain is a digital way to create a transparent environment for this type of P2P systems. The main objectives of blockchain are:
- To combine all information (all transactions in the system) in blocks
- Link one block to another without possibility to replace it in future with cryptography methods
- Provide a convenient way to add transactions into the blocks
Why is it called “cryptocurrency”? Because it’s cryptography that makes tokens inside the system unforgeable, and the rules – unbreakable. For the sake of our narrative fluidity, we won’t get too deep into technical details, but if you want to dive into it, here are some helpful links:
So, the blockchain is basically a protocol that can record P2P transactions between users. It can help to write a log of actions in a transparent P2P system without possibility of replacement.
Blockchain is a log where knowledge can be written.
Blockchain is a unique tool for monitoring and coordinating the actions of participants in a P2P system. As we have already understood, a decentralized system is an excellent option for honest and transparent exchange and communication of people. But everywhere there are its own peculiarities and fraud, which is why it is so important to remain extremely attentive when carrying out the exchange through the blockchain.