Understanding Bitcoin’s Peer-To-Peer (P2P) Network
In a way, Bitcoin is reigniting old standards of how we used to transact with one another: directly from buyer to seller.
Over the course of monetary history, more complex financial instruments have required more complex infrastructure to support it. It introduced “extra steps” for processes that weren’t previously necessary, like having intermediaries facilitate payments online.
Satoshi NakamotoWho Is Satoshi Nakamoto? Satoshi Nakamoto is the creator of Bitcoin and the first user of the original Bitcoin client. He has said in a P2P foundation profile that he... struck gold upon discovering a way for people to facilitate transactions directly between each other online, trustlessly, without having to reveal information to either party or any intermediary.
Fittingly, SatoshiWhat Is A Satoshi? A Satoshi (sat or sats for short) is the smallest unit of a bitcoin. 1 Satoshi is a hundred millionth of a BTC (1 sat =... called it “Bitcoin: A Peer-to-Peer Electronic Cash System.”
What is “Peer-To-Peer”?
Bitcoin’s “peer-to-peer” system is the answer to today’s double spendUnderstanding Double Spends Throughout our economic history, we’ve devised all kinds of different processes to mitigate the everyday challenges that arise when trying to transact with each other. Long ago,... problem. It allows users to transact directly between each other without the need for any intermediaries, and removing the need for them to verify transactions and prevent potential double spends.
When you think of a typical payment today, at a grocery store, for example, swiping your credit card isn’t directly sending moneyWhat Is Money? Money is a tool that enables humans to perform 3 basic functions: store value, exchange value, and account for value. In order for money to perform its... from your bank account to the store’s. An intermediary – a credit card company in this case – opens up a payment channelWhat Is A Payment Channel? A lightning network payment channel is a specialized smart contract between two lightning nodes that allows for near-instantaneous bitcoin payments between the two nodes with... between your bank and the seller’s.
The credit card company authorizes each bank to transfer funds from one bank account to the other once manually verifying with each bank that it’s a valid transaction. For their service, the company charges a percentage fee of the transaction you just made.
If you’ve spent a decent amount of time with bitcoin, you may recognize that this vaguely describes how a blockchainWhat Is The Blockchain? The blockchain is the public record of bitcoin transactions, which are organized into blocks that are all chronologically linked to one another. Because every block is... similarly operates, though bitcoin’s unique properties as a distributed ledger are what make all the difference.
On the other hand, Bitcoin peer-to-peer payments are much closer to bartering than today’s mainstream payment methods. Funds move directly between users’ wallets, and thanks to bitcoin’s decentralized peer-to-peer network, it creates an ideal environment to facilitate these payments directly, instantly, and trustlessly around the world.
Historical Context Of Peer-To-Peer Networks
Peer-to-peer payments have been around long before today’s complex financial system. Bartering goods directly for other goods is the “original P2P system.” Two parties, each holding an item the other desired, would meet and simply exchange their goods, with no intermediary involvement.
However, as societies grew increasingly complex with new goods, services, and financial instruments hitting the market, society needed to create a universally accepted medium of exchange; and thus, currency emerged.
Managing different nations’ currencies naturally required a consensus mechanism, so we opted for the best we had at the time – centralized, third party systems – to work as financial intermediaries. Fast forward to the present, and our economic system is unrecognizable compared to our peer-to-peer past.
The internet and the rise of e-commerce changed the landscape of digital payments forever, but the problem is that the infrastructure remained relatively stagnant. People have the capability to buy goods from anywhere around the world, but when it comes to payment, we’re stuck handing money over from intermediary to intermediary to get it where it needs to go, with each taking their cut and slowing down the process along the way.
New developments in the economy have called for new developments in our money – and more specifically, our payment networks.
Closed Vs. Open Payment Networks
You’re probably familiar with a few of the popular centralized peer-to-peer payment networks out there: Venmo, Zelle, and the like.
These apps let you send money directly from user to user, however, they’re both closed payment networks. You can’t send money from your Venmo account to Zelle, or vice versa. You’re stuck on the Venmo payment rails, only able to interact with other Venmo users.
On the other hand, a “theoretical” open P2P payment network would allow for Venmo and Zelle to communicate with one another, while still enabling peer-to-peer exchanges between the two user bases without the need for any intermediary involvement, thus cutting down on costs and time spent on each transaction.
Bitcoin is that theoretical open payment network.
How Bitcoin Facilitates Peer-To-Peer Payments
Instead of calling on a credit card to contact each of our banks to facilitate an exchange, settlement lies in the message itself with bitcoin. Once a transaction confirms on the blockchain, it’s finalized. The transaction details are the “message”, and they contain all the necessary information to approve sending the payment..
When you send a transaction on the Bitcoin network, that payment is moving directly through nodes to the receiver’s wallet. The transaction itself gives nodes all the information they need to either validate or deny the transaction, requiring no intermediation in the process.
The Bitcoin network is made up of three key components that enable trustless, global peer-to-peer transactions:
Full Nodes And Lightweight Nodes
Everyone wanting to participate in the Bitcoin network can run Bitcoin Core software on their creating another “node” in the network. Nodes all connect with each other to broadcast and validate transactions as well as new blocks. By running a node, you can participate in this process and strengthen the Bitcoin network.
Not all nodes store the complete history of bitcoin’s blockchain. Full nodesWhat Is A Bitcoin Node? A bitcoin node is any computer that runs the bitcoin software, enforces the bitcoin consensus rules, and validates bitcoin transactions and blocks. Bitcoin nodes are... store the entire blockchain’s transaction history so they don’t need to rely on a third party for data. Lightweight nodes, on the other hand, only store a subset of the blockchain and rely on full nodes for transaction validation, which may be an ideal setup if you’re tight on resources.
Validating Transactions And Blocks
Once someone broadcasts a transaction or a miner finds a new block, the closest nodes receive it first. They validate the transactions or blocks and pass them on to other nodes in the network, spreading them across the entire network in just a few seconds.
With each new block added to the blockchain, the transaction receives another confirmation. As a result, transactions are becoming increasingly secure over time, because altering a specific transaction would also require changing every block and transaction in bitcoin’s history leading up to it. That would take an immense amount of computational power that no single entity could likely produce to override the network consensus.
Stamping With Proof Of Work
To ensure the integrity of this process and uphold consensus about which blocks and transactions are valid and which aren’t, Bitcoin miners have to expend energy and computing power to earn the block rewardWhat Is The Block Reward? The block reward is how Bitcoin miners are compensated for mining and adding blocks of transactions to the blockchain. The block reward is made up.... This energy expenditure, or “Proof of WorkWhat Is Proof Of Work? Proof Of Work, often abbreviated as PoW, is both the method for achieving consensus across the entire Bitcoin network as well as a piece of...”, serves as the proof needed for the network to come to consensus on the newly mined block.
With these components set in place, the Bitcoin network opens the stage for entirely trustless, global peer-to-peer transactions.
Benefits Of P2P Payment Networks
Bitcoin’s peer-to-peer payment network is an advancement of our monetary system today because it’s:
- Not dependent on trusted third parties, which introduce security gaps that are out of your control.
- Resilient to attack, since it’s decentralized and has no central server to target.
- More accessible, as new participants can join the network from anywhere in the world almost instantly.
- Redundant to enhance security by storing copies of data across multiple nodes, ensuring the network functions despite the failure of any other nodes.
By enforcing network security through code rather than through intermediary trust, we can enjoy frictionless P2P transactions at scale around the globe.
Importance Of P2P Payment Networks
Facilitating P2P payments over a trustless, global network is a breakthrough in money – prior to the Bitcoin network, society had to rely on countless trusted intermediaries:
- Banks
- Payment processors like Visa and Mastercard
- Money transfer companies like Western Union
- Centralized peer-to-peer payment networks like Venmo and Zelle
- E-commerce payment platforms like Stripe and PayPal
- And countless others
You can probably think of several you use on a week-to-week basis.
While all these apps work independently, having multiple disjointed, closed monetary networks introduces a lot of friction to our daily spending/transferring.
On the other hand, the Bitcoin network could support all different types of payments on one open monetary network, entirely peer-to-peer – reducing time, cost, and energy spent on our daily financial needs.
With peer-to-peer payments riding on Bitcoin rails, our financial system is better suited to:
- Bring access to an open monetary network to the 1.7 billion unbanked people around the world.
- Prevent fraud by removing the degree of trust needed in our financial lives.
- Reduce time and expenses incurred on both governments and citizens alike by (now) unnecessary transaction fees and transfer wait times.
- Streamline our financial lives in ways never before possible with innovations like atomic swaps, micropayments, and more.
Best Bitcoin Peer-To-Peer Exchanges
Buying bitcoin peer-to-peer is relatively simple. All it requires is finding the right exchange for your needs. Here are some of the most popular peer-to-peer exchanges available:
Bisq
Bisq is a privacy-focused and open-source peer-to-peer exchange that users can download as a software to connect buyers and sellers. As a trustless peer-to-peer network, Bisq doesn’t require any Know-Your-Customer (KYCWhat Is KYC? KYC, short for Know Your Customer or sometimes Know Your Client, is a legally required process that banks, bitcoin exchanges, and other financial institutions use to verify...) information, and Bisq doesn’t hold any user’s bitcoin.
Instead, it’s held in 2-of-2 multisignature (multisigWhat Is MultiSig? Multisig, short for multiple signatures, is a security measure that requires multiple signatures in order to authorize and send a bitcoin transaction. It is a feature in...) escrow addresses that the traders manage themselves.
HodlHodl
HodlHodl is another great option. Like Bisq, HodlHodl doesn’t require KYC information, and it doesn’t hold users’ funds, but stores them in multisig (P2SH) contracts. Unlike Bisq, however, HodlHodl is Bitcoin-only, which may be preferable to avoid additional complexity.
RoboSats
RoboSats is a free and open-source peer-to-peer exchange on Tor. For Tor natives and newcomers alike, RoboSats provides plenty of resources up front to get familiar with; and all you need is the latest version of Tor and a lightning walletWhat Is A Lightning Wallet? A Lightning wallet is a specific type of bitcoin wallet that uses the lightning network to facilitate near-instantaneous peer-to-peer payments at a lower cost than... to get started.
Currently, RoboSats is in the process of adopting a federated approach in an effort to decentralize and reduce single points of failure.
AgoraDesk
AgoraDesk is another great option to buy bitcoin anonymously that lets you choose from a wide variety of payment methods, like: PayPal, credit/debit card, bank transfer, gift cards, Venmo, or even in-person with cash. There’s plenty of flexibility to choose the right payment method that works for you.
Each peer-to-peer exchange has their own unique benefits, so do your due diligence and understand the tradeoffs of each before choosing one that’s right for your needs.
Final Thoughts
Bitcoin’s peer-to-peer electronic cash system captures the essence of what the network is built on: decentralization, autonomy, and transparency.
Global peer-to-peer exchanges empower people to live their financial lives as they please, not dependent on the whims of any unrelated third party.
If fully adopted, bitcoin’s peer-to-peer network will force us to rework our understanding of money, economics, and financial instruments. It unlocks newfound capabilities that we’re only now in the process of discovering, but overtime may prove to be a powerful force in reducing poverty and increasing freedom throughout the world.
FAQs About Bitcoin’s Peer-To-Peer System
Q: How can you get your money back if you send a Bitcoin peer-to-peer payment to the wrong person?
A: Bitcoin peer-to-peer payments are irreversible. Once confirmed on the blockchain, the transaction is complete and the funds won’t come back. Unlike the legacy financial system which operates on credit, Bitcoin transactions don’t offer the same level of recourse. Be sure to double-check the recipient’s address before confirming any transaction, and consider a test transaction before setting up regular P2P payments. In case of an accidental transfer or fraud case, your best option is to directly communicate with the recipient, if possible, and try to cooperate to return the lost BTC.
Q: Is it safe to trade Bitcoin peer-to-peer?
A: While trading Bitcoin peer-to-peer may be a great option, it doesn’t come without its own risks, such as potential scams, price variances, and other counterparty issues. Always be sure to thoroughly research and review different platform reputations, counterparty trustworthiness, and other general safety practices for peer–to-peer bitcoin trading.
Q: How are Bitcoin P2P exchanges different from OTC exchanges?
A: Peer-to-peer trades facilitate exchanges directly between buyers and sellers, which has more value to everyday users. On the other hand, over-the-counter (OTC) exchanges primarily cater to institutional or high net-worth investors who make private deals in which each party agrees to a specific price and quantity of bitcoin. While these trades have no effect on the market value since they are conducted peer-to-peer, they still involve an intermediary (the OTC desk) in the transaction.