This post is intended to serve as a summary of Step 3 in the book titled Blockchain Basics: A Non-Technical Introduction in 25 Steps, by Daniel Drescher.

Part 3: Recognizing the Potential of Peer-to-Peer Systems

This step builds/elaborates on our comprehension of the purpose of the blockchain by considering a specific kind of distributed system, that of the peer-to-peer (P2P) system. Consequently, this step will help you understand why there is so much excitement about the blockchain among technologists and business professionals alike. This step also covers the main area of application(s) in which the blockchain is likely to provide the most value. In addition, this step discusses some consequences of P2P systems in the real world.

P2P systems provide the possibility of disrupting entire industries, based on a simple idea: Replace the middleman (or middlemen) with P2P interactions. In the case of the music industry, the traditional studios and their marketing and distribution channels that acted as the middlemen between artists and consumers were replaced by P2P file sharing services, such as Napster. The main traits that made the music industry so at risk of being replaced by P2P systems are the immaterial nature of music and the low costs of copying and transferring data (such as MP3 files) over a network. The power of P2P systems is not limited to the music industry. Each industry that primarily functions as a middleman between producers and customers of immaterial or digital goods and services is at risk of being superseded by a P2P system. This statement may seem a bit abstract, but you can discover many middlemen for immaterial and digital goods and services around you once you are familiar with the largest one of them all: The financial industry.

"What is it that you have in your bank account or on your credit or debit card? Is it really money? The money you own has been turned into immaterial bits and bytes long ago. Only a small amount of actual money exists as physical banknotes and coins. The vast majority of the world’s money and assets exists as immaterial bits and bytes in the centralized information technology systems of the financial industry. Banks and many other players of the financial industry are just middlemen between producers and consumers of bits and bytes that make up our money and our wealth. The act of borrowing, lending, or transferring money from one account to another is just the transfer of an immaterial good operated by middlemen, also called intermediaries. It is amazing how many middlemen are involved in seemingly simple transactions (e.g., transferring money from one bank account to another one in a different country involves up to five middlemen, which all need their processing time and impose their own fees). As a result, something as simple as transferring an amount of money from one bank account to another in a different country involves a long processing time and incurs high transactions costs. In a peer-to-peer system, the same transfer would be much simpler and it would take less time and [fewer] costs since it could be processed as what it is: A transfer of bits and bytes between two peers or nodes, respectively.

"The advantage of peer-to-peer systems over centralized systems is that direct interactions occur between contractual partners instead of indirect interactions through a middleman, hence, there is less processing time and lower costs.

"[...] Every industry that mainly acts as a middleman between producers and customers of immaterial or digital goods and services is vulnerable to being replaced by a peer-to-peer system. As digitalization continues, more and more items of everyday life and an increasing amount [sic] of goods and services will become immaterial and will benefit from the efficiencies of peer-to-peer systems. [...] Advocates of peer-to-peer systems argue that almost all aspects of our life will be affected by the emergence of digitalization and peer-to-peer networks (such as payments, money saving, loans, insurance, as well as issuance and validation of birth certificates, driving licenses, passports, identity cards, educational certificates, and patents and labor contracts). Most of them already exist in digital form in centralized systems run by institutions that are nothing other than a middleman between natural suppliers and customers."

Note: "Replacing the middleman is also called disintermediation. It is considered a serious threat to many business and companies that mainly act as intermediaries between different groups of people, such as buyers and seller, borrowers and lenders, or producers and consumers."

Terminology and the Link to the Blockchain

Now that you have learned about the possibilities of peer-to-peer systems, clarification of the terminology of the problem domain and explanation of its affinity with the blockchain is required. In particular, the following points need to be covered:

• Defining a peer-to-peer system
• Architecture of peer-to-peer systems
• The relationship between peer-to-peer systems and the blockchain

Defining a Peer-to-Peer System

P2P systems are distributed software systems that consist of nodes (individual computers) that provide their computational resources (e.g., processing power, storage capacity, or information distribution) directly to the other nodes. When connecting to a P2P system, users turn their computers into nodes of the system. All nodes are equal regarding their rights and roles. Although users’ machines may differ in terms of the resources they contribute, all the nodes in the system have the same functional capability and responsibility. Therefore, the computers of all users are both suppliers and consumers of resources. For example, in a P2P file-sharing system, the separate files are stored on the users’ computers. When someone wants to download a file in such a system, he or she is downloading it from someone else’s computer, which could be located just down the road or situated halfway around the world. Thanks to high speed Internet connections, the phsical distance between the two nodes is almost insignificant.

The Architecture of Peer-to-Peer Systems

P2P systems are distributed by nature, due to how they are constructed. However, some P2P systems have centralised components that perform such tasks as aiding the interactions between peers, maintaining directories that detail the services offered by the peer nodes, or accomplishing look-ups and identification of the nodes. Such systems make use of hybrid architectures, as shown in the previous step. Such architecture makes it possible to combine the advantages of both centralized and distributed computing. On the other hand, entirely distributed P2P systems do not have any element of central control or coordination, making it difficult to shut down a system with no single central point of failure. Therefore, all nodes in those systems run the same software and accomplish the same tasks, acting as both providers and consumers of resources and services. (BitTorrent is an example of such a system.)

An example of a centralized P2P system is Napster, which kept and updated a central database of all nodes connected with the system and the audio files on these nodes. Thus when the central node was compromised, so too were all the users of the service.

The Relationship Between Peer-to-Peer Systems and the Blockchain

As stated in Step 2, the blockchain is a tool for achieving and maintaining integrity in distributed systems. Purely distributed P2P systems might make use of blockchain technology so as to achieve and to preserve system integrity.

The Potential of the Blockchain

The link between entirely distributed P2P systems and the blockchain is that the former uses the latter as a tool to accomplish and ensure integrity. Therefore, the argument that explains the excitement about and the potential of the blockchain is this: Completely distributed peer-to-peer systems have a huge commercial potential as they can replace centralized systems and disrupt entire industries as a result of disintermediation. Since completely distributed P2P systems may use the blockchain for achieving and maintaining integrity, the blockchain becomes a hugely important aspect of a distributed system. The important aspect that excites people is the disintermediation offered by the blockchain. The blockchain is only a means to an end that aids in accomplishing disintermediation.

That's as much as I'm going to post as far as a summation of the book is concerned. If you would like to read more, I suggest downloading or purchasing a copy of Blockchain Basics: A Non-Technical Introduction in 25 Steps, by Daniel Drescher