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DEFINITION of 'Peer-to-Peer (P2P) Economy'

A Peer-to-Peer, or P2P, Economy is a decentralized model whereby two individuals interact to buy or sell goods and services directly with each other, without intermediation by a third-party, or without the use of a company of business. The buyer and the seller transact directly with each other. Because of this, the producer owns both their tools (or means of production) and their finished product.

This form of an economy is viewed as an alternative to traditional capitalism, whereby business owners own the means of production and also the finished product, hiring labor to carry out the production process. In capitalism, the workers do not own the means of production, nor do they have any rights to the finished product they have helped make. Instead, they are paid wages in return for their labor. An advantage of the capitalist system is generally increased productivity and efficiency of the production process over a P2P system, since traditional businesses have the advantages of economies of scale and mass-production techniques.

BREAKING DOWN 'Peer-to-Peer (P2P) Economy'

A Peer-to-Peer economy can exist within capitalism. Open-source software (which is P2P) co-exists with retail and commercial software. Services like Uber or Airbnb serve as alternatives to taxi and livery services or hotels and inns.

Since a third party is removed from the transaction, there is a greater risk that the provider may fail to deliver, that the product will not be of the quality expected, or that the buyer may not pay. This extra risk is often defrayed by reduced transaction costs and lower prices.

Because providers of P2P goods or services own their finished product and means of production, the peer-to-peer economy is similar to economic production of pre-industrial age when everybody was a self-producer, a system that was supplanted by more efficient economic systems that provided greater productivity and wealth. The internet and the IT revolution have made the P2P economy a much more viable system in the modern age, and have also spurred investment in service providers who, while not directly involved in the production of P2P goods or services, act to make P2P transactions more visible, safer, and efficient.

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