What Is a Peer-to-Peer (P2P) Service?

A peer-to-peer (P2P) service is a decentralized platform whereby two individuals interact directly with each other, without intermediation by a third party. Instead, the buyer and the seller transact directly with each other via the P2P service. The P2P platform may provide services such as search, screening, rating, payment processing, or escrow.

Key Takeaways

  • A peer-to-peer service is a platform that directly connects parties to a transaction without the third-party intermediary.
  • Peer-to-peer services leverage technology to overcome the transactions costs of trust, enforcement, and information asymmetries that have traditionally addressed by using trust third-parties. 
  • Peer-to-peer platforms offer services such as payment processing, information about buyers and sellers, and quality assurance to their users.

Understanding Peer-to-Peer (P2P) Services 

The modern peer-to-peer concept was popularized by file sharing systems, such as the music-sharing application Napster, which appeared in 1999. The peer-to-peer movement allowed millions of Internet users to directly connect and form groups and collaborate with each other to function as user-created search engines, virtual supercomputers, and file systems. This model of network arrangement differs from the client–server model, where communication is usually to and from a central server.

Today peer-to-peer services have moved beyond purely Internet services, though they are mostly thought of as at least Internet-based. Peer-to-peer services involve activities that range from simple buying and selling to those that are considered part of the sharing economy. Some peer-to-peer services don't even involve a paid transaction by the users at all, but they bring together individuals to work on joint projects, share information, or communicate without direct intermediation. These kinds of P2P services may be operated as free nonprofit services or generate revenue by advertising to users or by selling users data.   

When a third party is removed from the transaction, there is a greater risk that the provider of the service may fail to deliver, that the service will not be of the quality expected, that the buyer may not pay, or that one or both of the parties might be able to take advantage of asymmetric information. This extra risk constitutes added transaction costs to a peer-to-peer transaction. Often, peer-to-peer services are created with the intent of facilitating these transactions and reducing risk for both buyer and seller. The buyer, seller, or both might pay the cost of the service or the service may be offered for free and generate revenue in some other way. 

Some popular examples of P2P services are:

  • Open-source software: Anybody can view and/or modify code for the software. Open-source software tries to eliminate the central publisher/editor of software by crowdsourcing the coding, editing, and quality control of software among writers and users. 
  • Filesharing: Where uploaders and downloaders meet to swap media and software files. In addition to peer-to-peer networking, filesharing services can provide scanning and security for shared files. They may also offer users the ability to anonymously bypass intellectual property rights or alternatively may provide enforcement for intellectual property. 
  • Online marketplaces: A network for private sellers of goods to find interested buyers. Online market places can offer promotion services for sellers, ratings of buyers and sellers based on history, payment processing, and escrow services. 
  • Cryptocurrency and blockchain: A network that users can make payments, process, and verify payments without a central currency issuer or clearinghouse. Blockchain technology allows people to transact business using cryptocurrencies and to make and enforce smart contracts.
  • Homesharing: Allows property owners to lease all or part of their property to short-term renters. Homesharing services typically provide payment processing, quality assurance, or rating and qualification of owners and renters. 
  • Ridesharing: A platform for car owners to offer chauffeur service for people seeking a taxi ride. Ridesharing platforms offer similar services as homesharing services.