DEFINITION of Peer-To-Peer (Virtual Currency)
The exchange or sharing of information, data, or assets between parties without the involvement of a central authority. Peer-to-peer, or P2P, takes a decentralized approach to interactions between individuals and groups. This approach has been used in computers and networking (peer-to-peer file sharing), as well as with currency trading (virtual currencies).
BREAKING DOWN Peer-To-Peer (Virtual Currency)
In a digital peer-to-peer network, each user is (in theory) an equivalent owner and contributor of the network. This kind of network can be used for almost any kind of information or file-sharing process (one of the earliest mass uses of P2P networks was on Napster's file-sharing service).
In the context of currencies, P2P refers to the exchange of currencies that are not created by a central banking authority, and an especially common application is with cryptocurrency exchange networks such as Bitcoin. Currencies that are not traded through a physical exchange, such as through the use of coins and banknotes, are considered virtual currencies. Virtual currencies are transferred between parties electronically.
Peer-to-peer exchanges allow individuals to move currencies from their accounts to the account of others without having to go through a financial institution. P2P networks rely on digital transfers, which in turn rely on the availability of an internet connection. This allows individuals to use computers as well as mobile devices, such as tablets and phones.
Peer-to-peer currencies are not created or exchanged in the same manner as those created by central banks. The creation of new currency as well as the recording of transactions between parties is managed through a network of computers that is not maintained by a government authority, and is thus maintained by the collective. In cryptocurrency exchanges, these distributed ledgers can confer what P2P advocates consider to be a notable security advantage; with transactions recorded on every peer's network, it is very difficult to overwrite or falsify ledgers in a cryptocurrency exchange.
While privacy advocates may appreciate how peer-to-peer currency exchanges allow individuals to conduct business without government interference, the lack of transparency in virtual currencies may allow individuals and groups engaged in illegal activities to launder money without detection or oversight.