ECONOMICS BEHAVIORAL ECONOMICS

Peer-to-Peer (P2P) Service: Definition,

Facts, and Examples
By ADAM HAYES Updated February 26, 2024

Reviewed by CHARLES POTTERS

Fact checked by KATHARINE BEER

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 in a
transaction without a third-party intermediary.
Peer-to-peer services leverage technology to overcome the transaction
costs of trust, enforcement, and information asymmetries that have
been traditionally addressed by using trusted third parties.
Peer-to-peer platforms offer services such as payment processing,
information about buyers and sellers, and quality assurance to their
users.
 Peer-to-Peer (P2P) Service

Investopedia / Julie Bang

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
P2P movement allowed millions of internet users to directly connect, 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 P2P 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 user's 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 P2P transaction. Often, P2P 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.

Examples of Peer-to-Peer (P2P) Services

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
Filesharing is 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
Online marketplaces consist of 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 blockchain is an aspect of cryptocurrency technology. It is a network where
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
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
Ridesharing is a platform for car owners to offer chauffeur service for people
seeking a taxi ride. Ridesharing platforms offer similar services as homesharing
services.

What Are P2P Payment Services?

P2P payment services help facilitate the transfer of funds between people.
Examples of P2P payment service providers include Venmo, CashApp, Zelle, and
PayPal, among many others.

What Are Drawbacks of P2P?

One major disadvantage of P2P services is a lack of third-party vetting engaged
parties. This introduces a level of risk and information asymmetry. On
filesharing sites, media available for download may be corrupted. On
homesharing platforms, there can be discrepancies between the expectations
of property owners and lessees, leading to disagreements that are difficult to
mediate in the absense of a third-party. On P2P payment platforms, it can be
difficult to retrieve erroneous payments, as there is no mediator involved in
overseeing a transaction.
Why Are P2P Services Popular?
P2P services have become incredibly popular over the past decade. This is in
part due to the convenience they offer. People may transfer money to each
other in seconds through Venmo, hire rides through Uber or Lyft in minutes, and
book apartments through AirBnb across the world, seemingly with ease. On the
flip side, P2P services can also introduce risks to one or both parties due to
asymmetries in information.

The Bottom Line

Peer-to-peer services (P2P) are platforms where two parties may connect
directly to engage in a transaction. On P2P platforms, technology plays a role in
matching buyers and sellers, where a third-party intermediary may have
previously played a role. Example of P2P services are prevalent in many fields,
from payment processing to filesharing to online shopping. They can offer ease
to users, though P2P services are not without their risks, as well.

Related Terms
Decentralized Applications (dApps): Definition, Uses, Pros
and Cons
Decentralized applications, or dApps, are software programs that run on a blockchain or
P2P network of computers instead of a single computer. more

Peer-to-Peer (Virtual Currency): Definition and How It Works

Peer-to-peer is the exchange of information, data, or assets between two parties. Virtual
currency is a digital representation of value with no tangible form. more

Populous World: What It Meant, How It Worked

Populous was a peer-to-peer invoice platform founded in 2017. The project was
apparently abandoned in 2022. more

Peer-to-Peer (P2P) Economy: Definition Vs. Capitalism

A peer-to-peer economy is a decentralized model whereby two parties interact to buy or
sell directly with each other, without an intermediary third-party. more

Embedded Finance: Everything You Need to Know

Embedded finance integrates financial and banking services into platforms for
nonfinancial companies. more

Sharing Economy: Model Defined, Criticisms, and How It's

Evolving
The sharing economy is a peer-to-peer activity of acquiring, providing, or sharing access
to goods and services, often facilitated by a website platform. more
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