As the previous chapter has proven, the economic dynamics of blockchain are embedded in the economics of decentralized peer‐to‐peer models and architecture. We have more to learn about peer‐to‐peer issues to inform our understanding of investing for the long run. Consider this our master class in peer‐to‐peer.

In a peer‐to‐peer transaction, people create cooperative value directly with one another in a business or personal interaction, contributing to shared production with one another with little to no intermediation by third parties. The Internet and blockchain are force multipliers in increasing the ability of people to engage in peer‐to‐peer economic activity. For example, Airbnb rentals depend on a complex cooperative system of Internet‐based consumer and owner reviews. This virtuous feedback cycle fosters the trust needed for the renter to fork over cash for a rental with no third‐party certification and, conversely, for the owner to open their home or apartment to strangers. It's the community that fosters the trust; however, the centralized corporation (Airbnb) is the facilitator of this two‐sided marketplace. We think it's pretty clear that these two sides could work without a central arbiter, but up until the blockchain breakthrough this was just not possible.

Designing your sneakers on the Nike platform isn't peer‐to‐peer; it's a co‐creation between a behemoth corporation and a consumer. Venmo transactions are not true peer‐to‐peer, because Venmo is owned and supported by one firm, PayPal. An e‐book is a digital purchase, but usually from one supplier.

We agree with the views of many that peer‐to‐peer beats traditional businesses in economies of scale, transaction costs, customer engagement, and resilience, and therefore is a secular mega‐trend worthy of investor attention. MIT's Geoffrey Parker, Marshall Van Alstyne, and Sangeet Choudhary call this The Platform Revolution in their brilliant book of the same title, where they make the case‐closed argument for the advantages of peer‐to‐peer in terms of two‐sided marketplaces like Airbnb or Uber. They demonstrate how platform businesses (two‐sided marketplaces) beat out pipeline (traditional) businesses because platform businesses can build a defensible moat against the competition.

The MIT authors show that platforms typically employ just a tiny fraction of the people the incumbents employ, as the ecosystem partners provide labor and capacity. By contrast, a pipeline business operates a step‐by‐step arrangement for creating and transferring value, with producers at one end and consumers at the other as in a traditional linear value chain. In a Harvard Business Review article, the authors write that “platform businesses bring together producers and consumers in high‐value exchanges. Their chief assets are information and interactions, which together are also the source of the value they create and their competitive advantage.” According to the authors, businesses – newcomers and traditional firms reinventing themselves – must understand the new rules, and executives must make intelligent choices about access and governance.

Platform businesses can beat traditional companies by harnessing resources they do not own and scaling at a pace traditional firms cannot match. This has proven itself – and we argue that now, platform businesses can exist even more efficiently in a peer‐to‐peer mode. We're living in a truly progressive age.

Computer Networking

Peer‐to‐peer evolved into a business model, but started as an innovation in computer science, where a network consists of a group of devices that collectively store and share files. Each participant or node acts as an individual peer. Typically, all nodes have equal power and perform the same tasks. In financial technology (fintech), of course, peer‐to‐peer refers to the exchange of cryptocurrencies or digital assets via a distributed network. A peer‐to‐peer system operates through a network of users with no central administrator or server. Each node holds a copy of the files, which are accessible to all nodes and also contribute to networked operating capacity. Each node can download files from other nodes or upload files to them. This differentiates peer‐to‐peer networks from traditional client–server systems, in which client devices download files from a centralized server.

Networks use software that mediates data sharing so users can query other devices on the network to find and download files. Once a user has downloaded a given file, they can act as a source of that file.

We've seen now how peer‐to‐peer networks create the decentralized architecture empowering innovations; decentralized architecture does not have a single point of failure, whereas centralized architecture does. This makes peer‐to‐peer models more resilient than centralized ones.

Recent developments in microgrids – individual or small energy grids – demonstrate this very well. If a flood or wildfire takes out a big power plant, everybody locally loses power. However, community‐based networked solar panels make it possible for communities to source power through microgrids. If communities tap a microgrid powered by solar panels on their roofs, they can share power during an outage.

We've seen peer‐to‐peer applications in the past, such as music sharing and file sharing. Cutting out the middleman and rent‐seekers opens a world of new possibilities since a trusted third party is no longer required for economic transactions. This is changing the world and how we will go about economic activity in the future.

We can consider peer‐to‐peer services in four archetypes, according to a team of Swedish and Danish researchers who presented their findings at a conference in Milan, Italy:¹

• File‐sharing platforms, such as BitTorrent, facilitate the sharing of digital media content such as music, software, or books.
• Trading platforms, such as eBay, enable trading of physical goods. These platforms frequently facilitate asynchronous interaction (e.g., bidding via agents) between peer consumers and peer providers.
• Goods‐sharing platforms based on rental concepts (with eBay and similar sites, one person buys from another) involve relatively expensive physical objects such as scarce parking spaces (ParkatmyHouse), accommodations (Couchsurfing, Airbnb), and car rental sharing (Turo, and to some extent, ZipCar).
• Service‐sharing entails the peer provider and peer consumer collaborating on a mutually beneficial service or experience. Think of TaskRabbit or ThumbTack, the platform for hiring an amateur handyperson peer‐to‐peer to assemble furniture or exercise equipment, fix a drain spout, install windows, what have you. The Nordic researchers dig into cooperative ridesharing, essentially a digital platform and algorithm for carpooling. A notable example is BlaBlaCar, a French online marketplace for carpooling. Its website and mobile apps connect drivers and passengers willing to travel together between cities and share the cost of the journey. In peer‐to‐peer style, the company owns no vehicles; it is a broker and receives a commission from every booking.²

Due to its architecture, a peer‐to‐peer network can offer its users many advantages, including easy file sharing, reduced costs, adaptability, reliability, high performance, and efficiency. Let's look at these benefits one by one.

Easy File Sharing

File sharing to the peer‐to‐peer economy is what slot machines are to casinos: the simplest, fastest application of the ecosystem in which they are allowed. The world first learned about this through the MP3 song‐sharing software Napster, which torched conventional music industry models in two notorious short years, from 1999 to 2001. Napster's moment recalls the words of Edna St. Vincent Millay, recited in the film A River Runs Through It: “My candle burns at both ends; It will not last the night; But ah, my foes, and oh, my friends – It gives a lovely light!”

Founded by Shawn Fanning and Sean Parker, Napster took the next step after Usenet (founded in 1979) gained popularity as an early Internet discussion platform that allowed the sharing of files. (Usenet would experience the growing pains of early tech as it became swamped with ads, spam, and porn, but it nevertheless served as an excellent preliminary use case and pilot for things to come.) Napster did two things well: it allowed people to share their MP3 music files, thereby cutting out the music industry (and the artists), and provided an easy‐to‐understand interface.

Napster had 80 million registered users at its peak.³ Parents wondered where their kids were getting all this music, the record industry scrambled to a war footing, and debates raged over the reality that artists were not being paid. What's more, Napster was breaking the soul of campus IT administrators.

“Private network administrators, however, look upon Napster as a malignant organism devouring bandwidth by the kilobyte and sucking the life out of finite network facilities,” reported Pauline Fusco for ISP Planet in the year 2000. “Some system administrators said Napster accounted for 40 to 61% of their networks' overall traffic. Yet others found that as little as 5% of their bandwidth was usurped by MP3 file transport. Approximately a dozen university facilities in the U.S. and U.K. have blocked access to the service; students are naturally fighting the ban.”

With millions of songs traded through peer‐to‐peer, the music industry and musicians faced an existential pivot; they needed to kill Napster and start streaming services of their own. So, of course, they sued. As is often the case with the first soldiers over the barbed wire, Napster's owners and customers took the bullets. “That case – A&M Records, Inc. v. Napster, Inc. – wended its way through the courts throughout 2000 and early 2001 before being decided in favor of the RIAA on February 12, 2001,” recounted History.com. “The decision by the United States Court of Appeals for the Ninth Circuit rejected Napster's claims of fair use, as well as its call for the court to institute a payment system that would have compensated the record labels while allowing Napster to stay in business.” On March 5, 2001, District Court Judge Marilyn Patel issued a preliminary injunction requiring Napster to remove any songs named by the plaintiffs in their list of copyrighted material contained on Napster. After these events, the company would attempt to stay afloat, but it shut down its service just three months later.⁴

In these later days of computer processing power, which was a distant dream in 2000, file sharing is easy, fast, and limitless. An advanced peer‐to‐peer network can share files quickly over large distances. Files can be accessed anytime. Whenever a user wants to download a particular file, the downloading action from multiple locations can take place simultaneously without any hassle. File‐sharing peer‐to‐peer networks range across the universe of known content. They include file hosts such as Dropbox, Mediafire, and Google Drive, which offer the efficiency of sharing documents with no slogging through emails and versions. Peer‐to‐peer video‐sharing sites are led by the household name YouTube (the world's second most visited URL address), Dailymotion, and PeerTube. Several sites skirt or break copyrighted law through film sharing, such as Putlocker and 123Movies.

The German firm StriveCast uses peer‐to‐peer architecture to solve the problems of dropped signals, jumpy feeds, and poor lighting in corporate video communications. The firm deploys a network of video experts and resources to provide video distribution and video analytics software to companies that heavily rely on online video's smooth and reliable performance. StriveCast serves 150,000 customers daily with a smaller workforce than a football team.

BitTorrent sites deploy a communication protocol that enables users to distribute and share data and electronic files over the Internet in a peer‐to‐peer manner. The BitTorrent software allows users to send or receive files, while a BitTorrent client is a computer program that implements the BitTorrent protocol. BitTorrent trackers provide a list of files for transfer and permit the client to find peer users, known as “seeds,” who may transfer the files. It's worth noting that many of these sites violate copyright laws and are eventually closed; however, they demonstrate the demand for unqualified interaction.

Reduced Costs

A peer‐to‐peer network doesn't require a server, a network operating system, or a full‐time system administrator. Multitudes of users are willing to pay the micro‐fractional costs of owning and operating their computers to share in the benefits of the Internet, including peer‐to‐peer networks. We encourage you to keep an investor's eye on platform‐powered businesses which, as we've seen, are disruptive to industry. Cryptocurrency disrupts global financial markets. Uber has driven down the value of New York taxi medallions. Airbnb has challenged the hotel conglomerate. As pointed out by the authors of Platform Revolution, platforms eat pipelines.

One big reason is the costs to scale are radically lower.

For example, the Internet largely replaced newspapers as the leading source of news for many. News organizations don't have to pay for paper, printing, distribution, and countless other expenses when they publish online. Only the biggest media brands could afford to subsidize their printed editions. Many regional newspapers merged or went out of business. An efficient method of dispersing the news “ate” a less efficient pipeline. The Internet provides infrastructure and coordinates communication.

Social media sites provide a decentralized architecture for citizens to share news and their views of it. We know from recent experience that these online echo chambers aren't necessarily good for civic discourse and cohesion. But there's no putting the Twitter genie back in the bottle, so the challenge must be reforms that are supported by users to improve discourse on the big channels. Twitter, for example, prompts readers to “read the article first” when the headline is tweeted out.

Just as the Internet changed the news industry, it is the lubricant of decentralized platform businesses and peer‐to‐peer software. Platforms make use of these characteristics for transactions all over the planet. The Internet cuts costs, making peer platforms more efficient than pipelines so they can scale rapidly. They profit from the network effect, which gives them the economic edge over pipelines. They can grow faster than traditional businesses.⁵

Blockchain technology similarly enables a user to transfer cryptocurrency across the globe without needing any middleman or intermediary. Therefore, users do not pay the implicit costs for a financial institution to have buildings, facilities, and workforces to maintain those facilities. In the blockchain, each user adds to security and verification; the network helps maintain a complete replica of the records, ensuring data accuracy.

Adaptability

Peer‐to‐peer networks further extend to include new clients quickly. This benefit makes these networks more flexible than client‐server networks. Scalability is cheaper and faster, as we've seen with German startup StriveCast, which serves 150,000 customers daily with a small staff but a robust network of computing power.

Likewise with crisis management. The global pandemic crisis of COVID‐19 was devastating and unprecedented in the loss of life, illness, and impact on families, communities, society, and the global economy. The sacrifice and service of healthcare professionals, first responders, and frontline workers deserve to be honored and remembered in history. No one can diminish their courage or the cost of lives and loss.

In the face of this crisis, peer‐to‐peer companies such as Lyft and Uber, with their decentralized legions of solopreneur drivers, adapted fast to the circumstances and responded to serve their communities.  They lacked the hierarchical structure of companies such as FedEx and UPS that went into overdrive, deploying armies of trucks and drivers for two years and more at a 24/7 pace while coordinating closely with the federal government.

Lyft and Uber pivoted with the agility of a super‐hive mind. Among the measures taken during the worst of the pandemic:

The companies installed safety standards, deployed their driver networks, and launched innovative programs. Lyft launched food delivery programs in ten cities. Drivers picked up meals from distribution centers and delivered them to individuals in need, including seniors and low‐income families whose children usually rely on free or reduced‐fare lunch but were currently out of school.

Simultaneously, Uber made 10 million free rides and deliveries to healthcare workers, seniors, and people in need. During the pandemic Uber Freight carried over one billion pounds of emergency relief equipment and helped distribute PPE to drivers. In addition, Uber Eats waived the delivery fee for more than 100,000 restaurants across the United States and Canada, facilitating noncontact delivery, while also launching  “Work Hub,” a system to connect drivers to other work opportunities while ride requests were lower. Uber also partnered with the National Restaurant Association to create the Restaurant Employee Relief Fund, which will give grants to restaurant industry employees impacted by COVID‐19.

The LyftUp Critical Workforce Program was launched to provide first responders, healthcare, transit, and certain nonprofit workers with free bike and scooter rides as they serve the public on the frontlines. In New York City, Lyft partnered with Citi and Mastercard to fund free annual Citi Bike^® memberships for 27,000 critical workers to help them get to work safely during the pandemic. Further, Lyft offered monthly bikeshare memberships to essential workers at no charge in the San Francisco Bay Area, Boston, Chicago, Columbus, Washington, DC, Minneapolis, and Portland. Free 30‐minute scooter rides were also available for critical workers in Austin, Denver, Los Angeles, Washington, DC, San Diego, and Santa Monica. Lyft also engineered several options for getting essential workers where they needed to be. In July 2020, Lyft launched LyftPass, a customizable ride‐sharing program for employers that provided a way for organizations to pay for the Lyft rides of anyone, from essential workers to guests. In 2020, Lyft helped over 200,000 employees obtain employer‐sponsored rides.

This is the power of a platform‐based system.

Reliability

Unlike a client–server network, which can crash if the central server malfunctions, a peer‐to‐peer network will remain functional even if a server crashes. If a single computer goes down, the others continue as usual. This also prevents bottlenecking since traffic is distributed across multiple computers. Point being, it is extremely tough to bring these networks down. Even if one of the sections is about to shut down, other pairs continue to operate and communicate. Some peer‐to‐peer human‐technology networks even thrive under stress and chaos because their decentralized aspect allows them to respond and operate apart from massive institutional infrastructure.

In his book Antifragile, Nassim Taleb coined that same term: “Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better…. Fragility implies more to lose than to gain, equals more downside than upside, equals unfavorable asymmetry. Antifragility implies more to gain than to lose, equals more upside than downside, equals favorable asymmetry.”

Peer‐to‐peer systems are antifragile, a quality we often discuss as being true of blockchain. On Twitter, for example, the content is exchanged between peers. Users can participate in discussions with other members of the platform and share information. In democratic and populist uprisings against an authoritarian state, such as in Iran, Twitter became an antifragile communications system.

While crypto got clawed by the bear in 2022, we expect it to rebound, and one reason is that it is antifragile. When fiat currency is stressed, decentralized currency thrives. When contracts break, when parties default, those who physically control their assets will be the winners. Crypto assets are bearer instruments and those who possess them control them. Remember the adage “Possession is 9/10ths of the law.” Crypto assets are the epitome of antifragility.

Even a diversified portfolio with stocks, bonds, commodities, real estate, gold, private equity, and venture capital cannot help in a sovereign debt crisis.  You need assets that do not require trust to transact.  You need peer‐to‐peer networks. You need blockchain.