Ask CryptoVantage: How Do Peer-to-Peer Bitcoin Transfers Actually Work?

What is a Peer-to-Peer Transfer?

P2P (Peer-to-Peer) simply refers to the sharing of information, data, or assets between equal parties without the involvement of a centralized entity. This is a type of decentralized interaction where parties connect directly to transfer information, currency, or assets.

For example, if Person A in Hong Kong wants to send currency to Person B in London, a P2P transaction allows for direct transfer from Person A’s digital wallet to Person B’s digital wallet without the need of a bank or an intermediary.

This concept is mostly used in computer networks as well as trading and exchange platforms where each participant is an equivalent owner and contributor to the entire network. Without a centralized entity verifying and validating transactions, the network owners have to device security measures such as cryptography and encryption.

One of the earliest uses of P2P technology was in the late 1980s when file-sharing platforms such as Napster started to appear. These services were used to exchange content such as software, music, and videos over the internet. The most popular example of P2P transfer is BitTorrent – a peer-to-peer sharing platform that shares large files like movies or games.

At its core, the P2P concept advocates for control over the transfer of data across networks, the anonymity of participating parties, and overall security as each participant is in charge of their security.

How Are Peer-to-Peer Transfers Done with Bitcoin?

Bitcoin’s P2P network operates on the same principle as P2P file-sharing networks where participants can share files directly with each other. In a P2P network, participants share information in a decentralized manner without the need for a centralized governing body. In like manner, and considering a bitcoin to be a type of information shared across a network, the bitcoin network enables users to share that information from one wallet to the other.

In this case, however, participants include miners and users. Miners on the bitcoin network are responsible for securing the network as well as validating transactions and introducing new coins into circulation.

Miners can interact with other miners in a P2P network and establish a consensus on which transactions should be validated and added to the blockchain. In Bitcoin’s case, the blockchain operates as a distributed ledger upon which miners rely to validate transactions. The blockchain is made up of blocks each containing transactional data. Once a block is published to the main ledger, it remains immutable as it is encrypted and protected with a secure hash.

In a Bitcoin-style P2P network, the ledger represents every single transaction ever made on the entire blockchain from its inception. If Person A from Hong Kong wants to transfer bitcoins to Person B in London, s/he would send digital currency directly through a peer-to-peer or P2P transfer. Miners will be able to validate the transaction by checking the distributed ledger to confirm that the bitcoins being sent from Person A truly exist and that Person B’s wallet address is valid and part of the network.

Therefore, while the transfer of bitcoins happens directly from one wallet to the other, miners act as validators who also secure the network by updating the blockchain.

Interestingly proof-of-stake blockchains like Solana and Avalanche use validators and stakers to validate transfers instead of miners.

Conclusion

As stated above, all transactions done through the bitcoin network are registered in a public ledger called the blockchain. The blockchain contains links to previous transaction blocks as well as a record of all current unspent coins.

For a transaction to be completed, miners must verify it. Once miners have validated the transaction, it is approved and added to a block of information along with other transactions. The completed block is then added to the blockchain which becomes its permanent ledger.

Therefore, while there is no middle man on the bitcoin network, the blockchain acts as the central unit of authority. It is the blockchain that records all transactions, determines how many bitcoins each user has, and assigns those coins to specific bitcoin addresses.

However, unlike a centralized database owned by an entity, the blockchain’s decentralized nature gives ownership of the network to all participants.