Peer-to-peer (P2P) networking functions by allowing devices, called peers, to connect and communicate directly with each other rather than through a central server. This decentralized model enables resource sharing, such as files, bandwidth, and processing power. Each peer acts as both a client and a server, facilitating greater resilience and efficiency, since there is no single point of failure. P2P networking is commonly used in applications like file sharing and blockchain technology, enhancing user collaboration.