Does encryption of data/information take place in peer to peer networks like Gnutella, Bittorrent? Do peer to peer networks like Gnutella, Bittorrent have any encryption system to secure the users privacy or encrypt the file/data being shared? Elaborate please.
BitTorrent, when encryption is used (optional in most clients), uses the Diffie-Hellman protocol for key exchange and RC4 for confidentiality. It also drops the first 1kb of data from the RC4 output as part of the specification.

There is no authentication, not really enforceable anyway due to the nature of peer-to-peer sharing networks. Standard theory applies; man in the middle is possible, but a passive attacker, only able to observe traffic, cannot see the content of the messages being sent.

The idea is to stop people from figuring out specifically what data is being sent, but bandwidth analysis will clearly reveal the use of peer-to-peer technology. Other factors, such as popularity (peer count) and total bandwidth may help in identifying the specific files being downloaded.