[COLOR=royalblue]"Subscribers of Wanadoo Netherlands can download MP3s and videos twice as fast, thanks to a PeerCache set up by the company for users of KaZaA and other peer to peer networks. "[/COLOR]
When this technology is used, peers automatically and transparently look first to a local, temporary cache. Only when a file is not available, KazaA will get it from other users on the network. Files are stored locally, but not in any kind of instantly recognisable form. Usually, files are only swapped between users and there is no central server.
More here, and here.