Peering is voluntary interconnection of administratively separate Internet networks for the purpose of exchanging traffic between the customers of each network. Peering is settlement-free or "sender keeps all," meaning that neither party pays the other for the exchanged traffic, instead, each derives revenue from its own customers.

Peering requires physical interconnection of the networks, an exchange of routing information through the BGP routing protocol and is often accompanied by peering agreements of varying formality, from "handshake" to thick contracts.

Source WIKI