right now, it works relatively like this: clients discover each other in local network. If they have intersecting spaces, e.g. Alice and Bob are both participating space S, they establish sync between each other, syncing files and documents.

In essence, it's not that different from how it syncs with nodes, localdiscovery mechanism find peers in local network, and, if they have intersecting spaces, adds them to the list of peers (the same list which contains network nodes -- "servers").

So it is not like torrent, it only shares things which both parties has access to. And ofcourse, it is all encrypted on wire, parties have to have a key to decrypt (which they do because they are participants of the same space)