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Sunday 22 October 2017
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Ripple and the Future of Cryptocurrencies

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I was hooked. This just felt right.

When I first saw this in 2006 I knew this was right. I believed: this must be part of the solution. I checked the progress every few months. Nothing really happened. I almost forgot about it. Then, when I checked again in 2013, it was back. It was back big.

Funded by organizations with names like Andreessen Horowitz or Google ventures. Made for a world after Bitcoin.

“That’s more like it.” I said.

So what is this Ripple thing all about?

Nothing new, actually.

It’s exactly what people have been doing for thousands of years. And yet that is exactly what makes it so fundamentally new and great. People do things for each other every day, things they are good at. And they want things in return. At some point. Not all of it at once right now. Some of it later.

Division of labour. The global economy.

An exchange of goods and services is basically never just barter. Someone always goes first. Imagine you’re a skilled mechanic. I am a farmer. In spring you provide me with a handy machine that helps me farm more efficiently. In return I promise to provide you with part of my harvest in fall. Until then we have this “I owe you” relationship between us.

Informal credit systems (from Latin credere: to believe, to trust) like those have existed for thousands of years, long before any kind of physical money like coinage.

A lot of economists postulate though that before money there was barter. The same kind of economists who believe that money is and should be a commodity. Gold would be a perfect match for this. Or Bitcoin maybe.

No, it wouldn’t. It totally misses the point.

The money thing is just a token. It’s all about the informational value. Money is inherently about relationships between people. Somehow this insight seems to have been lost in all those years. Time to bring it back.

But we can’t just go back to a time when people did favours for each other, and could remember who did them a favour, and who deserved one in return. That works in small, local communities, not in a global economy.

What we need is a tool to keep track of all that information.

But who says we need a central bank for that? Ripple can be this tool. Ripple brings what has worked well for villages with up to 150 people to a global economy. Ripple is a system that is built with exactly this purpose in mind: effectively tracking who still owes what to whom. We use numbers for that today. And abstract units of account, like “USD”. That’s okay. Ripple can work with that.

Imagine the machine in our little example was worth 500 dollars. You, the mechanic, got IOUs worth 500 dollars from me. I now owe you crops worth that amount. Or actually to whoever presents those IOUs back to me.

So now you can go shopping with those IOUs. Buy some wood. And stuff.

That is essentially what the Ripple system can do. It provides a way to issue and transfer IOUs for whatever. Usually for units we are familiar with, like dollars.

This all assumes your sellers trust me – the issuer of those IOUs. It breaks down when this trust doesn’t exist. When the wood’s seller doesn’t trust me, he won’t accept my IOUs for payment.

Maybe he would trust his friend, the innkeeper, for 100 dollars. And the innkeeper would trust in my IOUs. So you could go to the innkeeper, ask him to write out an IOU for some good meals worth 100 dollars, and trade it for my IOU. Then just take the innkeeper’s IOU and get some wood for that. Easy. Not.

It makes your head hurt even thinking about it. You shouldn’t need to think about it. That’s why Ripple does all that automatically. If you want it to.

Having 5 USD with Bitstamp and trusting them with up to 100 USD

Having 5 USD with Bitstamp and trusting them with up to 100 USD

In Ripple trust is explicit. You implicitly trust your bank when you put money in your checking account.

In Ripple you say: I trust this person, or this bank, or this company for up to this exact amount.

Did you notice we didn’t use any actual government-issued money for all our trading? Just lines of credit between people and organizations. No need to acquire any Bitcoins from miners.

Any system that prevents this kind of economic activity, by requiring that the participants have money to start out with, can never be a complete solution to the economic problems the world is seeing today.

Ripple is so conceptually decentralized that it makes this possible.

This doesn’t mean that banks will not be necessary any more. There is still value in having a trustworthy third party that can aggregate people’s trust, and give out insurances and loans.

And banks can act as interfaces to the non-Ripple financial system out there, being called “gateways” in Ripple.

Some people might have to re-learn that money can just work like that. And we have a unique opportunity at the moment for this actually happening. I can already see this happening.

“Isn’t Bitcoin just speculation?” – Bam!

People are talking about money right now. Not just about how to earn more, what to spend it on, about never having enough of it, but actually about what money is.

Changing our basic way of understanding the world is always a slow process. Why should the generation that grew up on the Internet care though. They have all the tools they need.

Companies integrating Ripple are popping up everywhere. New gateways in different countries seem to open up every week. Actual banks – like Fidor in Germany – are starting to use Ripple to make money transfers cheaper and faster.

With it’s built-in exchange Ripple actually enables easy paying and trading with and between all the existing currencies in the world.

Chart showing Euro exchange in Ripple

Sending some Euro inside Ripple

Say I want to pay somebody in EUR. Ripple offers me the choice of sending any currency I have in my wallet and converting it to EUR automatically.

Now how does Ripple do that?

Well, anybody on Ripple can trade between currencies. This decentralized exchange is built right into the network. Just create an offer stating: “I have those 10 EUR in my wallet and would like to exchange it for 15 CAD”. As soon as somebody accepts that offer either explicitly or implicitly – by making a cross-currency transfer – your trade will execute.

XRP?

XRP. When using Ripple you will definitely come across this.

Besides being able to handle all kinds of other currencies, there is that new, built-in currency in Ripple called XRP (also – a little confusingly maybe – called “ripples”). There are two reasons for XRP to exist inside the Ripple system:

First, XRP ensures the security and availability of the system: You need to keep a minimum amount of ripples (worth just a few cents) to own an account in Ripple. And a very small amount of ripples is charged for every transaction you make (currently 0.000012 XRP, equal to 0.00000008 USD). The XRP charged as transaction fees are actually being destroyed by this process; nobody gets them.

So for every-day transactions Ripple is essentially free. But if somebody wanted to attack the system by flooding it with millions of bogus transactions, this would become expensive pretty soon, especially since the network will increase the fees temporarily during such an attack.

Second, ripples play the role of a bridge currency. Imagine you are in Canada and have Canadian dollars and you want to pay somebody in Kenya with Kenyan shillings on Ripple.

There might not be a big market between Canadian Dollars and Kenyan shillings in Ripple. But if Ripple is reasonably established in a currency zone, there will be a liquid market between ripples and the local currency.

So what the Ripple system will be able to do automatically, is convert your Canadian dollars to XRP, and then convert those XRP to Kenyan shillings, always looking for the cheapest such path that is available.

XRP is the only currency in Ripple without counterparty risk. If you’re holding anything else but XRP in Ripple, you’re actually not holding the thing itself, but trust somebody else with it. You’re essentially holding an IOU. This becomes particularly obvious when you hold some gold or silver in your wallet.

It’s really exactly the same as with your checking account in your bank: you trust the bank with keeping your dollars safe and making them available to you on your request.

Where do those XRP come from?

100 billion XRP were programmed into the system. There will never be more. 20 billion of those were kept by the inventors of the Ripple system. The other 80 billion XRP were given to a company called Ripple Labs. They now employ the developers that actually program the Ripple source code and ensure the Ripple system keeps running smoothly. Ripple Labs intends to give 65 billion of those ripples away to the Ripple users. Twelve percent of those have already been distributed.

The remaining XRP are being used by Ripple Labs to fund their operations. Their goal is to make Ripple a success and thus increase the value of their XRP holdings.

Everything about Ripple is actually open source. This means the Ripple source code can be audited, run and improved by anybody.

Ripple wallet balances

Ripple wallet balances

The present and future of Ripple

Ripple already is a perfectly working system for payment, credit clearing and currency trading.

Payments clear in two to ten seconds. Every time. No need to wait for an hour to get six confirmations on the Bitcoin blockchain. Or are you still sending checks in the mail?

You can use Ripple as an universal wallet for all kinds of regular and crypto-currencies.

Getting started with Ripple is really easy. Just use the web-based client on rippletrade.com.

To get national currencies into Ripple, use one of the existing gateways, like SnapSwap or Bitstamp.

If you already have some Bitcoin, it’s even easier. Just send some Bitcoin directly to your Ripple wallet using the btc2ripple gateway. That’s just the click of a button away in the Ripple wallet.

This gateway also acts as a two-way bridge in the Ripple system: You can actually send your Bitcoins from your Ripple wallet directly to any Bitcoin address. The system will redeem your Bitcoin IOUs and makes the gateway send the Bitcoins to the address you specified.

Future, phase 1: semi-centralized use of Ripple

In the next few months we will see more and more gateways in different parts of the world. Ripple gateways already exist in the USA, Canada, Mexico, Europe, Singapore, China, New Zealand, and other places.

Remittance is one common real world usage Ripple is targeting now: Making it more pleasant for people to send money all over the world. Having to rely on services like Western Union for that is not exactly cheap today.

Ripple is still under heavy development. It will become easier to use for all kinds of scenarios. It will soon have conveniences like recurring payments and far more advanced automation features (“smart contracts”).

For the near future people will use the Ripple system in a quite centralized manner, similar to the banking system we have today. A very large percentage of all money is managed by just a few of the largest banks.

The equivalent of those banks inside Ripple are the large gateways. Most users will have balances with those gateways only.

Future, phase 2: real monetary decentralization

Further into the future I can imagine more and more people understanding and appreciating the concept of trust relationships inside Ripple. They will start using Ripple in a more decentralized manner. This is a very powerful concept that could eliminate many of the inefficiencies we see in today’s monetary systems.

Ripple might be able to replace large parts of our existing payment systems.

I don’t see it completely replacing Bitcoin however. Bitcoin has found its place in the world as a trust-less money without counterparty risk.

Our ancestors only had to rely on barter when dealing with less trusted partners from far away. Then as now, we can leverage far more efficient credit relationships for our day-to-day business with individuals and organizations we know well.



Martin Kreidenweis

Martin Kreidenweis, MSc, is a software developer and Agile consultant in his day job. He has been writing software on the Internet since the late 1990s. His obsession with trying to understand systems of any kind, and making efforts to improve them, is deeply ingrained in his nature. Since 2004 he has been reading, thinking and talking about monetary systems. This involved co-founding a local community currency in southern Germany. Martin currently lives in Vancouver and is delighted by the growing crypto-currency community there. Martin also accepts tips. Bitcoin: 16EtgVpUbL7jZgcYsYxo6QmVRgX3fTsLRc, Ripple: ~martink (rpUNr3n6SdqTX2obxt78RRVQBS9ZJ3az6N).