2013-05-14

Bitcoin 2.0: Can Ripple Make Digital Currency Mainstream?

The company is trying to create an online money system that is easy for everyone to use, not just the insiders who feel comfortable trading in Bitcoins. It’s all built on a massive system of personal trust.

It has been a nail-biting year for people who hold Bitcoins, an open-source digital currency that has quickly gained traction in the tech community. Last June, Bitcoins were worth $5. By April 2013, they were up to $266. Then they dropped to $70 in April. They were back up to $108 by May 7. Bitcoin is volatile. We know that much. It’s also vulnerable. Mt. Gox, the biggest Bitcoin exchange (where users go to exchange Bitcoins for other currency)--was recently faced with multiple DDoS attacks , shutting down the site temporarily.

But here’s the thing about open-source currencies: they’re open to improvement. Ripple, a platform that just received funding from Google Ventures, Andreessen Horowitz, Lightspeed Venture Partners, and others, has created both an alternative to Bitcoin and a distributed currency exchange for Bitcoiners (and others) who aren’t comfortable using only Ripple’s currency, known as XRP.

Bitcoiners could have reason to be suspicious of Ripple right off the bat. Whereas Bitcoin was created anonymously and relies on a foundation to standardize and protect the currency, Ripple is the product of OpenCoin, a public-facing company that just raised funding from a number of firms. OpenCoin plans on holding 25% of all the XRP in existence--the idea being that as the currency becomes more valuable, the company will have more resources to fund its operations (and presumably, to make its founders quite wealthy). There’s nothing intrinsically wrong with OpenCoin wanting its currency to rise in value, but the system is dramatically different from Bitcoin.

OpenCoin co-founder Chris Larsen believes that having a central company behind the currency is to its users’ benefit. "Bitcoin does a great job with a group of folks working through a foundation, and ad hoc contributions," he says. "We thought we could get that too, and also get a core group to nurture this thing for a few years."

The Mechanics of Ripple

The Ripple platform serves two purposes: it’s a distributed open-source payment network, and it’s the home of the newly minted XRP currency. As a payment network, Ripple provides free global payments without chargebacks (minus a $0.0001 per transaction network charge, implemented as a security precaution against hackers), the ability to pay in any currency using a distributed currency exchange, and an open protocol that any developer can use. "The Ripple network is a protocol. It’s like HTTP for money. Users, merchants, anyone can use it for free without a license," explains Larsen.

Participants can exchange dollars, yen, Euros, and even completely made-up currencies, all of which are entered into the system via "gateways." Larsen says: "A UI designer and myself can be a gateway to each other. A gateway can be a friend, neighborhood, a group. Most gateways will be larger. It’s like the way Paypal works--you give them $100, they create a $100 balance." The largest Ripple gateway right now is Bitstamp, which is used to buy and sell Bitcoins.

If one gateway is taken out by a hacker, users can move on to the next. And as McCaleb pointed out to The Verge, the Ripple gateways can’t seize or freeze accounts (unlike Bitcoin gateways), so they require less trust to use.

The only currency that doesn’t need to be entered into the Ripple platform from a gateway is XRP. This is an advantage over Bitcoin: Ripple is its own currency exchange--so it doesn’t have to rely on outside exchanges like Mt. Gox (Jed McCaleb, the creator of Mt. Gox, is a co-founder of OpenCoin).

While Bitcoin relies on anonymous exchange, Ripple supports an IOU system. The platform’s website explains it best:

One day your best friend’s sister comes to visit. You, your best friend, and his sister go out to dinner. Your best friend’s sister forgot her wallet, and to be friendly you offer to cover her portion, which comes out to $20. Your best friend’s sister now owes you $20.

Instead of waiting for your best friend’s sister to get to a bank or ATM, you use Ripple. Your best friend’s sister accesses her Ripple wallet on her phone and sends you an IOU for $20.

She can do this because there is a trust path between you in the network, through her brother: you said you were willing to trust her brother (your best friend) up to $100, and he said he was willing to trust her up to $50. So a $20 IOU can get from her to you, by passing through her brother.

The system works because everyone along the path has vouched for the person just directly before him in the pathway. He accepts an IOU from her and then issues an IOU of his own for the same amount to the next person in the path who accepts his. His balance then zeroes out and the IOU has moved along one more link in the pathway.

Distribution

New Bitcoins are created by a process called mining, where network nodes verify transactions by solving math problems. In exchange, the users behind the nodes receive Bitcoins. In contrast, OpenCoin is slowly distributing 100 billion XRP, starting first in the Bitcoin community. No new XRP can ever be created. GigaOm explains:

As this process has nothing to do with mining the virtual currency, there is no need to control the timing of the verification, meaning transactions can happen within seconds rather than in 10 minutes or more it takes with Bitcoin. This is clearly a big advantage, and there are others, such as the ability to create a chain of IOUs, either through people they personally know and trust, or by using ripples.

Larsen thinks that Ripple’s distribution method--giving away XRP--will pump up its appeal to the masses. "It comes down to ease of use, how easy it is to get the currency," he says. "To really get this going, it needs to be in the hands of tens of million on the user side." Getting a hold of Bitcoins, on the other hand, isn’t easy. You have to either buy or mine them--and mining is really only for experts. Bitcoin is expanding, albeit slowly.

Says Larsen: "You give [XRP] away for free, and you give it away in a way that’s super easy to use. Then I think the merchants come with that."

Bringing Bitcoin Users Into The Fold

Ripple isn’t trying to convert all Bitcoin users to dedicated XRP advocates (though that would certainly be nice for OpenCoin). Instead, Larsen sees Ripple as a companion to Bitcoin. "It’s complementary. You can hold your Bitcoin in Ripple. We want to be agnostic to any currency, whether that be a virtual currency, political currencies, or peer to peer currencies," he says.

But Ripple will easily fail if people don’t use it, regardless of whether they hold most of their currency in dollars, Bitcoins, or XRP. Adoption will be key. And judging by conversations on the Bitcoin sub-Reddit, the Bitcoin community is cautiously optimistic. At the moment, that’s the best sign OpenCoin can hope for. The real test will come when Ripple starts moving into the general consumer space--and tries to teach people the somewhat complicated mechanics of the platform.

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19 Comments

  • Berrtus

    Many may not quite understand this but Ripple appears to be the currency that the NWO has planned for so long.  The funding by Google is evidence for that.  There is other evidence: It is (nearly) impossible to buy xrp except through a gateway that requires identification.  Once identification is given they can track your every move.  Some don't see lack of anonymity as a problem just like they don't see it a problem that the NSA can track your speech.  But it is a problem for similar reasons having to do with government control.  Ripple also appears to allow for a tax on every transaction by using the gateways to charge it.  Sorry, I don't understand how that works exactly, but read something about it.  So infinite trackability and taxing each transaction those are two NWO goals now finally add that in the future Gateways could become quasi government entities along with the fact that this is still a centralized system and we can see.  This is why there are trolls EVERYWHERE on this topic.  They are locking up the currency.  They are in complete control and the human population is like complete idiot dodo birds.  No wonder they plan to kill 95% or much more.

  • Kurious

    I have ripple and I can tell you that the Bitcoin 'Gateway', Bitstamp is currently one way ONLY, that is you can get Bitcoin IN to Ripple, but not out again.

    Be careful out there - places shut down, shut you in and shut you out - it's all very unregulated.

    I only found this article as I am searching for a Ripple gateway I can trust to actually get some Bitcoin OUT of Ripple!

  • John Prescott

    I understand that Ripple is based on trust. Please call me dense or stupid, but I do not want to have to trust anybody. While it is encouraging that a BitCoin founder is with OpenCoin, I don't trust that XRP will never print more, a la the Fed. Or that the company will never violate any laws and get shut down by the govt (easy, since it is centralized). What I appreciate most about BitCoin is that its founder(s) went out of their way NOT to own it; not to require any trust. This makes the cumbersome precautions and transactions worthwhile.

  • John Prescott

    I am tying to respond to Salwilliam and Guest, but the only respond button is in my own post.
    Salwilliam: I agree money supply with Ripple is fixed. But the existence of a central authority makes me fear that they migth take it from me one day.
    Guest: In theory I can trust the banks (I do not live in Cyprus). In practice I do not; keep most of my money outside.

  • Salwilliam

    The money supply with Ripple is fixed in the same way it is with Bitcoin. It can't be changed unless the entire network agrees.

  • Guest

     You already trust the banks where your money is deposited. In fact, you trust them in spite of they don't hold your money. They use it to give credit and/or make investments.
    The Ripple network will remain existing regardless Opencoin (the company who created the Ripple network and the XRP currency) gets shut down or not.

  • Rob T

    Aaron, you misunderstood how Ripple works. There are not USD in the system. There are "USD issued by Bitstamp" and "USD issued by MtGox" in the system. If you trust MtGox's USD but not Bitstamp's USD, you can only ever receive USD/MtGox. You, personally, trust MtGox to convert back and forth to real USD. The ripple network will try to find a way to convert a payment from someone to you from their currency+issuer to one you trust, and the payment will fail otherwise.The only way to convert to a non-ripple currency is through a gateway or some OTC trade (eg. your friend will pay you $100 for $100 USD/MtGox. But you can hold and trade a ripple currency without having a personal/business relationship with the gateway. So long as you don't want to convert it to a real world asset, you can do whatever you like within the system. It's this trust by yourself or others that will make a ripple currency valuable.

  • Rrefrg

    "The Ripple network is a protocol. It’s like HTTP for money. Users, merchants anyone can use it for free without a license".
    It's a lie! It is true for bitcoin, but not true for ripple. Anyone can use bitcoin, but you have to register with ripple.com to use ripple. Mathematics are behind bitcoin; a corporation is behind ripple. Bitcoin is decentralized and open source; ripple is centralized and closed source.

  • Aaron Holmgren

    A separate system like this could be setup though. Ripple does not need to be the specific decentralized network that ends up serving this purpose. The bitcoin community could easily support their own version of ripple.

  • Aaron Holmgren

    As long as people are not required to collect physical money from one another, and there are enough trusted entities dealing in physical money to support the system, then so far, I see no reason why it wouldn't work.

  • Aaron Holmgren

    I just realized. I think the system would prevent this by disallowing me to choose the highest price for bitcoins on the market... duh. ok.

  • Aaron Holmgren

    On the other hand, if I can go to a single designated entity to collect his cash, it then becomes easy to "rip off the network", does it not? I could develop a very large circle of trust over the years, so that I have thousands of US dollars worth of credit line among people. I could then "cash out" by simply selling say 0.00001 bitcoins for an outrageous price, say thousands. Nobody in their right mind would buy that insignificant amount of bitcoins for thousands, except myself. So I would then proceed to "pay" myself, from my account that has a huge line of credit, to my other account that is selling the bitcoins for an outrageous price. I would then go and collect the physical cash, through my account that sold the bitcoins; and voila, I have just robbed the system.

  • Aaron Holmgren

    Lets say I want to withdraw $500 dollars US from the ripple network, in exchange for bitcoins. Who pays me this physical cash? Do I have to go to all the people whom I have a line of credit with to collect this cash? Or does the organization that started ripple have to set up special entities that I can go to in order to collect the physical cash? If I have to collect all this cash from my "circle of trust", I highly doubt people will go for this...

  • Matthew Lipscomb

    Well written article; however, I feel that you should have done more to explain the differences between a centrally controlled currency vs one that isn't. That's the key to bit coin and the very reason Ripple won't be trusted. 

  • Dominik Ż

    As I understand it the Ripple network is supposed to have independent transaction nodes that keep a copy of the tx ledger.  So it's not entirely accurate to say that it would be centrally controlled.

  • Dominik Ż

    As I understand it the Ripple network is supposed to have independent transaction nodes that keep a copy of the tx ledger.  So it's not entire accurate to that they it would be centrally controlled.

  • JimboToronto

    Indeed. Another aspect to consider is that with a central company there is a real danger of a loss of anonymity.

    Lack of any central authority and anonymity are Bitcoin's to greatest strengths. Authority must remain equally distributed between every anonymous peer on the network without any meddling from any governments, banks or other corporations.