It also holds (or controls) any IOUs you might own. The underlying asset is kept by the issuing gateway, or at least you hope that's true, and you have to trust them to redeem it for you, possibly for a fee. That's why IOUs are always linked to a specific issuer so you know who is responsible for it. It's just like a Bitcoin coloured coin, the Ripple network provides a reliable and impartial public record of who owns what, but you have to trust gateways to abide by their promises. If you are dealing with a legitimate gateway, then you could use the court system to try to recover your money if necessary. This is a complement to the trustless system used by Bitcoin and XRP, not a replacement for it.

You don't have to use XRP if you only want to use Ripple as a distributed BTC-fiat exchange, except for a very small minimum reserve requirement and tiny fees. And that's what got me interested in Ripple in the first place, a resilient distributed exchange for fiat and cryptocurrencies. That's what my signature refers to. Whether XRP succeeds as a currency or whether it is "fair" or not doesn't matter for that.

And as for fairness, I fail to see what is unfair about generating the XRP and the distributing them as they see fit. This is no different from store credit, gift vouchers etc.

Interesting. Is this fee just the "quality" setting of the rippling mechanism in action, or is it a separate setting?

OK, I see what you mean. In the case BTC IOUs, yes they do hold your BTC for you, which means they do host a BTC wallet, or maybe outsource that to others. I thought you meant a Ripple wallet. You can store your Ripple wallet (which may or may not contain BTC-denominated IOUs) locally, you don't have to use a hosted service. Except for XRP, it means you're trusting the gateway to hold the fiat currencies and cryptocurrencies other than XRP for you. In the case of fiat currencies that could involve keeping physical money in physical vaults, but it more likely means keeping it in a bank account. For cryptocurrencies it means hosting wallets, though not necessarily a separate wallet for each customer.

Nothing wrong with that, right? No one is forcing you to use it. If you have a financial interest in seeing BTC win, then that's just as legitimate and you are free to boycot it or to try to come up with a superior BTC-based solution. I'm agnostic about this, the more solutions the better, and market forces will sort out which ones will survive. I don't care which one wins, and it's even possible several ones wil coexist. In the short run I expect Ripple and Bitcoin to be enormously synergistic, and to me that's the most important thing, since that will make it likely P2P cryptocurrencies will take over the world. Which one ends up winning isn't that important.

You could do something similar with Bitcoin. It would be slower, but that needn't be a big problem.

If you want to understand Ripple, you have to make sure you understand the difference between the roles of validators, wallets and gateways.

Validators make decisions on which transactions make it into the ledger, much like Bitcoin miners, though there's no equivalent of a block reward. And like bitcoin miners, they don't get to decide the rules that determine which transactions are valid. Unlike bitcoin miners, they do have a vote on some things like fees and minimum reserve requirements.

Wallets are just like bitcoin wallets, they are just collections of private keys and maybe some extra information like labels for otherwise pseudonymous addresses of others. You can host them yourself, or use a hosted wallet service. You do not need to hold any IOUs issued by gateways to use a wallet, though that will limit you to using XRP and any fiat trade credit provided by your extended social network.

Gateways hold fiat currencies and issue and redeem IOUs for them. They need not hold wallets or run validators, though most gateways probably choose to do that as well. They do not keep the books, they merely allow fiat currencies to be traded on the Ripple ledger by honouring their IOUs. This is very similar to the idea of using coloured coins with Bitcoin. The blockchain can be trusted to keep accurate records, but you have to trust the issuers of coloured coins to redeem them for the real world assets they represent.

So you admit it's actually a very good system?

What would you accomplish with this? I don't think they make any money on Ripple.com, other than as a way of promoting the Ripple network, which they will hope will eventually lead to substantial appreciation of XRP. Running a gateway (which means holding fiat currencies and cryptocurrencies other than XRP for safekeeping) or acting as a market maker is how you make money with Ripple, and you don't need Ripple.com for it.

Wallets aren't stored on gateways, only currencies (except XRP) are. It's the gateways that are federated, not the wallets themselves. Of course, gateways can offer wallet hosting services if they want to, but it isn't required for being (or using) a gateway.

Ripple isn't a site, it's a network. The Ripple.com website is just a convenience, and just like blockchain.info, you don't need it to use Ripple. In addition, and unlike blockchain.info, your wallet isn't actually hosted there. People can already start their own sites if they want to.

I haven't done it myself, but I understand it's a couple of hours work if you've never done it before. Probably minutes to an hour if you've done it before, and less if you have it scripted, but I don't think many people do. Note that I'm not saying that Ripple Labs doesn't have closed source code, but that's just like Bitstamp or Mt Gox or blockchain.info having closed source too. The essentials like client and server and lots of supporting stuff as well are open source.

You've said it before, and you're wrong. Ripple is now fully open source.

Does this fee for cross-currency payments only apply when you are sending money to a recipient through the rippling system, or also when you explicitly place an order in the order book?

This is just like having an account at a bitcoin exchange, or a bank, with the difference that with Ripple it is a neutral and algorithmic P2P network that is keeping the books, not the bank or exchange itself. Don't extend trust to anyone you wouldn't open an online account with.

You shouldn't be able to send them to people that don't trust TradeFortress.

It wouldn't matter if Ripple Labs went down, you would simply have to talk to a different server, maybe your own. It would be like blockchain.info going down. Actually, even less than that since you would still have access to your funds.

Its architecture is fully decentralised.

Eh, that's TradeFortress' anti-Ripple propaganda site. Enough said.

Since they have never succeeded in eradicating the black market, they likely won't be able to stop it being used as the currency of the black market. And in that case, it's game over for fiat currencies.

How much potential is there for a more efficient wire encoding / data compression?