These are the things they say are baked into that fee to justify it, but the reality is quite different. The reality is that it's lack of competition, extension of credit, and fraud prevention (due to the fact that you give the credentials away fully to make a payment) that accounts for most of the fee. Still, credit cards are probably not the very best disruption target. The higher the cost, the easier to disrupt.

A .25% default risk (5% risk of the event, 5% of funds at risk) versus a 2% credit card fee, a 6% remittance fee, or a 5% conversion fee looks like a pretty good deal. But I definitely agree -- having insured gateways is even better.

That's what they said about Facebook and Twitter. We're open about almost everything else because the benefits outweigh the costs.

Say you need $50 to buy groceries. What do you do today? You put it on a credit card (at 12%?) or, worse, take out a payday loan. But there are almost certainly friends of yours who would gladly lend you the $50 if they knew you needed it.

To some extent. If one gas station didn't accept credit cards, they'd lose business to others. But since pretty much every gas station does, it basically just means gas is 2% (or so) more expensive.

I think it's overall a pretty bad deal for consumers. They pretty much accept it because merchants have accepted the 2% as the cost of doing business, so they see all these things as free.

You're right -- it's even worse than my analogy suggests. They lose the sale price, not the cost of goods.

Money can be lost. The trust extended to a gateway should be rationally balanced against the benefits of that trust.

This has only a minimal affect on people who use gateways to facilitate payments -- only money that's "in transit" is at risk. If you figure a respected gateway has, say, a 5% chance of going bankrupt or being shut down in a year and will be holding 5% of your yearly gross at a time, that's functionally equivalent to a .25% cost. Compared to 2% for credit cards, that's wonderful.

However, it can have a significant affect on people who use gateways as a store of value. For that, you really want gateways that are insured. This is a great application for Bitcoins, IMO.

Yes. This is one case where it might make sense for a gateway to extend trust to another gateway. And people evaluating the reliability of such a gateway should take into account the additional risk they're incurring. The gateway has to choose between keeping the profits in this path for itself while taking the risk or allowing market makers to take the risk, but also the profit. We don't know if anyone will actually adopt this business model. Personally, I think very small gateways may adopt this business model (because it's their only choice) and larger gateways may adopt it temporarily, until market makers come around.

It wouldn't require individuals to do anything. The gateway operator would either hold or accept balances from one or more other gateways, depending on which half of the imbalance he had to fix.

In my example of a gateway that's primarily aimed at merchants, the gateway operator could simply set up an account that offered to accept, say, Bitstamp USD balances in exchange for balances from his gateway. This would allow his customers' customers to buy from his customers using Bitstamp balances. Bitstamp would then become part of his cash in pathway -- he'd redeem those balances with Bitstamp directly.

If you imagine a "cash over the counter" gateway, the gateway operator could use Bitstamp as his cash out pathway. He would hold a balance at Bitstamp and offer to exchange his own balances for Bitstamp balances. This would ensure his customers could easily pay people who want to accept Bitstamp balances. He would take some of the money he took over the counter, send it to Bitstamp, and thereby acquire the balances he would trade for his own to keep his balances liquid.

Eventually, market makers would probably do this for him. But he may find his business model unusable in the absence of sufficient liquidity and he may at least need to do it himself to bootstrap.

2% for credit cards. 7% for remittances.

I think people have grown to accept as "just the cost of doing business" what they would consider intolerable if they were forced to look at it objectively.

I had a conversation about this with a man who owns a chain of grocery stores. And I asked him to imagine a hypothetical where 1 in 50 of his customers steals their groceries -- just walks out the door with a cart full of groceries without paying. Of course, he said his business couldn't survive with such a high level of theft, his margins were too tight and his costs too high, and that he would make fixing that his number one priority. Meanwhile, he takes credit cards which costs him just over 2% -- slightly more than 1 in 50.

Thank you.

Not any time soon.

I think only in very specific use cases, such as a gateway that has a huge cash in / cash out imbalance. Imagine a cash over the counter gateway or a merchant only gateway.

If Ripple catches on as a payment network, then the liquidity will make it a good platform for exchanging fiat for crypto. The big problem with exchanging fiat for crypto is the mismatch between hard and soft money. If Ripple makes hard fiat doable, I think that's enough to make it a competitive platform for exchanging fiat for crypto.

You can provide liquidity between gateways yourself if market makers don't do it for you.

Consider a gateway whose primary purpose is to serve merchants. Merchants who accept their balances won't do any business unless their customers can get balances from them. The easiest way for them to get that going is to agree to accept balances from other more established gateways that have a working "cash in from the general public" infrastructure. If customers with balances at other gateways can't pay the merchants, the gateway fails. One way to ensure this is to provide backstop liquidity by trusting other gateways.

Obviously, this has risk associated with it. The gateway would have to carefully weigh the benefits and costs associated with doing this.

Unless arbitragers or market makers come in, a gateway aimed primarily at merchants will have a huge cash imbalance as they pay out to merchants but don't get any cash coming in. Unless they accept balances from other gateways, this imbalance will destroy their business as their customers' customers can't acquire balances to make payments to the gateway's customers.

The existing systems are absurdly inefficient. Each payment system is tied to its own proprietary liquidity providers. Connections between systems are ad hoc, expensive, and slow.

I think that's one way of looking at it. Think about things like email and text messages. What makes them so ubiquitous and useful is the fact that they provide a unified namespace and work across providers seamlessly and without high costs, long delays, randomly different policies, or the like. Payment systems today are where email was before it was federated by SMTP.

The problem is that this lets them borrow from you even when it's not convenient for you, it makes it hard to keep track of how much they've borrowed and when they've paid you back, and it makes it hard to set and manage a limit to how much they can borrow. Ripple can knock down a lot of these barriers. But whether that's enough to make social credit work, I don't know. Real social changes will be necessary -- people will have to be more open about their finances and more willing to accept help.

I suppose you can view it as an exchange. One thing is traded for something else, certainly. There are two senses in which it's not like an exchange, at least not in the sense that Bitcoin exchanges are exchanges.

First, the two things traded are denominated in the same currency. A dollar from a gateway in Ripple is worth less than a physical dollar because there's counterparty risk. But a dollar from a gateway in Ripple is worth more than a physical dollar because it provides you access to the liquidity in the ripple network and can be transferred rapidly. For healthy gateways, there's an implicit agreement to treat these two factors as cancelling out for mutual convenience. The expectation is that this will remain true, so there's negligible exchange rate risk.

Second, the gateway acts much more like a bank than an exchange. The gateway is just holding fiat currency until someone claims it, just like banks normally do. The gateway doesn't have to match parties to counterparties or hold anything other than fiat.

I think these two factors make what a gateway does so different from what we think of as an "exchange" that it's not helpful to describe it in those terms.

A 1:1 exchange rate between assets denominated in the same currency is not at all comparable to an exchange rate between different currencies. People have to set values to assets, and it's reasonable to expect they'll select pathways. But the vast majority of people are not going to want to have to maintain exchange rates between currencies.

When you have an asset issued by a gateway, there is a convenience to the asset being tradable on the ripple network and there's a risk to the gateway collapsing. To make trade work, there's a kind of handshake agreement to pretend these effects perfectly cancel out and treat assets issued by reputable gateways as worth face value. This is much like people not weighing silver dimes or trying to count a microscopically light silver dime or a slightly heavy silver dime as worth more or less. The inconvenience simply isn't worth it. This is what makes rippling possible -- people widely considering assets fungible because their value is "close enough" and everyone benefits from the easier mobility.

It can't work across assets denominated in different currencies or with interest rates associated with them unless people manually maintain rates or set time horizons.

There is no incentive in Bitcoin to run a client. The only incentive is for mining, which doesn't exist in Ripple.

People running clients don't get any compensation in Bitcoin. The Ripple server is analogous to the Bitcoin client.

People will run Ripple servers because they want access to the Ripple network. Otherwise, they'll have to find someone else's server. People who run servers to provide access to the public will expect to provide access to hundreds of low-load clients, not a few high-load gateways, arbitragers, or market makers. The only way to ensure a reliable high-speed path is to run your own server (or pay someone else to do so for you). Then, people won't cut you off because you'll be pulling your weight and cutting you off would mean cutting themselves off.

Once you're running a server that tracks the network, the extra work to validate is negligible. It's just a few crypto operations to sign proposals and validations.

But I do agree that there is a real risk that the network could shrink to a small set of validators. I don't think anyone has any incentive to see that happen and I think everyone who uses the network has an incentive to see that that doesn't happen. We'd like to see a large number of validators around the world run by different groups with different interests, just as we now have a large number of Bitcoin clients running around the world run by different groups with different interests.

This is a very unfortunate truth. And yet if your friend called you up and asked you to help him move some things, you'd probably happily give him $50 worth of your labor. But if he was short $50 to buy groceries, there's really no way to help him, and he'll wind up putting it on a credit card or, worse, using a payday loan.

There are a lot of barriers to lending money to friends. Ripple can knock down a lot of them. For example, you don't have to actually ask your friends to borrow money. You don't have to meet with them in person to pay them back. You can keep track of who borrowed how much and people are cut off automatically when they hit a limit. I honestly don't know if that's enough to make it work. It may or may not be. Social changes will also be needed.

But if that happens, I think it will drastically change the way people think about money for the better. But I don't see it happening any time soon.

Except you get to choose precisely who you trust. In the conventional financial system, you have no such option and are pretty much stuck with your local currency and your local financial institutions.

Yeah, the problem is how we get from here to there. Ripple is like a bridge in that way. For example, one huge problem is the lack of systems that support hard fiat, particularly in the United States. Ripple can solve that.

These same flaws exist in the conventional financial system. At least in Ripple, you get to choose precisely who you will trust and, by default, trust no one. If you had to make something perfect to make it better, there would never be any progress.

http://www.hrmorning.com/would-you-trade-your-password-for-a-candy-bar/

Sadly, we see amoral people using zero day exploits to empty people's Bitcoin wallets. Is that a flaw in Bitcoin?

Sure they would have. If it didn't do it automatically, you would just have had to trick them into enabling it. There's no reason to think that would have been any more difficult than tricking them into trusting you.