Forget Bitcoin for a moment let's talk USD.
Bob owes me $US100. I don't know Bob but he says he will ripple me the money.
In order for Bob to ripple me the $US100 I have to trust him for US$100 (you cannot ripple USD without trust). But what I don't know is that Bob has created a second account called Bob's_sock_puppet. Bob has trusted Bob's_sock_puppet for $US 1 million.
You don't know Bob but you trust him for $100? Pretty stupid move. Don't do that. Not in real life, not in Ripple.
Apart from that, you really don't care whether Bob trusts his own sock puppet for $1000000, as you don't have any trust relationship with his sock puppet.
At 9.10 am I trust Bob for $US100. At 9.12 am Bob's_sock_puppet ripples me for $US100.
Now Bob owes me $100 and Bob's_sock_puppet also owes me $100. Both then default and I am twice as worse off as before.
What do you mean by "Bob's_sock_puppet ripples me"? Do you have any business relationship with Bob's_sock_puppet?
Let me know if I have misunderstood the mechanics.
Yes. Completely.
The only situation in which you should extend trust to a ripple account is when you are really sure that the owner of this account will pay his dues *in real life* whenever you request that payment.
That means that you can trust a gateway for $100 if you can get those $100 in real life from that gateway. For example, you could trust bitstamp for USD when you have a bitstamp account and you know that you can withdraw $100 from said account.
If you want to receive USD in Ripple from a stranger, request that he sends it to you in a currency issued by someone you trust, for example Bitstamp. He can then buy Bitstamp USD within Ripple using whatever currency he manages to get into Ripple (for example, DividendRippler BTC or LTC). Of course, he can use his own Bitstamp account just as well if he happens to have one. But what you end up with is $100 USD issued by Bitstamp, not Bob. And unless Bitstamp goes belly-up (which is of course a possibility, shit tends to happen) you can withdraw the $100 from Bitstamp anytime you want to.
Onkel Paul
Thank you this has been a highly educational experience so far.
So lesson 1 is I would be a fool to use Ripple as a peer to peer payment protocol. Instead I should use trusted gateways.
So Bob will pay my gateway in USD and my gateway will issue me an IOU. My gateway will then spend Bob's USD on pizza and beer. So long as my gateway issues IOUs faster than funds are redeemed the beer and pizza will keep flowing. If redemptions get too much they can always do a Gox and slow down fiat withdrawals.
This sounds marvellous. I am eager to set up Hairy Gateway right away. I will issue Hairy USD to all comers. I will also set up another gateway called Bitfin which issues BitYuan and another called Doge Gateway which deals in Doge coins. To show how trustworthy this all is Bitfin will trust Hairy and Hairy will trust Doge. As a New Years special everyone that trusts Doge will get 1 Doge coin.
Please tell me more about your accreditation process for gateways. I have an extensive criminal history for financial fraud so I hope you will not do extensive due diligence or run a criminal record check on me. Even if you do I will just register the gateway in the name of my 12 year old cousin who has never been caught.
When my gateways all blow up, I will start new ones with new fancy names and special promotions.
Looking forward to receiving more information about becoming a gateway king.