Is Ripple a Bitcoin Killer or Complementer? Founder of Mt Gox will launch Ripple

[benjamindees]

Which coins are the "more private" type I wonder?

Unless they are one and the same, neither will be private.

So, there's your answer:  Ripple is a Bitcoin-degrader.

Basically, a digital version of the existing, failed credit-money system, brought to you by the same idiots who have been trying to turn Bitcoin into a more Orwellian, digital version of the existing, failed monetary system over the past two years.

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[jimbobway]

Ive been doing a lot of thinking about this.  I think the way they are implementing ripple is to create trust relationships that determine which block chain is the valid one, even against attackers.  If this is indeed what they are planning then validation is purely on trust.  Imagine the byzantine generals problem where all the generals must attack at the same time.  A messenger must talk to all of the generals and tell the time to attack or lose.  Some messengers or generals could be liars and relay false information and they could attack at the wrong time and fail.  So what ripple does as the way jed is implementing is that some of the generals and messengers trust each other (whereas in bitcoin no one trusts each other.). So jeds solution is not a solution to the byzantine generals problem but a different problem entirely.  Perhaps the group with the most trusting generals is the vaild blockchain which would not require mining.

Bitcoin killer?  Maybe.  

[Elxiliath]

I actually like the idea of the miners, in a way it gives those without upfront cash and a means to mine to earn money. 

[bitCooper]

Even if that's true, provided the bank has assets significantly greater than its obligations, it can still pay everyone back eventually with significant interest. People may be inconvenienced by not having the liquidity they expected, but they can't lose their savings. If a bank doesn't have assets that are significantly greater than its obligations, then it's undercapitalized, and the run just exposes that problem.

My point is simply that a run cannot cause depositors to lose their deposits if the bank was healthy prior to the run. Bank runs are a solved problem for everyone but banks -- a run can bankrupt the bank.

Why would a professional lender not do fractional reserve lending? Once ripple btc or usd become almost equivalent to btc/usd due to level of trust, it's easy. You will never have all customers demand their cash at the same time unless they think the lender is going under; FDIC solves that problem. I would never say that a lender is unhealthy just because they have a fractional reserve, and ripple would facilitate it.

[bitCooper]

Philosophically, I wonder if lending will ever really make sense without very large entities who are being audited by the government. Banks are all about trust, after all. I know that banks won't steal my money because they have decades of history, boards overseeing activities, etc. And the idea of lending to friends might seem appealing, but I think it's bad for friendships.

You're afraid of OTC members building a reputation, then absconding with funds once the payoff is large enough? Why are you not afraid of government-approved banks, some of which have spent a century building strong reputations, stealing client funds and joking about doing so while in the elevator?

Yes, I think lending 100BTC to some Internet user with no identity details beyond a web of trust is far riskier than depositing money with a bank.
1. US bank deposits are FDIC insured up to $250,000. So if the bank goes under or is robbed by someone from the inside, the government will cover my loss.
2. Even investing in the stock of a public company through a broker is pretty safe, putting aside the performance of the stock itself. My understanding is that most securities fraud occurs in hedge funds that manage your portfolio for you. There will always be people like Bernie Madoff promising unrealistic returns and printing out fake "statements" with a fictitious value while they invest in mysterious instruments that you're unaware of.

[JoelKatz]

Why would a professional lender not do fractional reserve lending?

There are a variety of possible reasons. One would be if that's not what the market wants. There's no point in offering a product nobody's buying. Another is that it's risky for the lender. If they make unwise loans, they can lose everything. And even if they do everything right, a run can bankrupt them.

On the other hand, if the market demands a fractional reserve (say because people insist on being paid interest and aren't willing to pay storage fees), then a bank or asset holder will have not choice but to do fractional reserve lending.

I would never say that a lender is unhealthy just because they have a fractional reserve[.]

I agree that a lender is not unhealthy just because they have a fractional reserve. A lender is unhealthy if their assets (including loans) don't significantly exceed their obligations (including deposits). A lender is also unhealthy if the value of its assets are overstated, for example, if many of the loans are shaky.

[R]ipple would facilitate it.

That remains to be seen. I think it's very dangerous to assume any particular model will win out. You're trying to do the equivalent of predicting how people will use the Internet 20 years from now, and Ripple makes other models possible.

For one thing, with interest rates as low as they are now, it's not clear a fractional reserve actually makes sense. Of course, interest rates probably won't be this low forever.

[justusranvier]

A lender is unhealthy if their assets (including loans) don't significantly exceed their obligations (including deposits). A lender is also unhealthy if the value of its assets are overstated, for example, if many of the loans are shaky.

It's commonly accepted to consider loans to be assets for the purposes of determining solvency, but I believe this to be an error (and one of the causes of the ongoing financial difficulties since 2008).

A loan itself is not an asset - the collateral (if it exists) is an asset.

If you really want to determine the financial stability of a fractional lending institution no credit at all should be given for unsecured loans.

[Andrew Vorobyov]

Wow, how much things changed since my last visit.

We we could not have Ripple layer OVER bitcoin protocol just like this - https://bitcointalk.org/index.php?topic=118616.0

Come on guys, give me a hand and validate this idea...

[evoorhees]

I'm curious what would happen, in a world which used Ripple widespread...

Because "money" is created in Ripple via debt/credit issuance, and because there is no hard limit to the debt/credit issuance, it means that there is no hard limit to the money supply.

Example:
Bob wants to buy widget from Tom
Tom trusts Bob to repay in future, so extends him $100 credit
Bob pays for the widget with his credit

Money in this case is created by the debt (not altogether different than our current system of fractional reserve banking).  

So, if this was used all over the world, the money supply could shift very dramatically. In theory, the money supply could double overnight, then double again, then double again, all in a week. Upon bad debts not paying, the supply could similarly fall to a fraction of its former self the next week (actually the money supply could/would shrink just based on the genuine repayment of debts as well).

Interest rates are what prevent such fluctuations to be too wild... but I wonder in a world where the average joe can offer massive credit at the push of a button, or in other words the average joe can create a theoretically unlimited amount of money, how would things play out?

What is concerning here, is that in Ripple when you extend, say, $100 USD of credit to someone, you have created one hundred potential US dollars, in effect. Even with the soft discipline provided by interest rates, I worry about the usefulness of money itself under such a system.

Usually a monetary system has a base money supply plus a credit supply on top and these together equal the effective money supply. In Ripple, there is no base money supply, is there? Or at least, in the current world there is a notable relationship between base money and credit that can be built on top of it... in Ripple I'm not sure such a dynamic exists. It seems that the potential credit has no necessary relationship with any base money.

Would love to hear anyone's thoughts on this?

[evoorhees]

Another concern I have is the following...

The pricing of risk is a specialized industry. It is difficult to do. It requires work, focus, skill, and experience and like any competitive industry many/most people will fail at it.

And yet what Ripple is asking every average Joe to do, is to price risk efficiently with the people they know. Joe may know that his sister Susan is trustworthy, and is thus willing to extend credit on Ripple... but how much credit? Is he not likely to extend far too much, or too little? Why should we expect him to be able to price risk efficiently?

Just as we don't all grow our own food, or make our own shoes, because it is extremely inefficient, why should we all be pricing risk on a daily basis among multiple contacts?

[HostFat]

The pricing of risk is a specialized industry.

I don't think that you should be so "specialized" when you give credit to people that you know day by day.
You aren't forced to give credit to anyone.

[evoorhees]

The pricing of risk is a specialized industry.

I don't think that you should be so "specialized" when you give credit to people that you know day by day.
You aren't forced to give credit to anyone.

Yes correct, and that's good.

But to the extent that Ripple users abstain from credit issuance to others, what is the use of the system?
And to the extent that Ripple users proceed with credit issuance to others, can/will it be done in a profitable/efficient manner?

[Atruk]

The pricing of risk is a specialized industry.

I don't think that you should be so "specialized" when you give credit to people that you know day by day.
You aren't forced to give credit to anyone.

Yes correct, and that's good.

But to the extent that Ripple users abstain from credit issuance to others, what is the use of the system?
And to the extent that Ripple users proceed with credit issuance to others, can/will it be done in a profitable/efficient manner?

I have to say that I think the problem isn't that people are forced or not to issue credit. It's that they will feel obligated. Loans between friends and family can cause a lot of tension as it is. Adding a system such that formalize this system of spreading ill will is probably going to lead to a lot of pissed off people.

"You can lend to me, Ripple's going to keep me honest."

"It's been a whole extra year Bob, don't make me mark this debt as unfulfilled in Ripple."

If you connect lender and borrower through mutual social connections I can only imagine it getting messier.

A lot of why bitcoin works is that the permanence of transactions keeps people cautious. Reputation is everything and people who reliably maintain their end of the bargain get noticed and get business. When build credit into a system while putting forward social proximity as a substitute for demonstrated reliability people's already shitty risk calculations are going to take them to dark places.

[MPOE-PR]

Unless they are one and the same, neither will be private.

So, there's your answer:  Ripple is a Bitcoin-degrader.

Basically, a digital version of the existing, failed credit-money system, brought to you by the same idiots who have been trying to turn Bitcoin into a more Orwellian, digital version of the existing, failed monetary system over the past two years.

I don't see what sense this ripple doohickey makes either.

[JoelKatz]

But to the extent that Ripple users abstain from credit issuance to others, what is the use of the system?

You can issue credit only to reliable financial institutions with which you have a "withdraw on demand" agreement. Your Ripple balance then becomes the equivalent of a bank account balance.

And to the extent that Ripple users proceed with credit issuance to others, can/will it be done in a profitable/efficient manner?

I think that over the long term, this will be what makes Ripple awesome. But it does require people to evaluate risk more rationally and not be so risk averse. I may be fighting human nature here. Theoretically, a rational business person should be equally happy taking credit cards at 2% or having 1 in 50 of their customers defaulting. But the former seems much more acceptable than the latter.

I don't see what sense this ripple doohickey makes either.

The core of Ripple is somewhat analogous to a bank account. When you have dollars, or any other normal currency, someone owes them to you. If you say "I have $5,000 in the bank", what you mean is that your bank owes you $5,000. Now, imagine if instead of having a regular bank account, you had something more analogous to a Bitcoin transaction output, and the bank agreed to pay the money to any customer of theirs that could prove they owned that transaction output. Now, you can transact in dollars just like you do in Bitcoins. You can send that balance to someone, split it up, join it, whatever. And that output has value because any customer of that bank can redeem it for cash.

There's a lot more, but that's the basic answer to what sense it makes -- it lets people transact in national currencies much like they currently transact in Bitcoins. One key difference, however, is that someone has to hold the actual currency and you have to decide who you will trust to do that.

[evoorhees]

The core of Ripple is somewhat analogous to a bank account. When you have dollars, or any other normal currency, someone owes them to you. If you say "I have $5,000 in the bank", what you mean is that your bank owes you $5,000. Now, imagine if instead of having a regular bank account, you had something more analogous to a Bitcoin transaction output, and the bank agreed to pay the money to any customer of theirs that could prove they owned that transaction output. Now, you can transact in dollars just like you do in Bitcoins. You can send that balance to someone, split it up, join it, whatever. And that output has value because any customer of that bank can redeem it for cash.

There's a lot more, but that's the basic answer to what sense it makes -- it lets people transact in national currencies much like they currently transact in Bitcoins. One key difference, however, is that someone has to hold the actual currency and you have to decide who you will trust to do that.

Thanks for your posts, Joel, you always speak wisdom.

However, when you say "The core of Ripple is somewhat analogous to a bank account. When you have dollars, or any other normal currency, someone owes them to you. If you say "I have $5,000 in the bank", what you mean is that your bank owes you $5,000. "  There is a very important difference here. In the case of the bank, you know the bank is good for the money. When it's other people holding the money, there is far less certainty as to its payability.

So the issue here is that the money is not as fungible as otherwise. Paying someone $100 in cash is "money good" But paying someone with an IOU for $100 cash is less valuable. In other words, a $100 IOU is not worth $100. I worry that this fundamental issue is going to cause problems.

You say,
" it lets people transact in national currencies much like they currently transact in Bitcoins."

But it doesn't, really, enable this. It lets people transact in IOU's for national currencies. When I send someone a Bitcoin, they actually get the Bitcoin. When I send someone $100 USD via Ripple, the recipient only gets an IOU. With Bitcoin, money is actually moving. With Ripple, money is not moving. The brilliance of Bitcoin is creating a way to actually move money without a central party. Ripple may not have a central party, but it is also not actually moving money.

[JoelKatz]

You say,
" it lets people transact in national currencies much like they currently transact in Bitcoins."

But it doesn't, really, enable this. It lets people transact in IOU's for national currencies. When I send someone a Bitcoin, they actually get the Bitcoin. When I send someone $100 USD via Ripple, the recipient only gets an IOU. With Bitcoin, money is actually moving. With Ripple, money is not moving. The brilliance of Bitcoin is creating a way to actually move money without a central party. Ripple may not have a central party, but it is also not actually moving money.

I agree. That's why I say "much like".

Functionally, there is little difference between an IOU from a reputable institution and money. If you have $100 in your bank account, what you have is a $100 IOU from a bank. That's how people have dollars.

But I agree, the existence of counter-party risk will be a disadvantage that national currencies will always have over crypto-currencies like Bitcoin. Ripple doesn't change that. We're trying to remove some of the other disadvantages, and add a few new capabilities as well.

[evoorhees]

So that I don't come across as a Negative Nancy, let me say that I'm really excited about the team you guys have put together. All-star cast for sure. The software I've seen, and the branding, is all beautifully done.

I'm very interested to see how people start using this as it launches.

[Steve]

Functionally, there is little difference between an IOU from a reputable institution and money. If you have $100 in your bank account, what you have is a $100 IOU from a bank. That's how people have dollars.

It's important to add that the FDIC is what makes this really possible.  People would discount a bank deposit to a much greater degree than they do today were it not for the existence of the FDIC.  Washington Mutual was a reputable institution...until it wasn't.

[Rassah]

We're in 2010's, and the "new" music genre is Dubstep. Now, thanks to Erik's post, I imagining that Ripple will be the dubstep of currency, with its total supply going Wob-wob-wob-wob