Ripple and Trust

[Ripple Labs]

tldr: Ripple doesn't require anymore trust than bitcoin
I see a lot of people misunderstanding the way Ripple works so I'm going to attempt to clarify.

There are two pieces to the ripple system, XRP and IOUs.

XRP works essentially like bitcoin. No counter party risk. You can send xrp to anyone with a ripple account. No trust etc.

The IOUs are more complicated. Every IOU has an Issuer and a Currency. The Issuer is simply a ripple account. You can only hold IOUs from issuers you have agreed to trust.

A gateway is some business that has agreed to issue and redeem ripple IOUs. You take your money to a gateway and the gateway gives you a ripple IOU. You can send this IOU to other people, trade it for XRP or BTC or whatever. You can take your IOU back to the gateway and the gateway will send you money. This is essentially what paypal or dwolla or banks do now.

This is the same as sending USD to mtgox. You are trusting mtgox to the amount you have sent in. You can send that USD to another person that has chosen to trust mtgox in the form of a mtgox code.

So you can see that Ripple doesn't require more trust or counter party risk then you are already used to.

The powerful thing is that Ripple links all these gateways and that there is an exchange in Ripple where you can swap these various IOUs so you can trade between all kinds of currencies and issuers.


We hope to explain things better on ripple.com soon.

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[molecular]

thanks for the explanations, I think this helped a bit (still need to sleep to let everything sink in).

A key for me is that XRP is not like the other currencies. They are a real "commodity", like bitcoin.

Are there XRP IOUs at all?

One question the answer to which might shed more light into my mind: Say by brother and I both use ripple and after a while we determine he owes me 10 EUR (or he owes "the world" 10 EUR and "the world" owes me 10 EUR). Would it be possible for him to give me a 10 EUR bill in meatspace and somehow reflect this "settlement" into the ripple system?

[jancsika]

tldr: Ripple doesn't require anymore trust than bitcoin
I see a lot of people misunderstanding the way Ripple works so I'm going to attempt to clarify.

There are two pieces to the ripple system, XRP and IOUs.

XRP works essentially like bitcoin. No counter party risk. You can send xrp to anyone with a ripple account. No trust etc.

The IOUs are more complicated. Every IOU has an Issuer and a Currency. The Issuer is simply a ripple account. You can only hold IOUs from issuers you have agreed to trust.

A gateway is some business that has agreed to issue and redeem ripple IOUs. You take your money to a gateway and the gateway gives you a ripple IOU. You can send this IOU to other people, trade it for XRP or BTC or whatever. You can take your IOU back to the gateway and the gateway will send you money. This is essentially what paypal or dwolla or banks do now.

This is the same as sending USD to mtgox. You are trusting mtgox to the amount you have sent in. You can send that USD to another person that has chosen to trust mtgox in the form of a mtgox code.

So you can see that Ripple doesn't require more trust or counter party risk then you are already used to.

The powerful thing is that Ripple links all these gateways and that there is an exchange in Ripple where you can swap these various IOUs so you can trade between all kinds of currencies and issuers.


We hope to explain things better on ripple.com soon.

So how does the system protect against credit default swap shenanigans?  I never understood that with the original Ripple system, and I don't understand it with the current one.

In the lead up to the 2008 downturn, significant sums had to be spent to change regulations to enable the swaps and create loopholes to consolidate banking power.  But Ripple is devoid of those protections by default, so it seems the system would actually make the mortgage crises default chain several orders of magnitude cheaper to implement.

[ribuck]

Would it be possible for him to give me a 10 EUR bill in meatspace and somehow reflect this "settlement" into the ripple system?

I think if he gives you a 10 EUR bill in meatspace, you use the ripple system to send him 10 ripple-Euros. From his and your point of view, everything is settled.

[becoin]

A gateway is some business that has agreed to issue and redeem ripple IOUs. You take your money to a gateway and the gateway gives you a ripple IOU. You can send this IOU to other people, trade it for XRP or BTC or whatever. You can take your IOU back to the gateway and the gateway will send you money. This is essentially what paypal or dwolla or banks do now.

I don't think this is the same what paypal or dwolla or banks do. Why do you think, say USD IOU issued by gateway A will always be in par with USD IOU issued by gateway B?

[molecular]

Would it be possible for him to give me a 10 EUR bill in meatspace and somehow reflect this "settlement" into the ripple system?

I think if he gives you a 10 EUR bill in meatspace, you use the ripple system to send him 10 ripple-Euros. From his and your point of view, everything is settled.

Duh! Thanks for the kick. Yes of course, it's that simple.

I think I really need sleep now.

[Ripple Labs]

> Are there XRP IOUs at all?
nope

> Why do you think, say USD IOU issued by gateway A will always be in par with USD IOU issued by gateway B?
They might not be. there can easily be an exchange rate between them in the distributed exchange.

>I think if he gives you a 10 EUR bill in meatspace, you use the ripple system to send him 10 ripple-Euros. From his and your point of view, everything is settled.
yep


>So how does the system protect against credit default swap shenanigans?
What are you exactly worried about? I have a feeling it isn't credit default swaps since that is a complicated financial instrument that doesn't really apply to ripple.

[Bimmerhead]

Thank you OP for the explanation, because I was pretty confused until now.

So the level of trust required to use Ripple is the same as I need to use, say Mt Gox.  Is that correct?

Is it possible for one of these gateways to run off with a bunch of currencies?  Or to get hacked?

[Mashuri]

How are XRP's accounted for?  How are they prevented from double spends?

[molecular]

Is it possible for one of these gateways to run off with a bunch of currencies?  Or to get hacked?

of course: BitStamp is currently holding BTC 1 of mine (blockchain real BTC). They could just run with it.

[molecular]

How are XRP's accounted for?  How are they prevented from double spends?

cannot give you a qualified answer, but maybe this: https://ripple.com/wiki/Consensus is involved.

[JoelKatz]

How are they prevented from double spends?

See this post: https://bitcointalk.org/index.php?topic=145558.msg1545061#msg1545061

This is the key part:

Using my (overly simplified) agreement room analogy, it works like this:

1) There's a room where everyone agrees on the last closed ledger.

2) If you want to disagree, you can, but you must leave the room to do so.

3) If you want to know what the current ledger is, you walk in and ask everyone in the room.

4) If you want to perform a transaction, you read it out loud. Everyone honest agrees that it's valid.

5) If there are any transactions that someone in the room believes should be applied to the last closed ledger, they attempt to obtain a consensus on them.

6) When a consensus is reached, the consensus transactions are applied to the last closed ledger forming a new last closed ledger.

7) Everyone agrees on the new last closed ledger.

8 ) We go back to step 5. Any transactions believed still valid but that didn't get into the consensus transaction set for some reason should now be voted in by every honest person.

9) If people appear to be acting in ways that don't make sense, such as voting no on transactions that have no reason not to be included or failing to validate the correct ledger, you ignore them.

10) Your top priority is to enforce the rules of the room. Your second priority is to achieve consensus.

[becoin]

> Why do you think, say USD IOU issued by gateway A will always be in par with USD IOU issued by gateway B?
They might not be. there can easily be an exchange rate between them in the distributed exchange.

So I can't transfer 10 ripple USD issued by gateway A to a merchant that is pricing their products in ripple USD issued by gateway B without exchanging them first? That will lead to doubling the fees for every transfer. 1 XRP for the exchange and 1 XRP for the actual transfer?

If there are 1 million gateways issuing ripple USD how many currency pairs will we have in ripple USD being both base and counter currency? There are also euros, pounds, yen, franks etc. This will be speculator's heaven and a price chaos?!

[markm]

This will be speculator's heaven and a price chaos?!

Welcome to the free market.

-MarkM-

[JoelKatz]

> Why do you think, say USD IOU issued by gateway A will always be in par with USD IOU issued by gateway B?

They won't always be on par, but if the gateways are doing their jobs, it should almost always be very close. Every failure is a profit opportunity.

So I can't transfer 10 ripple USD issued by gateway A to a merchant that is pricing their products in ripple USD issued by gateway B without exchanging them first? That will lead to doubling the fees for every transfer. 1 XRP for the exchange and 1 XRP for the actual transfer?

Yes but no. A payment will take from offers if that's the best payment path. When making a Ripple payment, this is the typical payment mechanism:

1) The client gets the destination account and destination currency from some source. ("Pay Jeff 50 Bitcoins.")

2) The client looks at what the user holds and picks one or more source currencies to use.

3) The client asks the server what its options are. The server forms payment paths using the various possible source currencies taking into account what the destination will accept. These payment paths can ripple through accounts that hold and accept multiple IOUs but also offers. No transactions have been performed yet, so this is all free.

4) The client tells the user something like "You can make this payment for 50.03 bitcoins or 125 USD."

5) The user picks a source currency.

6) The client assembles one final transaction, incurring one fee. The transaction can include multiple paths (so long as they use the same source currency). The transaction can include a "maximum to spend" and the transaction will fail if it would cost more than that.

7) The client submits the transaction. The servers process it. The transaction is accepted. (The servers will take incrementally from more than one path of the paths explicitly specified in the transaction to get the best result.)

Notice that only one transaction is needed, even if you ripple through multiple accounts, take from multiple offers, and so on. The one and only transaction is basically "get Jeff 50 bitcoins he'll accept and don't charge me more than 50.03 Bitcoins to do it."

If there are 1 million gateways issuing ripple USD how many currency pairs will we have in ripple USD being both base and counter currency? There are also euros, pounds, yen, franks etc. This will be speculator's heaven and a price chaos?!

Possibly. But I don't see why that will be bad. Since there will be many possible paths for the same transaction, costs should typically be low. We'll see.

[molecular]

A possible suggestion/thought:

On the one hand I think it's a good idea for the client to hide such complexity as explained above from the user (displaying just the maximum cost and stuff).

On the other hand it would carry much "educational value" to actually show the complexity in the client (differenct payment paths, lot of work I'm sure).

This also goes for other things like the balances (these could be split by different issuers, right?)

[ribuck]

Is it possible for one of these gateways to run off with a bunch of currencies?

There's nothing in the ripple system to stop evil gateways.

Suppose I have various lines of trust with other people and organizations, including with Pirate's gateway. I have "deposited" $50 with Pirate. In return I have an IOU from Pirate valued at $50.

At some point, I start to feel uneasy about Pirate, so I remove the trust that I extended to Pirate. Am I correct that the $50 owed to me by Pirate then automatically becomes $50 owed to me by others, specifically those whom I trust and who in turn trust Pirate themselves (and who have not "maxed out" their Pirate balance)?

Then when Pirate defaults, I try to collect from those people. Not surprisingly, they don't feel like paying me and they default too. It could turn ugly fast. Those who are quick to spot the scam will modify their lines of trust fast enough to ensure that everyone else is stuck with the worthless Pirate IOUs.

Or am I missing something here?

[markm]

When you stop trusting Pirate his IOUs you hold are not automagically traded away. You need to trade them away yourself by looking for offers, or over time as others happen to Ripple through you, assuming anyone actually does Ripple through you, they should gradually get exchanged away / used.

-MarkM-

[Zedster]

OK as I understand it Bitstamp is one of the only functioning gateway atm. 

So Bitstamp lists Ripple as being possible to deposit.  So I "trusted" them and I deposited 1000xrp.  Now they seem to be gone.  No balance listed on Bitstamp anywhere.  I have contacted them 3 times with no reply.

Am I missing something or was I too quick on the trigger?

[JoelKatz]

So Bitstamp lists Ripple as being possible to deposit.  So I "trusted" them and I deposited 1000xrp.  Now they seem to be gone.  No balance listed on Bitstamp anywhere.  I have contacted them 3 times with no reply.

Am I missing something or was I too quick on the trigger?

Gateways hold fiat, not XRP. There is no reason to deposit XRP with a gateway. We're working with Bitstamp to make sure XRP sent to them by mistake are returned.