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Author Topic: Why Ripple has failed.  (Read 10465 times)
DumbFruit
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September 19, 2013, 02:41:25 PM
 #1

I was asked to create a new Thread on this subject rather than derail the other thread. So here goes nothing.

Ripple at its conception was the idea that in a web of trust debt (IOU's) can be created and destroyed among two or more parties that do not know each other.

The maximum amount that these two parties would trust each other was derived from the chain of proximate trust among a string of people between the two unknown parties. The lowest trusted amount along the chain would be assumed to be the trust between the two unknown parties.

The people in between the unknown parties are called "Liquidity Providers".

Flow of IOU
Party A -> Party B -> ... Party Z
If the lowest trust in that chain is 50 cents, then it is assumed that Party A could get an IOU from Party Z worth 50 cents and vice versa.

The name "Ripple" came from the idea that debt would be created and passed along this web in a ripple-like fashion.

This would be extremely useful because potentially the IOU's could be traded on the market without even needing to redeem them at a "Gateway". (A gateway is essentially just another party that is generally trusted and has a lot of assets. Usually a Bank.)

This would replace all of the tedious vetting, oversight, and redemption mechanisms for debt that exist today.

Almost immediately upon the acquisition of Ripple by OpenCoin, the web of trust was almost entirely destroyed because what became immediately apparent is that a trust relationship among two end parties cannot be derived from the known trust relationships among consecutive parties no matter how intuitive it might seem.

Consider your best friend. You might trust this friend with $10,000 no questions asked. How much would you trust your friends friend, no questions asked? If you're prudent, the answer would be "nothing".

However, in the ripple system, if your friend trusts his friend for $10,000 then this unknown person could borrow $10,000 from you!

Now if this person borrows from you and defaults, who's at fault? Would it be reasonable to sue your best friend because he's the one that extended trust out to this person that screwed you over? Do they share fault? This is frustrating enough, but in Ripple the defaulter could be a friend of a friend of a friend of a friend etc, and you could suddenly be out $10.00 .

I hope I've made it clear at this point that even one liquidity provider between a lender and a borrower is broken. It cannot be rationally done, and it cannot be fixed.

In order for this to work appropriately an algorithm to calculate the derived trust relationship between two unknown parties given only the trusted principle between consecutive parties in a chain would need to be formulated. Given that trust is subjective, no such algorithm can ever be formulated.

Therefore, the liquidity provider mechanism in Ripple needs to be removed entirely.

OpenCoin has not done this. Instead, no Gateways act as liquidity providers, and users are asked not to trust anyone but gateways. If a user is foolish enough to extend trust to even their best friend, they could be out real money in the aforementioned fashion.

At this point the only way OpenCoin's Ripple implementation works is if no one acts as a liquidity provider. No web of trust can exist. Therefore Ripple, as initially envisioned, has failed.

Now, even if the first impossible algorithm was formulated. There is a second fault in the Ripple system as original envisioned. The principle of a debt is not the only factor that determines the value of a debt. Initially it might seem intuitive that a $10 debt between two individuals is functionally equivalent, so that two lenders could trade their IOU's among each-other freely.

However, the value of debt in a marketplace is derived from the chance of default, the length of time the debt is held, the value of the principle, and the subjective value of a product held today versus the promise of a product at a future date.

Therefore, the value of a unit of USD IOU from Bank A and the value of a USD IOU from Bank B are different. They can not be equivalently exchanged based only on the principle.

This sounds crazy, but a quick thought experiment will prove to you that it is true.

Consider that your best friend owes you $10,000, and a your friend is owed $10,000, could you exchange the IOU's and wipe out the debt? No, because you still have to redeem the IOU's with your friends friend, which may not be good for it. You value the debt between your best friend differently than you value the debt with some person you don't know.

In summary Ripple, as was initially envisioned, failed for two reasons;

1.) No algorithm can be formulated to predict the trust relationship between two end parties given only the trust relationship among consecutive parties in the chain.

2.) The value if debt is subjectively determined. Therefore, no accurate calculation can be performed between IOU's, even if they are denominated the same underlying asset.


So that's how the original Ripple idea failed, but I will go a step further and describe why today's Ripple will not work.

Today's Ripple still holds onto the ghost of liquidity providers, but only among users (not gateways), and therefore exposes users to the risk of holding onto irredeemable IOU's in the event of a Gateway default (Or even a user default if they in-advisably trust someone other than a Gateway).
Not only are Ripple users not compensated for this risk, but Gateway will almost surely charge a premium to issue IOU's.

Think about that for a second. You go to a bank, give them money, and then receive a promise to get that same amount back from them less 1 or so percent at a future date. It's a CD with a negative return.

Not only is this perverse, but Gateways have an incentive to give out as many of these IOU's as they possibly can and then avoid redemption through any kind of contrivance that they -or their government- can dream up.

The people at OpenCoin say that this isn't a problem because the IOU's would devalue and the Gateway would not be able to sell their IOU's. This is true, but nonetheless there is a constant Moral Hazard built into the system that doesn't normally exist. (Fractional reserves are all but guaranteed.)

For the current system to work,
1.) IOU's would have to redeem for an amount higher than the principle. (I can't think of any way to do that besides introducing a Minimum-Held time to IOU's)
Edit: If users can't be Liquidity Providers, the above might not be necessary for some assets, given the utility gained by being able to exchange the IOU's.
2.) The final nail needs to be put in the coffin of "Liquidity Provider". (It should be removed entirely.)

While those problems are not unsolvable, they are tremendous tasks that are burdened by the cost of XRP, and it ensures only limited liquidity on the system.

Instant redemptions on this Ripple system are a fantasy. Edit: That's not really claimed anyway.

Now. If those problems are solved, Ripple will be an open source, trust-based, free to enter system for the trading of CD's denominated in any arbitrary asset (currencies/stores of value). Cool.
The great thing about that is any currency can be exchanged if the user base is big enough, without the need of Gateways to hold onto any IOU's of other Gateways.
For instance, you could trade a XBT IOU with a ripple user for a USD IOU, and then redeem the USD IOU at the USD Gateway, which doesn't care at all that you originally had a XBT IOU.

Edit: Expanded the explanation of the benefits of a working "quasi-ripple".

Excellent objections can be found here;
http://trilema.com/2013/ripple-the-definitive-discussion/
http://ripplescam.org/

By their (dumb) fruits shall ye know them indeed...
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September 19, 2013, 02:44:03 PM
 #2

One reason Ripple will likely fail in my opinion is this concept of allowing USD to be shifted "anonymously" among accounts. At least their marketing spin said you could do this. The recent laws about transfering USD around will mean this will likely be restricted or stopped.

I'm actually interested in what their source code will bring to light because their marketing claims are pretty big. And from the early structures I looked at it looks like it's going to be less efficient than Bitcoin their transaction engine. But wait and see!

You make some good points about the web of debt and such that is also another issue.

https://mcxnow.com - Fast and secure coin exchange.
Primecoin / Litecoin / Mincoin / Worldcoin / CopperLark
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September 19, 2013, 02:47:28 PM
 #3

"Why Ripple has failed."

because i see the future and i said it was going to?

tiny rick !
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September 19, 2013, 02:55:23 PM
 #4

I thought ripple is a scam

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September 19, 2013, 03:05:42 PM
 #5

The price is going up though

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DumbFruit
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September 19, 2013, 03:45:20 PM
 #6

The recent laws about transfering USD around will mean this will likely be restricted or stopped.
Probably and good point, but I was trying not to focus on externalities. They also need to get Gateways into the system, and they require a large user base, but that's not a problem intrinsic to the current Ripple system.
Unlike the ability of users to be Liquidity Providers, which is broken.

because i see the future and i said it was going to?
Because you can see the current Ripple system, compare it to the original Ripple claims, and see that they are not the same.

By their (dumb) fruits shall ye know them indeed...
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September 19, 2013, 04:53:20 PM
 #7

The price is going up though
This isn't about XRP.
XRP is used only as a fee for trading IOUs, it's valuated only by people who do not understand Ripple.

No XRP is "valuated" by people who enjoy having their money double or triple or more.  I rode XRP up from .001 to .02...that is 20x return.  It's about to double again, most likely, based on the price action and the news.  Do your own research but don't fight the momentum and the market.  I'm not saying buy and hold for 2 years, but it's a smart play over the next few weeks.

And to stay on topic with this thread, Ripple hasn't succeeded or "failed" yet.  It is still in beta and barely off the ground.  They are taking their time getting everything just right before adding more gateways, etc. It sounds like ZipZap is coming on board soon and that will be huge.

But time will tell how well the Ripple protocol does. I don't give it a lot of thought and just enjoy watching XRP go up...already up about 75% and could double from here easily...has done it before and I'm betting on it iwth my hard earned money.

Check this thread for details:  https://bitcointalk.org/index.php?topic=294856.0

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September 19, 2013, 05:14:12 PM
 #8

It hasn't failed at all, in fact I find it quite elegant...here's how to buy some the good way:

https://bitcointalk.org/index.php?topic=297326.0

Please add more BTC here (my son will apprecciate it when he's older): 14WsxbeRcgsSYZyNSRJqEAmB1MKAzHhsCT
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September 19, 2013, 05:34:55 PM
 #9

This entire wall of text is based on some fundamental misunderstandings that make the entire conclusion fall apart. I'll cut to the chase:


Flow of IOU
Party A -> Party B -> ... Party Z

    <snip>

Consider your best friend. You might trust this friend with $10,000 no questions asked. How much would you trust your friends friend, no questions asked? If you're prudent, the answer would be "nothing".

However, in the ripple system, if your friend trusts his friend for $10,000 then this unknown person could borrow $10,000 from you!

Now if this person borrows from you and defaults, who's at fault? Would it be reasonable to sue your best friend because he's the one that extended trust out to this person that screwed you over? Do they share fault? This is frustrating enough, but in Ripple the defaulter could be a friend of a friend of a friend of a friend etc, and you could suddenly be out $10.00 .


No, the person who directly trusted the defaulting party would be out the money.

You are never forced to accept IOUs from issuers who you do not trust. You misrepresent the system by claiming that one can be forced to hold IOUs from unknown parties, simply because they are on a chain of trust. This is false. In reality, the IOUs in the system will shift down the chain, so that each individual will only get an IOU from the next person down the chain, who they trust.

In your example above, you make it sound like Party Z ends up with Party A IOUs. Not so. Party Z ends up with Party Y IOUs, and Party B ends up with Party A IOUs. Thus, every recipient knows whose throat to choke.

Your argument also goes straight for the absurd by using $10,000 transactions. While some well acquainted hawaladars might adopt Ripple for such amounts within a tight circle of trust, most actual users will not. Even so, the system is not constrained by the smallest trust relationship in the path if there are multiple paths.

While playing with the system, I have trusted most gateways for .00001 of virtual currency and .01 of national currency while trusting Bitstamp for usable amounts. Guess what? Even with small transactions, the system has found multiple pathways to send that involved multiple parties.

This means that if you are using Ripple with your friends, trust them for small amounts each and you can still send bigger amounts through the pipe. The pathfinding will work it out, and you are not greatly exposed to any particular person.

Now, even if the first impossible algorithm was formulated. There is a second fault in the Ripple system as original envisioned. The principle of a debt is not the only factor that determines the value of a debt. Initially it might seem intuitive that a $10 debt between two individuals is functionally equivalent, so that two lenders could trade their IOU's among each-other freely.

    <snip>

Therefore, the value of a unit of USD IOU from Bank A and the value of a USD IOU from Bank B are different. They can not be equivalently exchanged based only on the principle.


Ripple has the concept of Trust Line Quality that accounts for the very phenomenon that you describe. It is a way to discount the IOUs from particular issuers that you value less than others.

It is also a way for individuals to make some money by acting as liquidity providers, since they can set their line quality to essential collect a transit fee. If a user's fees are too expensive, the pathfinding mechanism will route around them. However, if they are on the least cost path, they will be used and compensated accordingly.

Now, this mechanism has not been exposed in the client yet, but it does exist on the server. This is a part of the beta experience, and there are many additional features and polish coming that will make Ripple even better.

Once you consider how IOUs really flow within the system, the fact that you can't be forced to accept an IOU from someone you don't trust no matter what, and when you take into account that Trust Line Quality is built into the system and will be exposed in a future update, the basis of your argument falls apart.

Your conclusion is invalid. Ripple has not already failed. What happens in the future remains to be seen, but your particular concerns are not founded.
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September 19, 2013, 05:45:03 PM
 #10

One reason Ripple will likely fail in my opinion is this concept of allowing USD to be shifted "anonymously" among accounts. At least their marketing spin said you could do this. The recent laws about transfering USD around will mean this will likely be restricted or stopped.

You can transfer Bitstamp USD IOUs anonymously since Day One...
Though SnapSwap requires a US bank account...
Every Gateway does whatever it wants.

I did about 500 trades in May-June...
And you cannot get any Tax Compliant report on Ripple network trading activity...
So it's a Big Fat FIAT Laundering Machine.

*** OpenCoin claims it is not responsible for any of this activity. ***

FINCEN and SEC exists for the very purpose of shutting down dodgy things like Ripple...
CEO Chris Larsen has a history of tangling with US authorities like the SEC.
bibbit
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September 19, 2013, 06:03:31 PM
 #11

And you cannot get any Tax Compliant report on Ripple network trading activity...

This is actually one of my concerns, and something that might hamper adoption by players who could bring real liquidity to the system.  Undecided

Since the ledger is public, it seems like an opportunity for a company to provide a service where you give them a ripple address (or group of addresses), a jurisdiction and a time frame and then they produce a tax compliant report.

It would be nice to see this built in, but with all of the possible jurisdictions, I don't see that happening. Do you think there would be enough people willing to subscribe to such a service to support the programmers and various tax lawyers required to make it happen? What do you think serious traders would be willing to pay for this?

Note: I don't plan to do this myself. I just want to know if you think there is enough demand to support someone doing it the right way.
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September 19, 2013, 06:21:06 PM
 #12

The price is going up though
This isn't about XRP.
XRP is used only as a fee for trading IOUs, it's valuated only by people who do not understand Ripple.

No XRP is "valuated" by people who enjoy having their money double or triple or more.  I rode XRP up from .001 to .02...that is 20x return.  It's about to double again, most likely, based on the price action and the news.  Do your own research but don't fight the momentum and the market.  I'm not saying buy and hold for 2 years, but it's a smart play over the next few weeks.

And to stay on topic with this thread, Ripple hasn't succeeded or "failed" yet.  It is still in beta and barely off the ground.  They are taking their time getting everything just right before adding more gateways, etc. It sounds like ZipZap is coming on board soon and that will be huge.

But time will tell how well the Ripple protocol does. I don't give it a lot of thought and just enjoy watching XRP go up...already up about 75% and could double from here easily...has done it before and I'm betting on it iwth my hard earned money.

Check this thread for details:  https://bitcointalk.org/index.php?topic=294856.0

you make it sound like all xrp is good for is gambling based on news reports.. pass that sucker on to the tnext person and hope you're not the last person (or made enough money) holding XRP? if that's your argument....

ok
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September 19, 2013, 06:42:29 PM
 #13

you make it sound like all xrp is good for is gambling based on news reports.. pass that sucker on to the tnext person and hope you're not the last person (or made enough money) holding XRP? if that's your argument....
Pretty much, and he's not the only one.

Whether or not people speculate on XRP, like is done with pretty much every crypto-currency out there, does not negate the usefulness of the Ripple system itself. You can successfully use Ripple for many purposes and never hold more than the bare minimum of XRP needed for the account reserve and transaction fees.

Let's talk about the system, not some misguided users of the system.
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September 19, 2013, 08:25:46 PM
 #14

And you cannot get any Tax Compliant report on Ripple network trading activity...

This is actually one of my concerns, and something that might hamper adoption by players who could bring real liquidity to the system.  Undecided

Since the ledger is public, it seems like an opportunity for a company to provide a service where you give them a ripple address (or group of addresses), a jurisdiction and a time frame and then they produce a tax compliant report.

It would be nice to see this built in, but with all of the possible jurisdictions, I don't see that happening. Do you think there would be enough people willing to subscribe to such a service to support the programmers and various tax lawyers required to make it happen? What do you think serious traders would be willing to pay for this?

Note: I don't plan to do this myself. I just want to know if you think there is enough demand to support someone doing it the right way.

Well, you have to look at Ripple XRP volume and estimate number of traders...
Because most currency exchange is designed to go thru XRP...
XRP is a highly specialized internal Market Making currency...
And only XRP/BTC and XRP/USD Bitstamp have any liquidity.

So XRP volume had collapsed to about 150 BTC or $20,000/day...
And with the new Pump and Dump has tripled to 450 BTC or $65,000/day...
I will bet you anything OpenCoin is dumping XRP into this market to raise cash.

That translates into maybe 20 traders during dead times...
To maybe 100 traders during pumps.

http://bitcoincharts.com/charts/rippleXRP#rg90zigDailyztgSzm1g10zm2g25zv

Ripple is such a dog...
On average, mcxNow is doing about 5 times the business as Ripple...
And the Ripple client and trading interface is awful... with 242 bugs on GitHub.

https://github.com/ripple/ripple-client/issues?state=open

It's all smokes and mirrors, baby...
I'd be totally shocked if key server code is open sourced...
They have not yet achieved anything approaching critical mass...
All the Classic Ripple vultures are circling the sky waiting to hard fork.

I don't believe a word OpenBong says.

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September 19, 2013, 08:36:10 PM
 #15

Once you consider how IOUs really flow within the system, the fact that you can't be forced to accept an IOU from someone you don't trust no matter what, and when you take into account that Trust Line Quality is built into the system and will be exposed in a future update, the basis of your argument falls apart.
My argument isn't going anywhere because Trust Line Quality does not, and can not, address the problems presented, and neither does the name of the IOU at the endpoint of the chain.

The name on the IOU makes zero difference if the person that instigated it defaults, because the bottom line is there's a debt that needs to be paid and no one along the chain has an incentive to eat the loss. At what point would they eat the loss anyway? Is there an expiration date on IOU's now?

Trust Line Quality tries to emulate the interest rates in a market, but the interest in sections of a chain do not (and can not) come close to approximating the risk of default of a given debt. There is no relationship.
At best this could be wildly wrong to the point of costing too much for anyone to get any significant quantity of IOU's. At worst it would be just low enough for people to use it and default for the free cash.

OpenCoin could  cripple the web of trust so profoundly that no one uses it for any significant amount, or they could just get rid of the entire concept of a Liquidity Provider, because it's broken.

It doesn't matter how many rules or caveats OpenCoin tries to come up with the patch it up because you can't derive a subjective value, and interpersonal contractual arrangements, from the trusted value's among consecutive parties.
One does not follow from the other.

By their (dumb) fruits shall ye know them indeed...
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September 20, 2013, 01:05:42 PM
 #16

Quote from: bibbit link=topic=297287.msg3191090#msg3191090

Once you consider how IOUs really flow within the system, the fact that you can't be forced to accept an IOU from someone you don't trust no matter what,
To just touch on this point again..

More important than the issue of the contractual obligations and moral hazard is the fact that the IOU's don't carry any information to the lender. (asset holder.)

It's not a feature of ripple that the tie between the lender and borrower is broken by a myriad of jumps, it's a defect.

It's a defect precisely for the reason described in my opening post. If you break the relationship between the lender and the borrower, then you have to try to derive the correct terms of the IOU at the final point from the relationships along consecutive users in the chain, which bears no relevance to the problem.

But maybe I'm getting too theoretical.

In markets today if you want to borrow money you have to go directly to to the lender and present your case. You have to tell them what the loan is for, what your experience is, how trustworthy you have been in the past (Credit rating), and what you can use to back your loan (Collateral).

Using this information, the lender decides the risk of the loan, and assigns an appropriate interest rate and length of the loan.

In Ripple, this doesn't take place. Instead, the borrower goes to his friend (who's standards are usually much lower than a bank.) then the friend goes to his friend and so forth.

How can you determine an appropriate interest rate and terms for the loan from unrelated relationships in a chain? You can't. All of the appropriate data that could be used to make the determination is washed away long before the request gets to the lender.

In this way, highly risky loans make their way to asset holders through Liquidity Providers without any warning or determination being made by the lender.

That's why the fact that IOU's are not literally passed to the lender does not solve the problem that I was talking about in the opening post.

By their (dumb) fruits shall ye know them indeed...
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September 21, 2013, 08:56:49 AM
 #17

Excellent read, thank you! At least there is some intelligent Ripple discussion on these forums without the mindless Ripple bafoons who fabricate the information and thus lie to the BTC community about Ripple.
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September 21, 2013, 09:42:30 AM
 #18

Very good analysis, thank you.

I have made my own analysis and have reached similar conclutions. In my own words:

1. The only person/gateway you could reliably trust with USD in Ripple is the Fed. The only gateway you could trust with EUR is the ECB. You cannot trust any other parties. If you trust "some-shitty-gateway" with USD, they would be able to exchange *your* Fed-USD for some-shitty-gateway-USD. Some-shitty-gateway-USD are much much worse than Fed-USD.

2. Because of (1), you cannot reliably transfer USD, EUR or BTC within Ripple. The Fed does not participle in the Ripple system, and there is *NO* BTC gateway that would be fundamentally reliable, because BTC is not centrally issued. Playing with debt money is just asking for disaster, that will eventually happen.

3. The only innovation is that it would be possible to create private currencies within Ripple, but ATM this is not even being done and it's not even marketed as such due to it being much less useful than bitcoin.

Short version: Ripple is only good for DumbFruit to issue DumbFruit-dollars. Nothing else.

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September 21, 2013, 09:47:47 AM
 #19

Ripple in its standard idea would work like this community credit approach. Opencoin ripple is different in its most likely use case. It's weird that you still seem to ignore answers here and still claim that ripple should be used in a very inefficient way.

All in all what you'll need with ripple is most likely a single gateway you trust with your favorite currency (around here likely bitcoin). No friends, no 1:1 exchange for other IOUs...

This is also already now the most common use case, as you can see from the public ledger. There is a small network from the villages.cc community, most of the other users don't do real community credit.

Please tell me in your words what is the difference between me depositing btc at inputs.io and at a ripple gateway and where the loan terms etc of inputs are.

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September 21, 2013, 09:50:43 AM
 #20

* The only innovation is that it would be possible to create private currencies within Ripple, but ATM this is not even being done and it's not even marketed as such due to it being much less useful than bitcoin.
There is one: https://bitcointalk.org/index.php?topic=149533.0
This is respectable and innovative!

I do want to see a world with private currencies, however, as a centrally issued currency it can only end 2 ways:

1. It just fails due to lack of interest.
2. Person goes to jail for "money laundering", "terrorism" and "child pornography".

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