New blog post: "Ripples in the Ocean of Liquid Assets"

[mpfrank]

I've written a post on my Bitcoin blog summing up my present understanding of Ripple.  Comments are welcome.

http://minetopics.blogspot.com/2013/03/ripples-in-ocean-of-liquid-assets.html

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[misterbigg]

The peer to peer extension of credit is just a drop in the XRP ocean:

You don't need to make payment links with your friends;

Absolutely right, and this is confirmed by the principal architects of Nouveau Ripple:

...we're not relying on community/social credit. We're promoting Ripple as a payment system based on gateways. The social credit system will always be there should people be ready to use it.

And

I think it's reasonable to only make "business-related" links...

Also confirmed by the Nouveau Ripple architects:

...the path will almost always be either:

Payer -> Gateway -> Recipient

or

Payer -> Payer's Gateway -> Middle -> Recipient's Gateway -> Recipient

Your article focuses on the social credit system but that's not where the "money" is (literally). This is from the horse's mouth. Pay more attention to the man behind the curtain.

[mpfrank]

The peer to peer extension of credit is just a drop in the XRP ocean:
...
Your article focuses on the social credit system but that's not where the "money" is (literally). This is from the horse's mouth. Pay more attention to the man behind the curtain.

You may be right, in terms of the present developers' intent, although I think the system has quite a ways to go before lots of people will be using it for payments.  Except for Bitcoin users (who don't really need Ripple for transfers since they could just send Bitcoins directly), getting real money into and out of a gateway like Bitstamp is still a bit cumbersome - mainly because it seems that getting US dollars into or out of a traditional bank (where most people still keep most of their money) still always takes several days.  Although money-orders from retail stores (CVS, etc.) through BitInstant are faster, they have relatively high fees. 

So ultimately, to speed up/cheapen the money-transfer process, we need to get away from using traditional banks entirely.  It will be a long time before most people can do that.  And for it to be possible, the use of systems like Ripple needs to grow so there is more credit available through it.  Using Ripple for exchanging IOUs (as originally envisioned) is one way that anyone can begin to use it quickly and easily to facilitate day-to-day financial interactions with friends/clients without having to wait for any slow, cumbersome bank transactions to clear, or pay for expensive wire transfers or money orders to get money quickly to a Ripple gateway.

[misterbigg]

...to speed up/cheapen the money-transfer process, we need to get away from using traditional banks entirely.

The solution is not to make the process of converting to and from fiat faster and more decentralized, but rather to "close the commerce loop." It shouldn't be necessary to deal with fiat at all. This is done by growing the Bitcoin economy of goods and services to a sufficient size that someone can stay entirely within Bitcoins or IOUs without the need to deal with fiat.

[Peter Lambert]

...to speed up/cheapen the money-transfer process, we need to get away from using traditional banks entirely.

The solution is not to make the process of converting to and from fiat faster and more decentralized, but rather to "close the commerce loop." It shouldn't be necessary to deal with fiat at all. This is done by growing the Bitcoin economy of goods and services to a sufficient size that someone can stay entirely within Bitcoins or IOUs without the need to deal with fiat.

I would like to distance myself from the current banking system and embrace bitcoin and ripple, but the problem is I am currently paid a paycheck from my employer in USD direct deposited to my bank account. I thought coinbase would be a way to step from there into the bitcoin ecosystem, but the other day when I tried to use it they said they had already passed their daily limit. Hopefully such services will be more reliable in the future.

Edit: Ok, I got my transfer to go through now. But still, the amount you can move through them is limited, so they are only a part of the solution.

[mpfrank]

...to speed up/cheapen the money-transfer process, we need to get away from using traditional banks entirely.

The solution is not to make the process of converting to and from fiat faster and more decentralized, but rather to "close the commerce loop." It shouldn't be necessary to deal with fiat at all. This is done by growing the Bitcoin economy of goods and services to a sufficient size that someone can stay entirely within Bitcoins or IOUs without the need to deal with fiat.

Sure, but how do you get lots of people to do that?  Bitcoin still scares away a lot of people, because of (1) its price volatility (which is a consequence of it still being fairly small), and (2) its association in the media with "unsavory" activities (Silk Road, etc.) - which also is a consequence of there not being enough "legit" activity in BTC yet to outweigh the prominence of the scary stuff.  Until it's bigger, most people won't want to use it.  So growing the BTC economy is an uphill battle.

One nice thing about Ripple is that, even without making deposits through a gateway first, as long as you have XRP, you can go ahead and start creating your own IOUs that are denominated in whatever your favorite currency is - this avoids both of those worries.  It thus may be a more attractive "on ramp" to the world of digital currencies for many people than Bitcoin itself is.  Once they get used to using Ripple, they may be more inclined to try out things like Bitcoin.  Think of it as training wheels....

[ancore]

I think the big problems the social aspect of ripple has right now is
1.Incentive to use it 
     yet another layer to adopt, why even bother?
2.bad loans
     example say I have Allice's IOU for $1000 and the problem isn't that I don't trust her with this amount, she has a decent job and I know her
but Allice's unintentionally get's sick and need expensive treatment her reserve is burnt and she looses her job. She can't pay me back
I feel bad for her and will take the loss. The big question however is, will everybody do this? and if you introduce interests into the system to cover for bad loans, it doesn't look that tasty anymore to adopt

Your article doesn't really address these
 
having said that I'm still interested in testing it with my friends
we often lend each other euro coins to use with vending machines at school
I don't keep track exactly if I get paid back or not they are my friends, others do mind and it would be nice to never have discussions about this
sometimes however none of my friends got change and then Ripple could be genius if I could use it (XPR) to get change from people I don't really socialize with
problem with this why would anybody at my school start accepting XPR except if there is a gateway that doesn't charge for the conversion ( ok tiny fees to cover the cost of ripple transactions could be doable) and is trusted
now I want to be that gateway but I don't want to end up with bad loans

[hazek]

OP, you are confused. Banks aren't the problem, central banking monetary system of debt = money is.

[ancore]

is that really the problem or is it the uncontrolled creation of debt?

cause our dept system does create a lot of liquidity, I don't know if that's a good thing though ultimately

[misterbigg]

Banks aren't the problem, central banking monetary system of debt = money is.

No, it's the coercive power of the state. If people free accepted fractional reserve Federal Reserve Notes there wouldn't be any problem. Interests rates would also be different.

There's nothing wrong with a debt based currency as long as it is not forced on anyone.

[hazek]

Banks aren't the problem, central banking monetary system of debt = money is.

No, it's the coercive power of the state. If people free accepted fractional reserve Federal Reserve Notes there wouldn't be any problem. Interests rates would also be different.

There's nothing wrong with a debt based currency as long as it is not forced on anyone.

Exactly. I guess I should have put coercive in front of "central banking monetary system of debt = money" but I thought that was self-explanatory.

[misterbigg]

I guess I should have put coercive in front of "central banking monetary system of debt = money" but I thought that was self-explanatory.

Nope, it's not self explanatory at all. The government could eliminate central banks and currency entirely, give to each according to their needs (after commandeering the entire economy at gunpoint), and run a fully totalitarian state.

Abolishing central banks or even fractional reserve banking, accomplishes nothing if it is not also accompanied by a neutering of the state's monopoly on the use of force.

It's important to keep our eyes on the collective ball.

[mpfrank]

... and if you introduce interests into the system to cover for bad loans, it doesn't look that tasty anymore to adopt

You can implement interest on top of Ripple just by saying, "Alice, I will give you credit for $1000 worth of [whatever she wants from me], but you have to give me an IOU for $1050, and repay it a year from now."  That implements a 5% note from Alice with 1-year maturity, like a CD.  If you issue many loans like these, on average the interest gains can cover the default risk.  Of course, any enforcement of terms would have to be done outside the Ripple system.

... problem with this why would anybody at my school start accepting XPR except if there is a gateway that doesn't charge for the conversion ( ok tiny fees to cover the cost of ripple transactions could be doable) and is trusted
now I want to be that gateway but I don't want to end up with bad loans
...

XRP themselves are very cheap; think of them like 1-cent stamps (actually current price is less than 1/10th of a US cent).  But, once you have some of them, you can use them to issue and accept IOUs in your social circle for any amount in any other currency.  You don't need to trade XRPs themselves, you can be trading GBP or EUR or USD or BTC or anything...

[mpfrank]

Banks aren't the problem, central banking monetary system of debt = money is.

No, it's the coercive power of the state. If people free accepted fractional reserve Federal Reserve Notes there wouldn't be any problem. Interests rates would also be different.

There's nothing wrong with a debt based currency as long as it is not forced on anyone.

Exactly. I guess I should have put coercive in front of "central banking monetary system of debt = money" but I thought that was self-explanatory.

Yes, I agree that coercive debt-based money = bad (or at least, undesirable).

But, there's nothing wrong with individuals, small merchants etc. trusting each other for small amounts of credit and issuing IOUs to each other.  IOUs are a form of debt-based money.  There's nothing wrong with that.  Any time you pay for an item before delivery, you are temporarily extending credit to the merchant (accepting the order receipt as their IOU).  Or alternatively, if they deliver first and then invoice you, they are extending credit to you.  There's nothing wrong with voluntarily extending credit to others, per se.  

The problem comes when the control of the debt-based money supply becomes centralized into these huge monolithic financial institutions (central banks and huge commercial banks), which wield enormous political power as a result, and through that influence arrange things so they can carry out abusive practices with impunity, knowing that when they fail, they will be bailed out by the taxpayers because we're collectively afraid of whether we could even survive without them.

I like Ripple because its existence helps people realize that we *can* survive without necessarily being dependent on these monopolistic institutions.

[misterbigg]

You don't need to trade XRPs themselves, you can be trading GBP or EUR or USD or BTC or anything...

Wrong.

You can't trade GBP, EUR, USD, or BTC. But you can trade GBP IOUs, EUR IOUs, etc... issued by specific gateways. This might seem like an unimportant distinction but keep reading.

XRPs are the only Ripple currency that have no counterparty risk. If you receive 100 BTC IOUs from Bitstamp, you are exposed to the risk of loss of up to 100 BTC. On the other hand if you receive 500,000 XRP from someone, you are not exposed to any risk. You have those XRPs and nothing can change that (as long as you secure your private key).

Users will always favor trading XRPs over any other IOU because XRPs incur no additional costs. Remember that gateways can charge a transaction fee every time their IOUs change hands. This means that if Alice transfers Bitstamp IOUs to Bob, Bitstamp can charge a percentage of that transaction. Currently it is set to 0.2% and they promise to notify everyone within 30 days of a change in the policy:



The key phrase in this image is "fee for IOUs transferred between accounts." This means any account, not just when Bitstamp gives you the IOUs initially. This was confirmed by Ripple developers and you can find it described in the Bitcoin Stackexchange.

The only time it will be necessary to execute a transaction using IOUs is when interfacing with the outside world. For example, paying the electricity bill in US dollars. Or if you want to play SatoshiDICE (which requires real Bitcoins and not IOUs).

Ripple is being promoted based on the idea of self-issued credit but the way that the XRP currency has been woven into the system will make self-issued credit take the backseat to the star of the show, the XRP currency.

[ancore]

exactly what misterbigg said

also to continue with my Alice example: in case I'm asking her for an interest of 5%, than I'm not much better than a bank am I, there's no incentive for Alice to prefer giving the interest to me rather than the bank she already uses
and on a practical note isn't it illegal for me to charge interest on loans? or at least prohibitively burdensome to set up a legal system and pay due taxes to my local authority
or is Ripple also taking care of these legal aspects for me?

[mpfrank]

The key phrase in this image is "fee for IOUs transferred between accounts." This means any account, not just when Bitstamp gives you the IOUs initially. This was confirmed by Ripple developers and you can find it described in the Bitcoin Stackexchange.
...

No, but, I don't have to use a BitStamp IOU to transfer USD IOUs between Ripple accounts.  Ripple users can generate new USD IOUs themselves out of nothing.

Example:  I created a Ripple account last night for my 7-year-old son.  Never having transferred any USD into or out of Ripple via any gateways, I nevertheless granted him $100 trust since I know he has more than $100 cash saved up from birthdays, etc.  We were at the store and he wanted a toy that cost $15.03 (including sales tax), but he didn't have his cash with him.  Instead of worrying about having to make change for him later from the $20 bills in his stash, I said, "Why don't you just give me a Ripple IOU for the $15.03."  He did this, and now his Ripple account has $-15.03 and mine has $+15.03.  Note that we executed this transaction without EITHER OF US EVER HAVING BOUGHT ANY USD IOU FROM BITSTAMP OR ANY OTHER GATEWAY.  And, no USD fee was charged.  This is what I'm talking about.  If you stay within the Ripple world, the only fees are some tiny amount of XRP each transaction.  Using gateways is only needed if you want to adjust your Ripple currency balances up or down by moving your own money in or out, rather than by doing Ripple transactions with others.

[mpfrank]

and on a practical note isn't it illegal for me to charge interest on loans? or at least prohibitively burdensome to set up a legal system and pay due taxes to my local authority

It's not illegal to charge individuals interest AFAIK.  If you made a significant amount of income in this way, in the US at least you would be legally obliged to report it to the IRS and pay taxes on it.  No, of course Ripple would not track those taxes for you, and enforcement of them would be difficult.  But, the same would be true if you loaned someone cash currency or goods and accepted paper IOUs (which could similarly include interest terms) in return.  All Ripple does is simplify the accounting of the IOUs themselves, and automate finding chains of trust which can increase the pool of people you can transact with via these electronic IOUs.

[ancore]

oh I see

I thought that Ripple was something that could work growing from the bottom up, it seems I was mistaken

I thought the cool thing about Ripple was that it would connect isolated web of trust with each other without having to trust each others web of trust through use of XRP
so for example if someone outside my social circle at school needs some change, I could give change in return for some XRP
but if the gateway that changes this XRP needs to operate quite like a bank in light of what you said about legal requirements and bad loans then I don't see much incentive for regular people to start using this

[mpfrank]

oh I see

I thought that Ripple was something that could work growing from the bottom up, it seems I was mistaken

I thought the cool thing about Ripple was that it would connect isolated web of trust with each other without having to trust each others web of trust through use of XRP
so for example if someone outside my social circle at school needs some change, I could give change in return for some XRP
but if the gateway that changes this XRP needs to operate quite like a bank in light of what you said about legal requirements and bad loans then I don't see much incentive for regular people to start using this

Well, like I was saying, you don't have to use a gateway, except maybe occasionally to execute an exchange in order to obtain more XRP tokens whenever you run low.  The rest of the time, you could do all your transactions entirely within the "virtual money" world of Ripple, as long as your peer group accepts XRP, or whatever IOUs you are transacting within your social circle.  And yes, as someone pointed out earlier, the XRP themselves are like Bitcoins in that they have no counterparty risk, so they can be used to link up different trust webs - except to the extent that, like with any currency, their value is subject to fluctuation.