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I’ve been a fan of Bitcoin since they were worth $0.06 and I still believe we’re only scratching the surface of cryptocurrencies’ potential value. I’ve been seeing a lot of forks of Bitcoin and alternative digital currencies pop up. One of those in particular that seemed quite novel at first and caught my eye was Ripple. It’s this awesome idea created by Ryan Fugger that allows people to create a network of trust with each other to issue credit. The project popped up somewhere around 2004. I know of a number of startups working off of a similar concept. So, I sat down one day to learn what Ripple and XRP were all about.

I’m smart and also being tech-savvy I didn’t think it would take long for me to wrap my head around. Well, after a few hours of research I found myself more confused than I had been before I started. Jaron wrote up a blog post on Coinsetter which I read through and then after a lengthy conversation with him I still felt like I was missing some kind of vital piece that was preventing my long-awaited epiphany.

To be completely honest, I was fairly anti-Ripple by this point. After spending hours on the Ripple site and reading through everything and coming away with more questions than answers I turned to Google. It seemed like many were like me looking for answers and not quite grasping it all. Many were angry and felt deceived because of what seems like the very poor way (on Ripple and OpenCoin Inc’s part) it was presented.

It’s easy to be skeptical of the concept, it’s even easier to get angry with the way it’s portrayed. Coming from the Bitcoin world where privacy and transparency of operation is highly valued and at first thinking Ripple has the same kind of attitude was the first issue I had to overcome. The first thing I look for, is this open source? According to the FAQ no one owns Ripple and it is open source. Great! Is this decentralized? It is? Fantastic!

Actually, as it turns out, Ripple is neither open sourced or decentralized. There are plans for it to be open sourced and decentralized, but obviously until the source code is out, there will always be a looming sense of anxiety on that part. There’s immediately a bad taste in your mouth that just gets worse the further you dig.

There could be legitimate reasons for keeping it closed source. If there are already a wide number of users transacting real-money currencies then perhaps a number of security audits and patches for potential exploits are necessary before it’s safe enough to open to the world.

If Ripple were a for-profit piece of software for OpenCoin, Inc to provide financial institutions a better way to make transactions with each other, I don’t see why Ripple would need to be open sourced or decentralized at all. Mostly though it seems like their business would be at risk if Ripple were open sourced and it could be forked to function in a more idealistic manner. Perhaps once OpenCoin, Inc feels there’s enough widespread use to diminish that risk they can open source it without fear. Although it still brings back the question of why bothering to open source it or announce it will be open sourced at all.

The next big hurdle for me was XRP. It’s another digital currency, native to Ripple and necessary for transactions. There was a finite amount of 100 billion of them created and a transaction requires 0.00001 XRP although it actually is divisible to the millionth. Each transaction destroys the XRP that was used to conduct it. That doesn’t seem so bad, with a single XRP you could do 100,000 transactions. You need 50 XRP in order to start using a Ripple wallet though; I don’t know why this is, I assume as some kind of mechanism to stop people from creating an egregious quantity of accounts.

So where does one get XRP? Well you can buy some on an exchange for whatever price they’re selling for. Also OpenCoin, Inc. gives a whole bunch away periodically. What’s OpenCoin, Inc? They’re a for-profit company that was given 80 billion of the 100 billion XRP, of which they’ve committed to give away 50 billion XRP although over what period of time or through which channels is unknown. It could be over the next century if that’s what it takes to maintain the value. They are NOT, open source digital cash, although they’re wrongly linked and credited in a number of sources. Where are the other 20 billion XRP? The original developers of Ripple kept them.

I certainly don’t have a problem with companies building products of value and making a lot of money off of them. It does seem like approaching Ripple and XRP with any thoughts of Bitcoin is a bad idea because it’s a different beast. Unfortunately I did go in thinking about Bitcoin and XRP comes off as far inferior. This may not be OpenCoin, Inc’s fault since it’s not as though they’re hiding the fact they’re a company with full intent to make money. I do feel that the way their product, Ripple, is presented is completely disingenuous and requires far too much digging to figure out the exact relationship.

Anyway, back to XRP. If all they were used for was to facilitate transactions then the common analogy of postage stamps makes perfect sense. They are being traded for reasons other than that particular use and treated more like an altcoin (alternative cryptocurrency) of which it has all the necessary properties to be considered as. Also, it is the only currency that can truly be traded internally through Ripple. Everything else makes use of debt or IOUs through gateways. XRP having some kind of value and being able to trade with it internally as an intermediary to other currencies is certainly convenient. You can completely neglect this fact and use XRP for the purpose of building trust lines (12XRP) and making transactions by which the postage stamp analogy fits.

Another problem I had is talk about Ripple’s market cap. The market cap is not $43ojfgjdr0436 gazillion dollars or even close to that of Bitcoin. The vast, vast majority of XRP is owned by the original developers and OpenCoin, Inc. Of what is supposed to be given away, very little has been. It would be crazy to assume the market cap can be based on the total quantity of XRP when if even a fraction of what hasn’t been touched yet were to hit the open market the artificially high value would crash.

Needless to say one place I disagree with Jaron is his bullishness on XRP. Since OpenCoin, Inc. has a great deal of control over the value based on how quickly or slowly they release XRP into circulation you’re probably alright if you can figure out their best interests and predict their actions. It’s currently (and for the entire foreseeable future) at the mercy of their manipulation and does not provide a comforting feeling if that’s a currency you’re holding. I hold almost no value in XRP as an altcoin and can’t see a reason why I would use it beyond covering transactions and trust lines or using it as an intermediary between other currencies for the minimum amount of time necessary to complete a transaction.

The concept that may have taken the longest for me to wrap my head around, which I place much of the blame on the way Ripple is presented, is how it actually functions. After you have created a Ripple wallet at a Ripple client and have funded your account with some initial XRP you can start trusting other entities that also have Ripple wallets. In many cases you would trust a gateway the same way you may trust your bank or a Paypal account. For the ease of explanation let’s pretend your bank is a Ripple gateway.

You deposit $1000 into your bank and then you tell Ripple that you trust the bank for at least $1000. At your bank you would withdraw funds into Ripple and now you have $1000 on Ripple. So what has actually happened here? The $1000 is still actually being held by the bank, the bank owes you $1000 just as it did before, but now explicitly through Ripple. Let’s say you want to purchase some waffles and syrup with your money and need $400 to do so. Let’s also say the merchant holding the waffles and syrup uses a bank that is a Ripple gateway and that bank trusts the bank you use. You could transfer to the merchant $400 through Ripple which means that your bank owes you only $600 now, it owes the merchant’s bank $400 and the merchant’s bank owes the merchant $400. It would be expected that the banks settle the balance with each other periodically.

You can also trust friends and issue them credit lines. There are some benefits of trust networks between friends such as being able to make transactions without the direct knowledge of a gateway. Of course trust is a serious thing, and you shouldn’t be loaning people out more than what you trust them to pay back. Also the capability of moving money through your friends as opposed to through exchanges or gateways is a valuable feature when thinking about the rise of cryptocurrencies and heightened value on privacy.

So that doesn’t look too much different than how things work now with banks, checking, credit cards, etcetera. If all the major banks and financial institutions trusted each other it would be a very convenient and inexpensive way to transact. Imagine being able to bypass credit card payment gateways and deal directly with the providers. So, what are the issues a Ripple user faces?

There are a number of potential opportunities of exploitation or problems using the trust of others in a system that operates on debt. For example let’s say there’s a gateway operating that has accumulated a lot of user trust and accepts physical gold for Ripple gold. Other gateways trust this gateway and are willing to issue IOUs to their users if this gateway will issue them an IOU of gold they hold when their users make a transaction. What happens if the gateway decides to steal all the physical gold, or is robbed, or has been loaning out their gold and their customers default? The gateway would default on their IOUs to their Ripple users and to the other gateways. Gateways may be able to avoid this by not trusting each other and having intermediary parties with balances on both gateways handle the shift of IOUs, although this could leave those users open to theft from intentionally malicious users. So gateways may not trust each other or at least be willing to cover the IOUs that are defaulted on. It doesn’t help the direct users of the defaulted gateway or anyone that issued it trust.

Another issue I had trouble figuring out at first was getting your fiat or assets out of Ripple. With the way it’s designed it doesn’t seem like money is really ever supposed to leave Ripple. In a future where there are gateways for everything and everyone can transact using Ripple, then I don’t see that being a problem. In the meantime I would think you can just go to any of your trusted gateways and withdraw in a method they support the amount you’re good for through their trust. Even if they don’t owe you the full amount there may be other gateways that they trust and will issue them an IOU for the amount you’re withdrawing. It’s easy to predict situations where a lot of users may think they have more funds available to them than they actually do if they have IOUs and have issued lines of credit. If you have a dozen friends that collectively owe you $5000, it doesn’t mean your gateways trusts any of those people and will issue you IOUs or a withdrawal.

On the merchants page of Ripple’s site it compares to transactional fees of credit cards and Paypal which to me seem like deceiving comparisons. The transactional fees of Ripple may be negligible, but the fees on Ripple gateways which are inevitably what you’ll have to use and trust to properly make use of this system will undoubtedly charge fees that I can’t imagine would be much different than they are now. This would be a valid comparison if you could conduct all your transactions through Ripple.

From a software perspective, I’m not too keen on the way things are right now. Just because Ripple is supposed to act and function a certain way doesn’t mean it actually will. One great thing about open source software is being able to go through the code yourself and verify that it does in fact do what it’s supposed to. When going through Bitcoin one can appreciate the genius in the design and also see some of the places where it could use improvement. With Ripple all that’s available right now is the source of the Ripple client and some old work from Ryan Fugger.

I don’t feel negative about Ripple as I originally did, but there are quite a few misgivings I have about the project still. Most of these probably still root in how much different Ripple actually ended up being from first glance. My negative feelings are now placed on OpenCoin, Inc and XRP. The benefits Bitcoin gains from being open source and decentralized such as security, highly DDoS resistant, and less vulnerable to a 51% network attack are still possible for Ripple in the future and would make it far more appealing.

Most money is just quantities of debt owed by who to whom in databases these days. As for cryptocurrencies, I still feel much safer holding them myself than leaving them with a provider liable to being hacked. Until there are gateways that I trust and enough of them to increase convenience I don’t believe I’ll be using Ripple. OpenCoin, Inc does have venture backing from prestigious investors and overall it’s still a good idea so it still has a lot of potential to become a widely used system. The way XRP works and the way it’s distributed seems like the largest flaw. It will be extremely difficult to remove the negative association and it diverts the spotlight from the actual Ripple system and the great benefits it can bring.

A project that looks promising and could be used for the same purposes called Open Transactions is quickly rising up. It will be able to perform a lot of the same underlying features of Ripple without the use of XRP and it’s already open source. It’s probably not as far along as Ripple is, but I can see it quickly catching up and being heavily adopted once some decent clients are developed.

Of the progression of emotions towards understanding Ripple that Jaron referenced, I’m halfway through number 3; Acceptance. Ripple solves important problems, but I won’t know if it’s well designed until I see the source or a more formal specification on the protocol. The software idealist within me hopes that competition will drive forward better systems and open sourced will allow for superior products to be created. If I were to place a bet on the future my BTC would not be on Ripple.