The promise of Ripple

By Felix Salmon
April 11, 2013

This is a chart of the value of bitcoin yesterday, Wednesday. It’s hardly a secret that bitcoins are a highly volatile asset class, so relatively few eyebrows were raised when the price soared from an opening level of $230 all the way to a high of $266. An intraday swing of more than 15% is pretty much par for the bitcoin course, these days. But then came the crash: within a few hours, bitcoins the world over had lost well over half their value, and were trading as low as $107 apiece. That’s not normal — and it just goes to underline how bad bitcoin is at doing everything it’s meant to do.

Bitcoin is clearly not an effective store of wealth — just look at how quickly that wealth can be evaporated. Neither is it a useful payments mechanism, given how fast its value can fluctuate. Currently, it can take an hour for a bitcoin transaction to clear, which means that the value of the transaction when it clears can be radically different from its value at inception. Bitcoin only works for payments if you can be reasonably sure that its value will remain reasonably steady for at least the next hour or so.

At the end of my big piece on bitcoin, I conclude that we need “a universal payments system with no friction or interchange costs”, which can learn from bitcoin’s mistakes. And this morning, the company responsible for one possible such system — OpenCoin, which is responsible for developing Ripple — announced that it has closed its angel funding round, with support from the likes of Andreessen Horowitz, Lightspeed, and Founders Fund.

I’ve been playing around a bit with Ripple, and I think it’s extremely promising. It’s very early days yet, but Ripple already has clear advantages over bitcoin, and if various merchants and developers start to converge on the Ripple ecosystem — which, like bitcoin, is all open-source — then I think it could genuinely become the first real way for anybody in the world to pay anybody else in the world, immediately and about as frictionlessly as possible.

Ripple was founded by geeks, including Prosper founder Chris Larsen and Mt Gox’s Jed McCaleb. As a result, right now it has a bit too much functionality with too little ease of use. It supports an effectively infinite number of different currencies, for instance, including bitcoin; and although it’s easier to use than bitcoin, it’s still not particularly user-friendly. But that will come, with time — and in fact I would be happier if the people developing the easy-to-use front ends for Ripple were not OpenCoin. OpenCoin is a for-profit company, which will make good money if Ripple takes off; I’ll come to that bit in a minute. So it’s very important that a lot of the rest of the Ripple ecosystem not be built by OpenCoin: so long as OpenCoin is the only company to really buy into Ripple, the whole scheme will go nowhere.

Ripple has a lot of resources on its website which explain how it works in various levels of detail; I won’t attempt to duplicate that effort. But the end result feels a bit like bitcoin in many ways. Users are anonymous (or, technically, pseudonymous), for instance: if you want to send me money via Ripple, right now you have to pay racoLWuh2GtC72i1gV7ib14Jqgx3SLmwKc rather than just Felix, or my email address, or my Twitter handle. It’s all open-source, too: OpenCoin has no privileged access to the way in which people pay each other. The fees are de minimis, just enough to prevent DDoS attacks and the like. There’s even a built-in crypto-currency, the Ripple, with a fixed money supply. But the great thing about the Ripple system is that individuals don’t have to pay each other in Ripples. Instead, they can pay each other in pretty much any currency in the world: Ripples, yes, or dollars, or yen, or euros, or even bitcoins.

 

Here, for instance, is a screenshot of my Ripple wallet: it shows that I own, 3,052 Ripples, 13 dollars, and 0.0284 bitcoins. If I want to send a payment in any one of those three currencies, I can do so pretty much cost-free; if I want to send a payment in some other currency, then the system will select for me the best exchange rate, based on various companies which are offering currency-conversion services on the Ripple platform.

Any time you deal in currencies other than Ripples — which, in practice, is going to be all of the time — you have to go through “gateways” to the Ripple system. Eventually, those gateways could be PayPal, or Citibank, or Western Union, but that might take a while; for the time being, they’re smaller institutions, and you probably don’t want to be moving large amounts of money through them.

Everybody using a Ripple account will have some Ripples in their account, just to get them on the system, and there will always be people making a market, converting Ripples to real currency and back again. The good news, however, is that Ripples are not (fingers crossed) going to become speculative investment vehicles, in the way that bitcoins are. That’s because all the Ripples in existence — 100 billion of them — have already been created, and, to a first approximation, they’re all owned by OpenCoin, which is essentially the central bank of the Ripple economy. OpenCoin is going to be giving away billions of Ripples for free, to anybody opening an account, just to get the system seeded and get people transacting with each other. There’s little reason to hoard a few thousand Ripples if there are 100 billion of them just waiting to flood the market at any time.

It’s in OpenCoin’s interest, then, to carefully calibrate the rate at which it’s introducing Ripples into the active money supply, and to keep the value of a Ripple relatively stable. Right now, there are about 750 Ripples to the dollar, which means that theoretically OpenCoin’s 100 billion Ripples are worth something over $100 million. OpenCoin is going to want to see that number rise, slowly, as Ripple becomes more popular — but it doesn’t want to encourage hoarding: quite the opposite. It wants as many transactions to happen over its network as possible, so that it can really become, in Larsen’s words, “http for money”.

Given the Andreessen Horowitz connection, and a lot of shared interests between the two companies, the first place I’ll be looking for third-party ratification of the Ripple idea is the hot payments startup Stripe. I’ve had long conversations with Stripe CEO Patrick Collison about bitcoin and international payments and frictionlessness, and in theory there’s no reason why he shouldn’t build a pay-with-Ripple option into Stripe alongside its more conventional credit-card and debit-card payments.

As with all such things, there’s a first-mover problem here: there’s no point in building Ripple-based infrastructure if no one is using Ripple, and no one’s going to use Ripple if there isn’t any infrastructure. OpenCoin’s solution to the problem, which I like a lot, is to simply give away billions of Ripples for free, all of which are worth real money, thereby giving people an incentive to use it. I hope it works, and I hope that the number of gateways into the system will soon expand from the current list of relatively obscure sites like Bitstamp. Ripple hasn’t succeeded yet. But at least — unlike bitcoin — it has a genuine hope of doing so.

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Comments
26 comments so far

Frankly, having been a Prosper lender, I’m not too eager to trust my money to any ventures conceived by Mr. Larsen again.

Posted by microtherion | Report as abusive

“Bitcoin only works for payments if you can be reasonably sure that its value will remain reasonably steady for at least the next hour or so.”

yes! that was a key question I had yesterday which went unanswered – what were merchants who accept bitcoin doing as the price was plunging?

did they just stop accepting BTC?

did they use an exchange rate with a huge haircut built in?

Posted by KidDynamite | Report as abusive

“all of which are worth real money” Really? Only to payees who are willing to take a chance on the system. Is the secret of Bitcoin’s (temporary) success the possibility of making big money on appreciation? Without this, why take the chances that startup involves?

Posted by ytwod3621 | Report as abusive

I read both of your articles and was quite amazed to discover Ripple in between, seemingly exactly what you were talking about in the first article.

I follow you on Twitter, keep up the good work.

If you or any reader would like to send me some Ripples I’m doing some experiments.

Address: r42XvaEVtCL6WciYgxfy4ejANaWbxacvVQ

Posted by Paralititan | Report as abusive

Today, the primary use of Bitcoin is to move money from one place to another (to avoid capital controls for instance) or to one currency or another (for arbitrage etc). Trading for goods with BTC is still in its infancy and accounts for smaller slice of the velocity of Bitcoin transactions. If this is take as a given, then the primary platforms for interaction with BTC are the 30 odd exchanges that can turn BTC into sovereign currency and vice versa. What occurred yesterday was the breakdown of several of the largest exchanges under the weight of massive new interest. The price drop was more of a good old fashioned bank run than a flaw in the Bitcoin protocol. When the confidence in the exchanges evaporated, panic ensued with a predictable result. However, the BTC protocol itself handled all this panic with nary a twitch. The problem as I see it is that the layer of infrastructure built on top of Bitcoin is still very brittle.

Posted by k9quaint | Report as abusive

I am not sure that having a fixed money supply is sustainable with any fiat currency. Or maybe I should say non representative currency. Deflation will cause hoarding. When transactions stop its intrinsic worthlessness is exposed. I am by no means saying that we need to go back on the gold standard by the way. I think bitcoin has something with a somewhat steadily growing money supply, but even it has a built in stopping point in the software that will create the same issue 100 years later. I have to wonder if Satoshi didn’t expect some major deflation and volatility when the currency took off and thus split each bitcoin into 100 million units. By the way one satoshi is currently woth about 1.5 ten thousandths of a penny. That is .032 Viet Nam Dong and other small numbers as well. I suggest the new name “Planck’s Penny”.

Posted by notnews | Report as abusive

I’m afraid that I don’t get this at all.

Yes, new currency and all. Lovely.

But, as a payments method I don’t see that it’s all that different from PayPal. And I certainly don’t see why, as a legal, onshore, business the regulators aren’t going to insist that it’s regulated as PayPal is.

I can just about see bitcoing: entirely unrelgated alternative to Givt currencies. I can see electronic payment systems. But I can’t see e payment which is also legal, under control introducing a new currency in any meaningful manner.

Posted by TimWorstall | Report as abusive

Timekoin is better. More secure, and WAY easier to use than either Ripple or Bitcoin. Works on low-end hardware too. The only limitation is time itself.

Posted by ZuneTracks | Report as abusive

As k9quaint pointed out, the services built atop the Bitcoin system were the failure points, NOT Bitcoin itself. In light of the rest of the post, such a display of poor journalism and economic ignorance is reprehensible.

Ripple’s structure is not antagonistic to Bitcoin. In fact, Bitcoin and Ripple are the bricks and mortar, repsectively, of a new financial system.

It is extremely important to note that Ripple can be attacked in ways that Bitcoin cannot, and vice versa; the way they work complements and protects each other. In addition, the units of each system work in different ways – Ripple’s XRPs are infinitely renewable, while Bitcoin’s BTC are infinitely expandable. The former is the ideal transactional currency, while the latter is the ideal settlement currency.

In effect, Bitcoin is the ideal currency to settle Ripple transactions, especially when the Ripple network becomes congested – a situation that will occur sporadically as the network grows. That is the consequence of a consensus based design versus proof-of-work/proof-of-stake.

Posted by miscreanity | Report as abusive

i could see this being effective if they had done more like 100 trillion units of currency, rather than 100 billion, but the population is expected to reach 10 billion by 2100, that would mean at equilibrium each person would have exactly 10, that doesn’t allow enough room to differentiate in values unless they’re going to allow trading of partials.

Posted by mlschultz | Report as abusive

I’m afraid that TimWorstall don’t get this at all.

Posted by Blarn | Report as abusive

So who’s going to fund me? rnsqtKLpabEsz76wqGcnkQLA7zUAtuu6Mw

Posted by CrazyC | Report as abusive

I think I get it:

Short gold. Buy bitcoin.

That’s right, SHORT, GOLD. BUY, BITCOIN.

I am setting up this “correlation trade” post haste. If things start to go south… the mean well revert… just hang in there. So say I, and so say we all.

Posted by NathanB | Report as abusive

I think you are a good writer, but either you are lazy and did not conduct your proper research or you are—sorry to say—dumb, did the homework and did not get it. I apologize for being negative, but Reuters is a trusted name in news and you are misleading people and talking as if you are an authority on internet protocols, peer to peer networks and economics.
“The fees are de minimis, just enough to prevent DDoS attacks and the like. “‘ From this statement it is obvious that you are speaking over your head.

Bitcoin has a couple potential crippling problems, but the price volatility we have seen over the past month is not one of them. Most people still probably haven’t even heard of Bitcoin, but since the beginning of March the number of people that have heard of Bitcoin , has increased exponentially, just like its price. Bitcoin is new and exciting and in a few months the price fluctuations will settle down significantly.

But for real though, you are not an expert in economics or peer to peer networks and even though this is a “blog” you should not inject so much opinion, because you are still writing under the Reuters flag.

Posted by dillion3384 | Report as abusive

Felix, while a tiny tiny crypto currency with fewer than 1 million global users is experiencing growing pains. I would argue that a democratically created much debated mega-currency the EURO performed far worse in Cyprus a few weeks ago than Bitcoins did today.

Bitcoins are outnumbered by dollars or Euros millions to one which allows small amounts of the large currency to creates wild swings in the other. I can buy a Pepsi out of a vending machine at LAX for $2 or I can buy 12 of them two hours later in a Walmart in Iowa for $4. Did the price of Pepsi or the value of a dollar change by a factor of 6 in two hours?

I’m pro-western civilization and pro-democracy. I believe in citizens paying taxes to provide services for the greater good. I would also prefer that a government have zero control over a payment system than absolute control over a payments system. That last sentence reads at first like it came from the mouth of an anarchist; which is about as far away from what I consider myself as possible. Think about it though, depositors in an EU country were first told that they would be taking a haircut on government insured assets, then they were told that they could only access a tiny fraction of their money for over a week. Then they were told that their money can’t leave the island.

Go ahead and rag on bitcoins all you want. Our best and brightest haven’t done much better managing the “real currencies” lately.

Posted by y2kurtus | Report as abusive

I’ve got a currency/payments system thought experiment here:

Berkshire Buys McDonalds outright using cash/stock/debt. Interested in generating some more “float” BRK-MCD offers all global citizens an option to load any local currency in any amount onto a BRK-MCD gift card. The new arch cards however will be denominated in Macs rather than local currency. The accounts would bear no interest. They would be usable in the 119 countries where you can already find a golden arches and you could redeem your Macs for any local currency anywhere in the world for the current exchange rate and perhaps a nominal fee.

These arch cards would be totally untraceable just as current arch cars are, perhaps with some beefed up encryption. Just like that you’ve got the world most accessible global non-bank with 34,000 branches, which from memory is more than 5 times western-union.

I’d much rather trust uncle Warren than Uncle Sam with my walking around money. If a company with Berkshire’s reputation were to pull this off it would make their current float look like pocket change, bitcoins an afterthought, and over-spending over-reaching governments VERY NERVOUS.

Posted by y2kurtus | Report as abusive

I think the advantage you see in ripples over bitcoins is almost the opposite of “all the Ripples in existence … have already been created”, and is much more in the very fact that the effective “float” of Ripples will be managed by a central bank with an interest in creating stability of price rather than quantity. The supply of bitcoins is extremely inelastic, and thus small fundmental fluctuations in demand produce sizable fluctuations in price, the expectation of which produces larger speculative fluctuations in demand which produces huge fluctuations in price. That Ripple has “created” a whole bunch of supply that it simply sits on, ready to release it if the price goes up too quickly, is practically indistinguishable from their being willing to create it if and when necessary. It is their willingness to manipulate the market that is likely to give it stability.

Posted by dWj | Report as abusive

Felix, I hope you do some more postings on Ripple as it certainly looks interesting. I’m not an economist. I’m someone who’s tried to educate himself on basic economic principles so please excuse me if my terminology or understanding is incorrect. If my understanding of monetary theory is correct, than any unit in a monetary system is basically an IOU. And Ripple seems to understand this in that it’s a system for creating and transferring IOUs. IOU exchanges in the trusted network model might be akin to extending a bar tab to a known customer or close associate of that customer. While IOU exchanges between people not part of a trust network with each other might be more akin to buying and using traveler’s checks. Are these analogies valid?

What I don’t understand is how liquidity is maintained across the Ripple network. If the vast majority of people using gateway A are exchanging their dollars for IOUs and the vast majority of people using gateway B want to exchange the IOUs created at gateway A for dollars, how is this handled? The Ripple site didn’t explain this in its overview and I’m hoping you can shed some light on the matter.

Posted by ZephyrCA | Report as abusive

1. Bitcoins seem so dangerous. Thanks God that the other currencies don’t have currency risk.

2. Market regulation on bitcoins is barely growing, not the least thanks to current volatility. With time, price should stabilize. This has happened with gold and and all of the current currencies (you can say not with the euro, for instance, but only because it’s a mark spin-off).

3. Maybe this shock can kill bitcoins but if it doesn’t, it will strength them.

Posted by AdrianBrenes | Report as abusive

The BIG issue is that Open Coin, a for-profit company, could theorically, as you mention, become the new central bank. What’s there legitimicy?

Posted by julienalex | Report as abusive

We don’t need a big company to play GOD of the crypto’s and manage prices. We don’t need a new FED of the crypto world to ruin the fairness like the FED and IMF have done for our fiat currencies.

The point of Bitcoin is that people know exactly what they are getting and the value of the system is fair and decentralised. Ripple places too much power in the hands of its creator, and how long before power corrupts?

The only crypto-currency I will ever get behind is one that is free, decentralised, and anonymous. There is no limit to the number of crypto’s that can be created. Prices will stabilize in the crypto world as their float increases relative to fiat currencies. Soon crypto value relative to fiat will be as flat and boring as the current trading between fiats on forex, and it will largely be dominated by automatic trading programs.

the only reason there is volatility is because it is all so new. litecoins, terracoins, and many other basic copies of bitcoin are already coming out. soon new ones will come out at pace that matches demand, and prices relative to fiat will stabilize.

Posted by jdat747 | Report as abusive

from the department of “err, no” …

[Users are anonymous (or, technically, pseudonymous)]

The bit in parentheses basically means “or, technically, no they’re not”. The ripple wiki is pretty upfront about this to be fair – it’s not intending to be an anonymous system and it maintains a full audit trail.

Posted by dsquared | Report as abusive

Ripple is a trojan-horse posing as a better Bitcoin, but it doesn’t have anything new to offer – just a centralized Bitcoin-clone as a get-rich-quick scheme for the VCs. Ripple does nothing to sidestep wild price speculation, nor KYC/AML regulations so it is no different to current bitcoin exchanges. Their debt-based system is a smokescreen for the ultimate prize: their majority-owned XRP currency which they hope becomes the defacto currency used on the network.

Ripple replaces a decentralized system with a centralized one, which makes it completely antithetic to Bitcoin. OpenCoin will be subject to US laws and seizures so there will be no incentive to use it, except to enrich the OpenCoin stockholders. There are many other VC-funded Bitcoin startups such as Bitpay and Coinbase which help the bitcoin ecosystem rather than coopt it.

“Ripple hasn’t succeeded yet. But at least — unlike bitcoin — it has a genuine hope of doing so” Why it that? Because it’s centralized where one party owns 25% of the total currency and is accepted nowhere?

Posted by Peter12 | Report as abusive

Hey Felix Trout or Salmon or Herring or whatever your name is. Have you ever heard of Bitpay? Do you know what that is? I’ll just explain it to you in simpleton terms so your pea brain can understand it.

Let’s say I have a coffee shop and I accept Bitcoins.
On Monday Bitcoins are worth $100 each. You come in on Monday and buy 10 pounds of coffee at $10 per pound. You pay me 1 Bitcoin and you leave a happy customer.

Then . . . 15 minutes later, Bitcoins “crash” and their price goes DOWN to $10 per Bitcoin?

As the owner of the coffee shop am I sad?
Do I cry?
Did I take a loss?
No I did not.
Why not?
Because I use Bitpay.
Bitpay is the largest Bitcoin processor in existence and guess what? They pay me the $100 and everything is fine.
So let me give you a BIT of advice before you go wasting your time at the keyboard again:

1) You might want to consider getting a new job because you are failing at the one you have.

2) If you do keep your current job (God forbid), PLEASE, PLEASE, PLEASE do a little research before spouting off at the mouth. Diarrhea is bad enough coming out the back side, but when it’s coming out of a person’s mouth, it is nothing short of disgusting.

Posted by ReverendJohnny | Report as abusive

The problem with Ripple is that it is not decentralized, which Bitcoin is.
As you mentioned the problem with Bitcoin is that the transactions are way too slow and the price fluctuates too much. There are however alt coins on the market that fix some issues with Bitcoin. A good example is the Worldcoin crypto currency, which has instant transactions.

Posted by p0pe | Report as abusive

I am new to all this ripple stuff. Could anyone please send me some ripple ?

rHXLScTtvJ8ZH6bouX79s61QYpi6rcyLjU

Thanks

Posted by Dicewin | Report as abusive
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