IEEE: Ripple Credit System Could Help or Harm Bitcoin

I’ve been hearing a lot about the new version of Ripple, both excitement and criticism. while I have yet to read up on the specifics of the version due to out this month, I am both intrigued by the possibility of decentralized exchange and concerned with developer Ryan Fugger’s original goal for Ripple as ‘debt money without artificially imposed scarcity.’  I can’t imagine unlimited debt money as a serious competitor to Bitcoin, however, the IEEE seems to disagree with me. In the below review they speak with Ripple’s developers and beta testers.

“Within a few weeks, a new option will be available: a system called Ripple, which allows individuals to create credit and disburse it to people within a peer-to-peer social network. The project could be used to implement what many Bitcoiners have been asking for—a decentralized currency exchange. But if the more-ambitious parts of the design pan out, the credit created in Ripple could itself become a new form of digital currency and the first formidable competition for Bitcoin.”

“According to those at the helm of Ripple—including Jed McCaleb, who is best known in the Bitcoin community for developing Mt. Gox, the largest centralized Bitcoin exchange—they will release a public version at the end of January, the first peer-to-peer iteration of the Ripple project.“

“Ripple is actually a concept that predates Bitcoin and was first implemented by Ryan Fugger, a Web developer in Vancouver, B.C., Canada. His idea was to create a way for people to extend credit to strangers through the people they already knew. For example, if I trust Alice, who trusts Bob, I can offer my credit to Bob in an agreement backed by Alice.”

“When Fugger built Ripplepay in 2005 and 2006, ‘the goal was to create a system of debt money without artificially imposed scarcity,’ he says in an e-mail. What that meant in practice was giving individuals the power to operate as their own banks, with the ability to issue credit.”

“When you join the Ripple network, you designate primary contacts and establish levels of trust by choosing the amount of credit you are willing to offer each individual. I might feel okay lending up to $1000 to a few close friends whom I know will have a deep obligation to pay me back, while making only $50 available to the man I talk to every morning at the deli. But with Ripple, the credit isn’t only available to my acquaintances. It becomes available to anyone else who knows the people in my network.”

“Let’s say, for example, that I want to sell a Web application to Bob, who knows my close friend Alice (credit limit $1000). Ripple allows Bob to trade with me using his credit limit with Alice. If she trusts him for $100, that becomes his credit limit with me. I would send Bob the merchandise in exchange for his promise to pay. But instead of owing me, Bob would actually owe Alice, who would in turn owe me. Once Bob satisfied his debt, the Ripple network would destroy the entire chain of IOUs.”

“According to McCaleb, the new version of Ripple will include an exchange platform built right into the network. ‘For the currency exchange, you create offers, and these offers are stuck in the ledger. Anyone that has a trust path to the currency you are buying can take your offer,’ McCaleb explained in an e-mail.”

“For many who use or want to begin using Bitcoin, this is a welcome development. ‘If it does achieve that, I’d say that’s pretty big news, because the main weakness of Bitcoin, obviously, is that you have to rely on an exchange,’ says Eli Gothill, a Bitcoiner who has played with the new beta version of Ripple”

“Not only will this reduce the risk for individuals who want to trade in bitcoins (or other currencies, for that matter), it will also be much harder to shut down than a centralized exchange, because the upcoming version of Ripple will be the first iteration to run on a peer-to-peer network with open-source software.”

“‘The database that stores all the transactions and relationships is shared across the network. So everybody hosts it. And then every 10 to 20 seconds, there’s a consensus process where everybody’s node is brought up to date,’ says Gothill.”

“So far, Ripple’s founder approves of the new version. ‘An open, distributed transaction network is a hard problem, and I think Jed’s approach has tons of potential,’ says Fugger.”

“And that potential encompasses much more than a slight improvement for the Bitcoin economy. Embedded in the Ripple concept is the possibility that the network could become so large that its users would start to participate in a closed loop of trade, treating personally issued credit as a unique form of currency. In this scenario, rather than immediately demanding payment on IOUs, Ripple users would pass them on as payment in another transaction. And then IOUs would circulate like currency until they canceled each other out.”

“This is the bigger idea behind Fugger’s original design. ‘What Ripple is designed to do is get rid of the need for money to settle debts, because debts can be canceled out against each other. So if I send you an IOU for 10 and you send me an IOU for 10, then we don’t need to settle anything, because our debt will just cancel out,’ says Gothill.”

“Although the architecture of Ripple will be conceptually similar to that of Bitcoin, by design it will consume much less electricity than Bitcoin and will be able to conduct transactions over the course of seconds rather than minutes.”

“But even those who have tried the new version are reining in their expectations. The original version of Ripple has been around for a few years now, and it has yet to prove that you can build a mature economy from a network of acquaintances. There are plenty who think it’s a bad idea to make friendship the basis of a credit network.”

Read the review in its entirety here.