Saturday, March 2, 2013

Ripples in the Ocean of Liquid Assets

In today's world, banks dominate the issuing of credit (loans), and debt-backed paper money.  The banks accept promises to pay back the loan from loan recipients, and in return give them credit in a loan account, which is essentially a promise to pay out bank notes on demand, and the bank notes themselves represent promises from the Federal Reserve to... (it's not clear what - it used to be "pay out gold on demand," but not since Nixon closed the gold window in 1971).  Basically, a U.S. Federal Reserve Note represents some slice of the "full faith and credit" of the United States federal government, but only in some rather vague and ill-defined sense.  But in any case, it, too, is basically an I.O.U., a token of obligation (borne by future taxpayers, presumably).

But really, since long before banks were invented, in fact, ever since the dawn of trade itself, any individual has been able to issue a promise to pay (an IOU, whether verbal or recorded), and anyone who trusts that person has been free to accept that I.O.U., in exchange for goods and services, if they want.  The only problem is, personal IOUs are not very liquid or transferable, since only people who already know and trust the issuer will accept them.  It's possible that, if I trust you to owe me $100, and my friend John (who doesn't know you) trusts me to owe him $100, I can facilitate a loan of $100 from John to you by acting as an intermediary.  But keeping track of such "chained debts" by hand is a cumbersome and inefficient process.  People usually find it simpler and easier to use centralized issuers of credit, such as banks and credit unions.

Unfortunately, this centralization has created a problem in the world today where banks, by virtue of their effective monopoly on the issuance of credit, effectively dominate and control the world.  These days, no large new project can get accomplished unless its proponents can borrow the required liquid capital from a bank or other large financial institution.  Well, one can also issue stock (which is another kind of promise - a promise that the buyer will retain a share of the equity in the venture, and that the officers of the company will exercise fiduciary responsibility in maintaining shareholder value), but usually the underwriters or initial buyers of shares in an IPO will be large financial entities such banks and hedge funds - so effectively in this case it's still these large centralized entities that permit such large promises to be made.

Well, to be fair, these days are a few exceptions, such as crowdfunding through websites like Kickstarter and RocketHub,  But these are best suited to funding flashy, exciting, original projects, not necessarily to meeting the everyday needs of small businesses and individuals that need access to credit for miscellaneous reasons, such as to renovate their premises, or buy a new appliance, or a car, or a home.  If the "common man" wants to protest against unfair bank policies, and "vote with his feet," as it were, there are few practical alternatives to big financial institutions today.

A solution to the near-monopoly that the banking industry
has today on the issuance of credit.
But, a brand-new, revolutionary electronic credit system called Ripple aims to solve this problem.  Ripple solves the problem mentioned earlier of identifying and tracking chains of person-to-person obligations, by keeping track of all these obligations in a distributed electronic system.  It effectively allows participating individuals to serve as banks for each other.

In Ripple, any user can "grant trust" to any other.
This is like giving them a new credit line or loan account.
You can create it out of thin air, just like the banks do!
If I trust my best friend Alice, say, to borrow $1,000 from me (i.e., if I will accept an IOU up to $1,000 from her), I can input this information into the Ripple system; then if another person (my cousin Bob) trusts me to borrow $1,000 from him, then Alice can effectively borrow $1,000 from Bob by issuing me a $1,000 IOU, and then I issue Bob a $1,000 IOU.  Then Bob has an IOU he trusts, and in exchange for it, he can give Alice $1,000 (or some resource he is selling for $1,000) without worrying about whether he needs to trust Alice.  The beauty of the Ripple system is that it finds these linkages automatically through the network, and keeps track of the resulting IOU balances for you.  Later, the IOUs can be canceled out (the debts repaid) by another chain of IOUs going in the opposite direction.

Ripple automatically chains together trust relationships, so that you can
accept IOUs with confidence even from people you don't know directly.
IOUs in Ripple differ from bank loans in two important respects:
  1. They do not inherently carry any interest.
  2. There is no specific deadline by which they have to be paid back.
A $100 bill is essentially just an IOU
from the US Federal Reserve System.
Therefore, in this sense, Ripple IOUs are more like bank notes (standard paper currency, representing bank debt) than they are like your typical loan agreement from a financial institution.  A bank note (a $100 bill, say) declares that the issuing bank (which, these days in the U.S., is ultimately a Federal Reserve bank) owes the holder $100.  (That amount used to be payable in gold and silver; now at best you could get a bank account balance with it, or use it to defray a tax obligation.)  But, the issuer of those notes (again, the Fed) doesn't have to pay the holder of the note any interest, nor can the holder demand settlement of the note at any specific time.  It's like an indefinite-period, interest-free loan.  I suppose it's conceivable that the Fed could pay off all its notes by, for example, offering convertibility to dollar-denominated precious-metal coins, say, but I doubt I'll see this happen within my lifetime.

Anyway, the point is, by generating and sending an IOU (denominated, typically, in some existing currency) to another party via the Ripple network, you are effectively creating your own new paper money, in the same way that banks do when they create loan accounts.  Ripple IOUs are backed by the underlying social web of trust that they are based on - i.e., by their users' statements, within the system, that they trust each other to repay those IOUs, up to the specified limits.

Ripple makes it easy for anyone to exchange
IOUs for "real" money, or convert between
currencies.  BitStamp is an existing entity that
provides these services for Ripple users.
Another benefit of Ripple is that it facilitates the creation of automatic, distributed currency exchanges.  Using Ripple, anyone can act as an exchange, and facilitate currency trades via reciprocal trust relationships between themselves (as the exchange) and the individual buyers and sellers of currencies.  One existing exchange that you can use with Ripple already is  BitStamp will allow you to do deposits of "real money" (US dollars or Bitcoins, say) with them, and take out withdrawals in the form of IOUs issued from them to you within the Ripple network.  Then, once you have some IOU value inside the Ripple network, you can also set up BitStamp as your base currency issuer for any particular currency you wish to trade (BTC, or USD, say).  (If you want to try this, BitStamp's Ripple address, for exchange purposes, is rvYAfWj5gh67oV6fW32ZzP3Aw4Eubs59B.)  With that capability in place, you can then easily and automatically convert IOUs between different currencies in the process of sending them to another party.  So if I trust you for dollars, I can loan you Bitcoins, or vice-versa.

One limitation of Ripple (in its current implementation at is that there is a small transaction fee for sending IOUs or making currency trades; this is denominated in XRP ("ripples"), which you can think of as postage stamps used for delivering transactions.  XRPs are pretty cheap; lately the exchange rate for them through has been hovering in the general neighborhood of 10,000 - 50,000 XRP / BTC, meaning that each XRP only costs around 0.000'02 - 0.000'1 BTC (i.e., two to ten milli-bitcents), or about US$0.000'7 - $0.003'5, that is, in the ballpark of one-tenth of a cent.  Someone has to give you some XRPs in order for you to get started using Ripple -- you need to keep a balance of at least 300 XRP (about a dollar's worth, or less) on hand to use all features of the system -- but, once you have some XRP, you can always buy more at market prices by going through the trading interface.  Also, has been hosting various XRP "giveaways", such as one for Bitcoin Forum users.

It's important to note that, even if you don't transfer a lot of "real money" into Ripple through a gateway like, as long as you have some XRP on hand for executing transactions, you can use Ripple to manage and track IOUs between yourself and your friends/family/neighbors/customers/clients in any amount you want.  If you trust your brother to borrow $1,000 from you, there is nothing to prevent you from granting him $1,000 worth of trust within the Ripple system, and then he can generate an IOU in the amount $1,000 to you "out of thin air," as it were, and send it to you in the Ripple network, in exchange for your giving him $1,000 of money in the "real world."  When he pays you back, you send him an IOU in Ripple for $1,000 to cancel out his debt.  In this way, you are using Ripple to track the debts in your social circle.  And, as long as a chain of trust exists from you to any other party, even someone you just met who you don't know directly, you can use Ripple to automatically generate the chain of IOUs that secures a new loan that you issue to them.

A new Ripple currency unit: 1 LMR.
You can also make up and use entirely new "currencies" within Ripple, to represent not just dollars or Bitcoins, but anything you want.  Let's say your neighbor wants to borrow your lawnmower.  You could agree to use a new made-up currency unit of "1 LMR" to represent the lawnmower; then you could grant your neighbor a trust for 1 LMR, and then he could send you an IOU valued at 1 LMR in exchange for your actual lawnmower.  When he returns the lawnmower, you give him the IOU back.  Thus, Ripple can be used to track any kind of obligation you want.  If you are exchanging labor with friends in volunteer activities, you could use "1 PHR" to represent one person-hour worth of labor.  Etc., etc.  Except for the special unit XRP that's used to pay the system's transaction fees, the Ripple network does not know or care what the currency units represent, and you can choose them to represent anything of value that you and your friends agree on.

The beauty of Ripple is that it allows the easy creation
and spread of liquidity.  Anyone can create liquid wealth
that ripples from person to person through the network.
I only just started learning about Ripple within the last week or so, but already I'm convinced that it could be the key to finally free mankind from our virtual enslavement by the big banks, by giving us a way to generate and distribute our own credit to each other, based on webs of trust between individuals.  If enough of us sign up to use Ripple, and grant trust within it to all the people we know and trust in their lives, there will soon be a "network effect" resulting in almost everyone in the world becoming able to use Ripple to loan, borrow or transfer value, represented by Ripple IOUs, to/from each other, almost anywhere in the world, even if they do not already know each other.  With money readily transferable, and credit obtainable, by individuals, without needing to go through banks, many of the big banks, with their high fees, will quickly lose business and collapse - and good riddance to them!  Ripple could easily become the basis for overthrowing the entire global banking system, and unshackling us all from the cold and self-serving control of the global financial elites.

Therefore, I urge you to sign up for and begin using Ripple today.  If you have friends who already use it, ask them to give you a few XRP to help you get started.  Or if you're an established user of Bitcoin forum, get some free XRP in the giveaway (I got 40,000).  Eventually, there will be ways to directly buy XRP on an exchange even if you don't already have some, and then everyone in the world can get involved.  At the moment, availability of XRP is more limited - I think they are trying to grow the system gradually, to avoid growing pains.

But, I, for one, am very much looking forward to the day when almost everyone in the world uses Ripple to track their obligations; then we can all just create our own money as needed, in the form of IOUs backed by our existing networks of social capital, and, best of all, we can collectively give a giant "screw you" to the big banks, who have been funding the destruction of our planet's habitability through pollution of the commons, privatizing their profits while socializing their losses through "too big to fail" bailouts (which they can only extort from lawmakers to begin with because the bankers have such exclusive control over the issuing of credit today that they can threaten to crash the global economy by withdrawing it), and sucking up all of our wealth through their control of the present global monetary systems.

By collectively adopting Ripple, and using it to issue credit to each other directly, the world's people can (finally!) successfully "vote with our feet" and tell the big bankers, NO MORE we will put up with your malevolent, greedy control and manipulation of our human economy for your own enrichment!  WE ARE FREE!

"Screw you, you rich bastard banksters!"
P.S.  Just in case anyone would like to grant me a trust, my own Ripple address is: rnfLDQaxN7isxzWZuc6BM8jeiCb2WSGpdG


  1. This does a great job of describing the ripple network for the moment.

    The only thing I would caution is that there was a time when most people thought banks did a huge service. Today, however, we describe them as "enslavers" who are "funding the destruction" of our planet through their profits.

    In the Ripple scenario, we may be free of the BANKS as the enslavers, but we gain (potentially) another one: OpenCoin.

    While this is easily overlooked in the excitement of XRP giveaways, it is the giveaways themselves that point to the power that OpenCoin will hold if Ripple takes off. They own Billions of the XRP's (and plan to keep a lot of them) and they have complete control of the network.

    What does that look like in 10 or 20 or 30 years down the road in a Ripple world? The "Evil" Banks only control the money. By your description, OpenCoin could find themselves controlling the money and all of your other obligations as well. A parasite leeching tiny bits of XRP with every move you make.

    What will it feel like then to know you sold your freedom almost the moment it looked like you had it? And the price? A 40,000 XRP giveaway at a time when they were worth nothing.

    Personally, I love the idea of the network -- it's the part where I'd be counting on the altruism of a single corporate entity for every Ripple that scares the hell out of me.

    1. Actually, while OpenCoin currently has control over the servers, plans to open them in the near future, as soon as they are ready, so they wouldn't be "controlling" anything...

    2. I would also add, if, at some point, OpenCoin starts charging excessive fees to release their XRPs, when the initially-distributed supply of them runs low, people can always create and migrate to a competing system at that time. The concept behind Ripple is fairly straightforward and could be easily reimplemented by other players if there proved to be a large demand for this type of system.

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    1. I assume that's your Ripple address? I've added my own Ripple address to the blog post in case anyone would like to grant me a trust. :)

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  5. Ripple makes it easy for anyone to exchange IOUs for "real" money, or convert between currencies.Thanks for your valuable information, It would be really helpful about ripple exchange.

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