Ripple (payment protocol)

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The Ripple logo.

Ripple is an open source protocol for a payment network based on an idea by Ryan Fugger, and further developed by Ripple Labs.[1][2][3] In its developed form, the Ripple network is intended to be a distributed, peer-to-peer payment system and foreign exchange market. The Ripple network supports any currency (dollars, yen, bitcoin, etc.).

At its core, Ripple is based around a shared, public database. This database contains a ledger with account balances. Anyone can view the ledger and see a record of all activity on the Ripple network. In addition to information about balances, the ledger can also hold information about offers to buy or sell a currency or asset, creating the first distributed exchange. [4]Participants in the network agree to changes in the ledger via a process called consensus. Consensus is reached by the network approximately every 2–5 seconds, allowing for trading of assets and settlement of transactions without any centralized clearing house.

In addition to the payment network and distributed exchange, Ripple also includes its own internal Ripple currency, XRP (sometimes called ripples). Users of the Ripple network are not required to use XRP as a store of value or a medium of exchange. The network is currency agnostic. XRP exists to fulfill two primary network functions—to stop network spam and to act as a bridge currency. To stop network spam, a small amount of XRP must be used in each transaction, and this XRP is destroyed after use.[5] This makes it quite expensive to implement a Denial-of-service attack, thus it serves an important security function for the Ripple network.

The current version of the original Ripple client is version 0.2.39.[6]

Gateways

Currency enters and exits the Ripple network via gateways. “Gateway” is Ripple’s term for the onboard and offboard ramps to the network.

Gateways are businesses that accept currency deposits from users and issue balances into the Ripple network in return. This is analogous to how traditional banks accept deposits from customers and issue them balances on the bank network in return.

In the traditional financial system, banks issue balances onto their own proprietary, closed networks. In the Ripple model, gateways issue balances onto Ripple's distributed ledger. In this way, balances can be sent freely between Ripple users to exchange value. When a user wants to redeem a balance for cash, the gateway that originally issued the balance into the network is responsible for redeeming it against the deposits it holds.

Holding balances within Ripple exposes the user to counterparty risk. [7]This is no different from traditional banking relationships. If you store your dollars with bank, you do not directly hold USD. You hold a USD balance issued to you by your bank. A bank balance can be redeemed on demand for cash USD against the bank's deposits. However, if the bank defaults, there is no guarantee that the depositor will be able to recoup all of his deposits.

This type of counterparty risk exists within Ripple as well. Users should only hold the balances of gateways they believe to be creditworthy, because a balance is nothing more than a gateway's promise to pay. If a gateway defaults, holders of that gateway's balances may not be repaid in full or in part.

In practice, many Ripple gateways may look very similar to traditional banks, but a gateway can be any business that provides access to the Ripple network. Gateways can be banks, money service businesses, marketplaces, or any financial institution.

Every currency on Ripple, except XRP, has a specific issuing gateway.

The Ripple protocol does not assume by default that users are willing to hold any balances. Users must manually “extend trust” with the Ripple client to a gateway in order to hold its balances. Extending a trust line indicates to the Ripple network that the user is comfortable with the gateway’s counterparty risk and is willing to hold its liability. Trust is not unbounded; it is extended for a specific currency and amount.

XRP

XRP (sometimes pronounced “ripples”) is the native currency of the Ripple network.[8] Unlike dollars or euros, XRP is a natively digital asset, and it exists only within Ripple. 100 billion units of XRP were programed into the ledger, and no more can be created according to the Ripple protocol's rules. The software was designed so that XRP is a scarce asset with decreasing supply.

XRP trades freely against other currencies within the network, just like EUR trades freely against USD. There is a fluctuating market price for XRP in dollars, euros, pounds, bitcoin, etc.

XRP exists to perform two specific network functions—it plays a role in network security and acts as a bridge currency.

Users of the Ripple network are not required to use XRP as a store of value or a medium of exchange. Ripple can be used to facilitate payments in a users local currency, however, every user is required to hold a small amount of XRP in order to use the system. Ripple’s design emphasizes the distributed payment system and currency exchange as opposed to emphasizing an alternative currency. XRP is just a tool to support the network’s functionality. Many users may prefer to use Ripple to send USD, EUR, JPY, and other fiat currencies.

The XRP currency is the only currency in the Ripple system that does not entail counterparty risk. XRP is a digital asset, whereas other currencies on Ripple exist in the form of balances, which are debt instruments (i.e. liabilities). XRP is not dependent on any third party to redeem it.

The creators of ripple created the network with 100 billion XRP, and gifted a for-profit company, Ripple Labs, with 80 billion XRP. Ripple Labs intends to distribute 55 billion XRP to users of the network, and will keep the rest, in the hope that this XRP will grow in value over time.[5][9][10]

XRP as an Anti-SPAM Measure

Since the Ripple network is based around a shared ledger of accounts maintained by servers around the world, a malicious attacker could create large amounts of “ledger spam” (i.e. fake accounts) and transaction spam (i.e. fake transactions) in an attempt to overload the network. This could cause the size of the ledger to become unmanageable and interfere with the network’s ability to quickly settle legitimate transactions.

To protect the network from abusive creation of excess ledger entries, each Ripple account is required to have a small reserve of XRP to create ledger entries. This reserve requirement is currently 20 XRP,[11] which is roughly equivalent to $0.35 [12] on December 18. This requirement is designed to be a negligible amount for normal users while preventing a potential attacker from amassing a large number of fraudulent accounts to “spam” the network.

With each transaction that is processed, 0.00001 XRP is destroyed. This is not a fee that is collected by anyone – the XRP is destroyed and ceases to exist.[13] This transaction fee is also supposed to be negligible for users. But when the network is under heavy load, such as during a Denial-of-service attack, this fee rapidly rises.

The goal of this design is to quickly bankrupt attackers and keep the network functioning smoothly.[14] Attacking the Ripple network can quickly become very expensive, but for regular users, the cost effectively remains “free-ish”.

Market Makers

Any user on Ripple can act as a market maker, broadcasting offers to buy or sell one currency for another currency. Bids and asks are aggregated into order books, to create a decentralized exchange. Users can transact with market makers to trade or convert currencies.

Ripple's path finding algorithm leverages this functionality to allow users to send payments in foreign currencies, without actually having to hold any foreign currencies.[15] For example, a user who holds only USD balances can send a payment in EUR to a merchant who wants to get paid in euros. This payment would get routed through one or more market makers who were advertising a willingness to buy USD (from the sender of the payment) and sell EUR (which gets routed to the beneficiary of the payment).

This feature set could reduce transaction friction in the financial world. In its developed form, users seamlessly pay each other via Ripple in different currencies, without assuming any undesired foreign exchange risk. For example, one user might choose to hold his wealth in bitcoins. Using Ripple, he could seamlessly pay merchants in USD or EUR, without exposing them to any bitcoin foreign exchange risk and without exposing himself to USD or EUR foreign exchange risk.

Path Finding Algorithm

Ripple's Path Finding Algorithm searches for the cheapest path between two currencies.[16] In the case of a user who wants to send a payment from USD to EUR, this could be a "one-hop" path directly from USD to EUR, or it could be a multi-hop path, perhaps from USD to CAD to XRP to EUR. Path finding is designed to seek out the cheapest conversion cost for the user.

Ripple Labs

Ripple Labs (originally called OpenCoin), the creator of the Ripple protocol, is backed by several investors, including Andreessen Horowitz, Google Ventures, FF Angel IV, IDG Capital Partners, Lightspeed Venture Partners, Vast Ventures, and Bitcoin Opportunity Fund.[17][18]

Advantages

  • The Ripple protocol is an open standard that can federate existing payment networks, similar to how Simple Mail Transfer Protocol federated messaging systems in the 1980s.[19]
  • Ripple allows users or businesses to transact in different currencies without exposing themselves to undesired foreign currency exchange risk.[no citations needed here]
  • Ripple can provide fast transactions (transactions can typically be settled in only a few seconds).
  • Ripple's was designed to be counterfeit-proof.Template:According to whom
  • Ripple can act as a universal translator for money, in its developed form.[20]
  • Ripple lets people be in debt via IOUs.[5]

Criticism

  • When issuing trust to multiple parties for the same currency, user balances can automatically switch between one trust source and another. The Ripple client warns users of this risk, though it remains a source of confusion.[21][22][23][24]
  • Ripple Labs will hold half of all the XRP in existence, in the hope that they will gain value.[5][25]
  • Some claim that the fact that Ripple allows people to have debt is a weakness, as the debt may not be paid, may not be worth as much money as it represents, or requires a level of trust in the person issuing the balance into the Ripple network. However, this criticism also applies to virtually all existing monetary systems (except those from crypto-currencies), as deposit cash in a bank results in a balance from the bank and requires trust in the institution.[5]
  • Ripple Labs has stated that it intends to give away 55 billion Ripples (XRP), but it has only given away a small percentage of that thus far.[26][27]

See also

References

  1. "Ripple is officially open-source!". https://ripple.com/forum/viewtopic.php?t=3718&p=18013. 
  2. "ripple (Ripple) 路 GitHub". Github.com. https://github.com/ripple. Retrieved 2013-10-30. 
  3. "RippleWiki | Main / HomePage". Archive.ripple-project.org. 2011-11-12. http://archive.ripple-project.org/. Retrieved 2013-10-30. 
  4. http://motherboard.vice.com/blog/beyond-bitcoin-a-guide-to-the-most-promising-cryptocurrencies
  5. 5.0 5.1 5.2 5.3 5.4 Joshua Kopstein (2013-04-23). "Gold 2.0: can code and competition build a better Bitcoin?". The Verge. http://www.theverge.com/2013/4/23/4252808/can-zerocoin-and-ripple-build-a-better-bitcoin. Retrieved 2013-10-30. 
  6. "Ripple Client Update 0.2.39". Ripple. 2013-12-02. https://ripple.com/blog/ripple-client-update-0-2-39/. Retrieved 2013-12-04. 
  7. http://web.mit.edu/e-club/Archive/sort/98.2.pdf
  8. https://ripple.com/ripple_primer.pdf
  9. "Introduction to Ripple for Bitcoiners - Ripple Wiki". Ripple.com. 2013-10-17. https://ripple.com/wiki/Introduction_to_Ripple_for_Bitcoiners. Retrieved 2013-10-30. 
  10. http://dealbook.nytimes.com/2013/11/11/the-rush-to-coin-virtual-money-with-real-value/
  11. https://ripple.com/blog/proposed-change-to-ripple-reserve-requirement-2/
  12. http://ripplecharts.com/
  13. https://ripple.com/wiki/Transaction_Fee
  14. http://letstalkbitcoin.com/the-decentralized-exchange-for-fun-profit/
  15. https://ripple.com/wiki/Ripple_for_Users#Automatic_Cross-Currency_Payment
  16. https://ripple.com/wiki/RPC_API#ripple_path_find
  17. "The Creators of The Ripple Protocol". Ripple Labs. http://www.ripplelabs.com/. Retrieved 2013-10-30. 
  18. http://dealbook.nytimes.com/2013/11/11/the-rush-to-coin-virtual-money-with-real-value/
  19. "Payments Should Be More Like Email (Or, the Power of Federated Network Protocols)". Ripple. https://ripple.com/blog/payments-should-be-more-like-email-or-the-power-of-federated-network-protocols/. Retrieved 2013-10-30. 
  20. "The Global Currency Conundrum and the "Babel Fish" of Money". Ripple. https://ripple.com/blog/the-global-currency-conundrum-and-the-babel-fish-of-money/. Retrieved 2013-10-30. 
  21. New trust lines should have the quality in/out set to zero 路 Issue #748 路 ripple/ripple-client 路 GitHub. Github.com (2013-05-21). Retrieved on 2013-08-18.
  22. 1+ free Ripple BTC giveaway - ended! See OP! (Over 455 BTC gaveaway). Bitcointalk.org (2013-05-16). Retrieved on 2013-08-18.
  23. Ripple Discussion • View topic - Warning: TradeFortress' Bitcointalk.org scam. Ripple.com (2013-05-16). Retrieved on 2013-08-18.
  24. Ripple Discussion • View topic - [WARNING] Crypto-giveaways con/scam. Ripple.com. Retrieved on 2013-08-18.
  25. "Bitcoin 2.0: Can Ripple Make Digital Currency Mainstream? | Co.Exist | ideas + impact". Fastcoexist.com. 2013-05-14. http://www.fastcoexist.com/1682032/bitcoin-20-can-ripple-make-digital-currency-mainstream. Retrieved 2013-10-30. 
  26. Ripple Discussion • View topic - Looks like Opencoin is preparing for NO giveaway. Ripple.com. Retrieved on 2013-08-18.
  27. Ripple Discussion • View topic - Did anyone get some XRPs from the company?. Ripple.com (2013-05-31). Retrieved on 2013-08-18.

External links

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