Making a Ripple with Cryptocurrencies

A business is really just a legal structure that allows you to ring-fence the risks and returns associated with a particular model of exchanging value with others. Fiat money is used to exchange value with other individuals or organisations. In the old days we exchanged beads, coins, and even paper with special designs printed on them – a method still in use today! The reality is that while printed money used to have some notional link to an actual asset (e.g. the gold standard), for a long time money has really just been a digital concept – it’s a number associated with an account, rather than a physical asset. The money is stored in many systems, each of which need to know who you are and verify your identify before moving any money. Just think of moving funds from your local bank via a credit card via PayPal to a foreign sellers PayPal account linked to their credit card and bank on the other side. Currently, at each stage of exchanging value with someone there is a transaction cost that gobbles a few % of the total and there is risk that in the 2-7 days it takes to process the transaction even more can be lost to differences in exchange rates. So when a new way of exchanging money arises that offers fees 1000x lower, almost instant global transactions, and conversion into any currency, then it’s important stuff; hence the interest in crypto-currencies.

While Bitcoin has received most of the hype and press, it has some problems and is also not the only gig in town: this morning I was one of about 25 Thousand other Beta users to receive 1000 Ripples (currency code: XRP) into my wallet. With an exchange rate of about 180XRP to the USD, this is only about $10 to me (or ZAR 100 at time of writing) – but about USD 250K in total, just given away.

Ripple.com is a cryptographic currency that allows you to send money anywhere in any currency instantly with transaction costs of a ridiculously low $0.0001 per transaction. There is no risk that exchange rates will move significantly in the few seconds that it takes to process your transaction, and because Ripple by design avoids the ACH, Banks or credit-card networks, it has none of the associated costs. Did I mention that it’s also not for profit and open-source? Anyone can use it and anyone can build on top of it. Unlike Bitcoin, there is no money to be made from mining for new bitcoins, but there are a finite number that have been made.

Ripple is a peer-to-peer (think Napster) network where the interconnected servers run a shared copy of the ledger. No one owns it. The ledger is kept up to date by a technical process called consensus, whereby all servers in the network verify and agree on the correct view of the database, in the processing allowing only legitimate transactions. The ledger tracks account balances not people, so its super easy to move money from one account to the next. Money moves across the world in the time it takes to update the ledger – literally a few seconds. To make this even easier, Ripple has its own network currency called Ripples (XRP) – essentially the first app built on top of the core technology. Since Ripple works off accounts not people, it means your wallet has to be treated like cash. Of course, Ripple as a system has to work within the overall banking system via gateways: these allow the entry and exist of fiat money. Anyone can build a gateway as long as they comply with local laws, and gateways will charge a fee that will probably close to what they currently charge.

100 Billion ripples have been made and no more will ever be. The minimal transaction cost for each transaction doesn’t go to anyone, its just destroyed within the network – the effect of which is to distribute them evenly to all account holders in proportion to their network. Unlike todays’ system where the transaction costs go to make profits for the banks, the Ripple costs are there purely to prevent someone sending millions of transactions and swamping the system.

You can send Ripples to any other Ripple account with no counter-party risk, but to send any currency, including Bitcoins to someone else, you need extend ‘trust’ to that person or gateway. The amount of trust you extended is set per transaction or business and is tracked by Ripple. Your trusted accounts send you an IOU no larger than the amount of trust you’ve extended to them. By extension, Ripple transactions are safe and irreversible – this gets around the problem with many international transactions where the customer disputes the transaction after goods have been delivered and charge-backs occur. Similar to a Public Key Infrastructure, Wallet IDs are public to receive money (mine is rDXx3WXLHJJM4YqJmnCZftzbbgTDa5ErBr), but only you know the Private key to access the wallet and make payments.

For a business trading internationally Ripple removes many issues: it reduces costs, makes transfer instant and irrevocable, and automatically finds the best price when converting currencies in or out of the network. If you’re doing any business internationally it’s something you should consider, seriously. Visit Ripple.com for more, its early days but this stuff will change the world and your life.

If you’d like to test the system, send me a few XRP, and I’ll send them back to you. Less transaction fees of $0.0001 of course…