Ripple: P2P banking

Great Debates
1

We’ve been having a discussion in this thread about Bitcoins. I went off on a tangent and discussed a separate concept known as Ripple. At Sunspace and DocCathode’s request, I agreed to take the topic to a new thread here. I haven’t had much time for internet forums including the SDMB for the last few years so I’m a bit out of touch. If GD is the wrong place then let a mod know and they can move as they see fit.

Anyway, there is a slowly (oh so painfully slowly) developing concept and some implementations of what could be described as distributed banking generally known as Ripple. The best explanation I’ve found for Ripple as yet is on the project’s main page

It’s actually a 5 minute video but I think it gives a pretty good idea of the concept and philosophy. The TL-DW version of that is that it’s lines of credit between members of a social network. Every pair of people wishing to enter into a relationship set up an account and that account tracks debt in the form of IOUs until a creditor asks a debtor for settlement in the form of hard currency. It can be dollars, pounds, yen or Bitcoins. Whatever they have previously decided upon when they entered into the relationship. In addition to currencies of account and settlement, there are a few other settings depending on the particular network you sign up to. Most I’ve seen have a facility for setting interest rates for example.

This system would be almost useless for me and most people I know if the idea wasn’t developed any further. I can’t think of why I would ever want to track debts between mates, family or any other individual I actually know except to recognise that I’m becoming either a bit of a sponge or a doormat. The real value is in the idea that these IOUs can be passed on. Stanley Milgram’s work back in the 60s developed the idea of small worlds and is now even better known as the 6 degrees of separation. It is actually very easy to use a network of acquaintances to move from any individual in a network to any other individual. I’ve never visited America but I’m confident that I could use such a network to reach most of the readers of this post in no more than 6 steps where every person is on a first name basis with the person before and after them in the chain.

Now imagine that each of those neighbours in that chain all had a running agreement that they would tolerate persistent debts that don’t run more than say $20 or so in either direction (debit or credit). The second and defining point of a Ripple network is that those debts can then be transferred between acquaintances to eventually be held by strangers. Using these 2 features and knowing about Milgram’s small worlds research, I can conduct very fast and efficient transactions with anybody in the world who has joined my network or a compatible network with cooperative links. I can buy things from Americans on eBay or Japanese on Yahoo Auctions without ever having to worry about Paypal, credit cards, cheques or COD. There is no wait for the transfer to go through and no transaction fees or commissions for an intervening bank. Bank holidays and hours are irrelevant. Paypal or the banks can’t hold up the transaction or freeze accounts because their systems have red flagged something for some reason. Nobody can intercept my cheque and alter it for fraudulent purposes. This is just some of the benefts off the top of my head.

One of the main sticking points for people new to the concept is below. It’s from a Reddit thread I posted to a couple of days ago and although the username is different you can feel free to send the writer a private message to check I haven’t plagiarised his work. As I said, I’m practically a newbie here so if reposting your own stuff isn’t kosher, moderate as the mods see fit.

I guess I needed a TL-DR version for my TL-DW version but let me know what you think. I’m keen to hear your ideas for the failure modes as well as how it could be successful. The exchange with the guy whose line I was responding to turned a bit sour and WTF. However his original point was the problem is one of critical mass and if things hadn’t taken a turn for the weird, I would have said the telephone must have seemed even more far fetched given the experience and world view of the people living around the time of the telephone’s introduction.

It’s getting late here and I don’t think I’ll be around for much longer after I hit submit but I’ll be back tomorrow and following the thread as long as it stays in the thread list.

2

Disclaimer_ I am on dial up and haven’t watched the video.

I don’t understand what problem ripple is supposed to solve. How is it better than traditional banking?

Second, what happens if somebody refuses to pay what they owe? If that happens isn’t the final resort the courts?

3

I get the sense (from watching the video) that somebody sees banks as at least part of the problem, since Ripple seems to make them unnecessary. It reminds me of the the days of barter and trade where we each exchange things of value, and Ripple is the mechanism that keeps track of how far in debt somebody is to somebody else.

4

Huh.

Huh.

5

Speed. I can get money to someone faster with ripple than I can with a bank due to the holidays and opening hours of our banks being irrelevant. The network works 24/7. It’s also cheaper. Every few months I need to send money home to feed my account in Australia so it can deal with the ongoing automatic debits I have there for different things. If I had ripple associations with most of those organisations, I could perhaps do one small bank transfer a year. At the moment I pay out the equivalent of about $35USD in fees and commissions that my JP and AU banks charge between them. In fact, with Ripple, I would probably jut ditch my AU account and forego the approximately $10USD monthly service fee I pay them as well.

It depends who they are and how much they owe. Are you going to take your next door neighbour to court over $10? Probably not. You would probably write it off or sever the Ripple relationship. His failure to pay would cost him far more than $10 worth of utility he receives from having a good reputation on the ripple network. Ripple advertises deadbeats and stand up debtors far better than our current system. Would you take your employer to court over a missed paycheque? Probably but you might look for another job if you suspected they were ever even inclined to do that. You could certainly go to court based on a failure to pay. I see no reason why Ripple relationships can’t have the force of contractual agreements and if they don’t have them now, the software could easily be modified to do it for any jurisdiction. I don’t see the legal route being the first one for the enforcement of obligations. Is it even the first route now? I believe people make good on their debts and follow other community norms for social reasons to a greater extent than is commonly assumed. With Ripple, the social effects and peer pressure to not cheat will be much stronger than what we have at the moment.

Hellestal, that really is quite rude. What exactly is it that you don’t understand? I’m assuming huh is an expression of incomprehension. You’re not live blogging a seizure or anything I hope. Am I to think that everything I wrote was so poorly and confusingly expressed that it should be obvious even to me that it was all completely meaningless?

6

So what happens when I really want to cash out? Say that for weeks now I’ve been exchanging various IOUs with people and all told I’m now owed a total of $500 by 25 different people. And now I need to buy a cherry used car (a 1986 Dodge 600) from some old codger down the street that doesn’t even own a computer and certainly doesn’t give a rat’s ass about Ripple.

7

You set separate limits for every person you have a relationship with. The sum of the debits and credits you have with all of your neighbouring nodes should tend to zero. If that number is approaching your maximum available credit then you can take it as a sign that your spending is out of control the same way you would if you have no money in the bank and a bunch of maxed out cedit cards. Unfortunately in Western countries, this is a common story.

The reverse isn’t really analogous to what we have at the moment unless you compare regular folks like us to banks. If that $500 represents a small portion of your available credit then you could request the money in cash and save yourself some time by drawing on your biggest lines of credit from just a few people. If that $500 represents the total amount of credit you have extended to other nodes, you are probably doing that for a rational reason like the interest rate you have set for each of those accounts. If you’ve set 0% rates for all of them (as I have) you might need to question the wisdom of your relationship choices. In your non-ripple relationships, are you generally a creditor to everyone and a debtor to none? We call people like that doormats.

8

In my non-Ripple relationships I’m generally neither for any great length of time. The only things I’ve ever bought on credit are houses and cars.

I guess I came up with the hypothetical of being owed $500 in Ripple based on your mention of eBay as an example. Say I had a collection of really valuable Beanie Babies and sold them piecemeal to various strangers on eBay. Wouldn’t that tend to push me out of the neutral state?

9

Yes. Ripple is a simplified and quantified representation of a subset of your social network. You are always a debtor or a creditor to your neighbouring nodes unless your balance equals exactly 0 but I wouldn’t expect to be on either side of 0 with the same person for an extended time unless I had self-interested or altruistic reasons for being there.

Assuming your only ripple transactions were when you take money for Beanie Babies then yes, you would become a creditor to some or all of your neighbors in your network. But why would you eschew the network for purchases you want to make if you think it’s good enough for selling your stuff? Purchases will push you back to a neutral state as such.

10

Because Ripple’s benefit of zero fees only applies to my (hypothetical) eBay sales. At some point I need to cash out and use my money in the “real world”.

11

Jenga, you need to dial your sensitivity-meter back a few dozen notches before you strain something.

My first post was an expression of curiosity, not whatever silly negative assumption you so enthusiastically leaped to. Despite the FAQ writers’ misunderstandings of our current financial system, Ripple is an interesting idea.

12

Huh.

13

Severian, if you need cash for non-ripple transactions and you don’t have any or enough income from non-ripple sources, you would go to the people you know whose lines of credit you haven’t maxed out and ask them for as much money as you need. Then that transaction is entered into the system as a debt you have to those people. The important question, using your $500 car example, is what proportion of of your total available credit is that $500 going to use up?

The original idea of a bank is an entity that passes around IOUs. The government originates an IOU in the form of currency. You can use that currency to settle your tax obligations and because the government insists on it, it has utility for your fellow citizens and can be used as IOUs between them. In the past, this complex work of consolidating these IOUs, moving them around and keeping account of them all required a huge bureaucratic overhead hence institutional banks. Advances with P2P tech and networks means this can be done in a distributed way by the people themselves effectively making every participant a bank. The main difference between me and a Citibank or HSBC isn’t the scale or the services we offer. It’s the fact that they can safely engage in fractional reserve banking. It’s safe for them because they have lenders of last resort ie their countries’ central banks. If they lend out all of their deposits and those depositors come looking for their money, their governments will step in and pay up and the banks and governments will sort it out later (or maybe not)

On the other hand, we do not have lenders of last resort. Perhaps a young GW Bush or Paris Hilton could get themselves into unmanageable debt and safely assume someone would come in and clean up their mess but the rest of us will be on our own when we fuck up that badly. This is why I was asking what share that $500 represents of your available credit. If it’s a pittance, your partners can come to you and ask for their debts to be settled and you’ll be able to manage it by moving the debts around your network. If that $500 is you when you’ve tapped everything, you are going to screw a lot of people over if any of them come looking for their money. In fact, even if none of them came looking, one look at your status in the network would show you to be either an irresponsible bum or a very hard luck story. In either case, you’re not going to be expanding your network and people will be quietly dropping you like they would the racist, tea partying brother in-law everybody has had on Facebook.

A ripple network or a financial system where credit cards are prominent both allow people to quickly get into unmanageable levels of debt. The difference is that your partners in a ripple network are more likely to counsel you when they see you fucking up and more likely to forgive some of your debt if you’ve had some hard luck. Neither is an invitation to go crazy with hookers and cocaine.

Hellestal, no problem man. Maybe it’s an accent thing. Here I am trying to make a curious sounding huh and all I’m managing is an out of shape caveman. Thanks for the clarification though. Got anything to add?

14

The economics of this is fascinating. Debt-money creation by private individuals is… well, it’s pretty damn nifty.

There is zero chance of this replacing the existing banking structure. However, it seems to me that it does have a legitimate shot at bringing down the costs of money transfer.

How much of a shot? I don’t know that the savings from money transfer will be as great as they think. Setting up a new network means extensive start-up costs, security patches, etc. Even if it’s done successfully, the network built and streamlined and successful and everything, I don’t know how much money will be saved compared to traditional bank transfer. Servers cost money. Safe online systems cost money. Major nodes that can handle large transaction sizes will still have fees. But competition is always nice, and I don’t know anything about the necessary technology. We’ll see if it works.

I wish the creators better understood the difference between the monetary base and what they call IOU money. The two aren’t the same. There will always, always be a need to convert back to the base. I mean, that’s what the IOU is. It’s a promise, yes, as they say. Specifically, it’s a promise to pay back monetary base on demand. And monetary base is NOT debt-money. They actually have different uses. For the most obvious example, taxes are not paid with IOU money. Taxes are paid with the monetary base. This process is normally hidden, because the bank handles all the details, but paying taxes is essentially equivalent to going to the bank, cashing out the bank’s IOU for green paper base (in the US, at least), and then mailing that green paper to the tax office. Having a bank account (the IOU) means the bank must be willing to give you the green paper (the base) on demand. That’s what the promise of debt-money is: the promise of providing base on demand.

Ripple’s IOUs will rest predominately on the same monetary base as a bank’s IOUs. Somewhere along the long, the piece of paper (so to speak) has to change hands.

Absolutely.

15

That wouldn’t even be desirable. Even if there aren’t any things traditional banking can do better, diversity in itself should be an end. Replacing a working system completely with another would be a step backwards. Fractional-reserve banking isn’t something I’d want to just disappear without a lot more consideration and public debate.

Bittorrent doesn’t need any of those things. Many of the factors involved if Ripple is successful will be the same that made Bittorrent successful and resilient. The security patches can be handled the same way as they are in Linux. The devs are well paid by the companies and organisations that receive benefit from a secure OS. There are plenty of other people with more altruistic reasons for contributing to development.

The network doesn’t need to be streamlined anymore than the rest of the internet does. Ripple just uses GPG signed messages over the extant internet. Routing algorithms find the optimum path between nodes depending on the way the clients are configured. Do you want to avoid interest rates, have as few steps as possible, route around certain nodes because they look like deadbeats? The network is allowed to grow organically though. That’s the point and it’s what provides much of a network’s strength.

Servers are cheap. Datacenters aren’t but I’m not sure how much how much server space a particular ripple network would occupy when it gets really big. I still expect the costs would be a small fraction of what we pay today. A ripple network has no need to turn a profit for shareholders and the wage, advertising, real estate and security costs incurred by banks are negligible if any.

I’ve never considered there was a difference. It’s good to be exposed to a dissenting view like yours. Actually, Ripple is so obscure compared to Bitcoin that it’s good to be exposed to any view about it. I’ll look into it some more although I still don’t quite understand all the differences between the two and what the implications are for Ripple. If I pay for something with a credit card, is that base money or debt money? I’ve paid tax bills in Australia with a card before and I don’t know why a government would necessarily baulk at entering into a ripple relationship with me.

For that matter, I can think of benefits for even the biggest banks, companies and governments using ripple networks to route funds amongst themselves.

16

The $500 isn’t credit I’m borrowing against, it’s debt owed to me in Ripple that I want to use in a non-Ripple transaction. It seems to me that Ripple isn’t very liquid. The IOUs that are tied up in Ripple may or may not be easily transferred to cash. Sure, I trust my buddy enough to loan him a couple hundred bucks on the assurance that he’ll pay me back when he’s able to, but I can’t do that with my walking-around money. So that greatly limits Ripple’s usefulness.

Also, I wonder about the balance of transactions. Will I really tend towards zero? In general I have one source of income and many expenses. I expect most people are the same, and most sources of income aren’t Ripple based. Over time, how does Ripple balance this out?

I wonder too about the benefits. No fees, and speedy transactions. It seems to me that the benefits for the buyer & seller are gained by offloading the fees and delays to the other people in the path between them. Take an example of an American buyer using Ripple to pay a Japanese seller for an eBay item. At some point, that Ripple path needs to cross the ocean. Someone in Japan trusts someone in America to take an IOU from them (Or, depending on the path maybe someone in Japan trusts someone in Germany who trusts someone in Canada who trusts someone in America, but you get the gist). For the parties who form that link across the sea, there may well be delays and fees associated with settling that IOU. I suppose you could say “what’s the rush” and instead of settling for cash those parties just wait until another transaction goes in the other direction, but that goes back to the question about the balance of transactions. Will Ripple be able to maintain a sustainable balance of creditors and debtors? Or, over time, will the balance of transactions between America and Japan exhaust the credit one side of the fence trusts the other with - forcing people who potentially have no immediate connection to the transactions to settle up via cash and incur regular bank fees in the process?

17

OK. Let’s say you want $500 and your only current transactions in the system are debts to you from a bunch of people who bought Beanie Babies totaling $500. I can see it would have been less confusing if I’d told you to just go to your debtors and ask them to settle their debts. But that might be 500 people you would have to go and settle with and some of them might be on the other side of the state/province/prefecture/world. Your balance would be brought back to what you described as neutral though and I guess we both think of that as kind of a good thing right? You could actually get the same effect (balance neutrality) by going to just one neighbour who set a high limit and taking the cash from him. Your balance in the system would still be 0.

Ripple doesn’t balance this out. You balance it out when you exercise financial responsibility. You’re right about the number of people’s income and revenue streams. However, your income from that one source needs to be greater than all your revenue streams. If it isn’t, you tap into wealth or go into debt. If the debt is for education or maybe bootstrapping a business then great. If it’s for a cherry Pontiac that won’t bring you any financial benefit then not so great. It doesn’t matter how much you get from or put into ripple though. If one outweighs the other then you’ll find you’re either paying into or cashing out from the system on balance if your goal is to stay at ‘neutral’ for some reason.

Actually, in my experience, the path is likely to go through a Canadian because the company I work for has an office in BC through which most of my co-workers come to Japan. I’m glad you got that the route can be more than a few steps. It can also be quite convoluted in unexpected ways because of some of the users’ preferences like wanting to avoid certain kinds of nodes for example.

I’ve been hearing “What’s the rush?” from bank and Western Union staff in North Africa, Europe, Australia and Asia for almost twenty years now and that’s the main reason I like ripple. Think of ripple as being a little like Bittorrent. If you find a linux dstro you want on the other side of the world, you don’t check with the owner and ask him when he will be at his computer so you can start downloading from him. The network and your client handles all the details. Maybe part of the .iso is right by you in the same town except that owner doesn’t have the whole thing so you download what you can from him until he turns his computer off. At the same time, there is a guy on dial-up (these people still exist in Australia) and he does have the whole thing. So downloading from him is slow but he’s about the only person around with the entire file (it’s an obscure distro) and so the network will make him your source of last resort so to speak. The computing overhead for all of this is pretty heavy and that is why a torrent client serving and pulling a few popular files keeps its computer running pretty hot. It’s also part of the reason why Bittorrrent has only taken off in the last decade. Ripple is the same except the bandwidth requirements aren’t as big. Instead of moving chunks of a 700mb linux distro, you’re moving GPG signed and encrypted messages about the size of a text message.

The only possible delays with settling an IOU is at the end point where someone actually goes to a neighbouring node and asks for money. That’s all that could ever happen. Nobody could ever come to you and demand settlement of a debt or request cash unless you’d personally entered into a ripple association with that person.

So let’s say a guy here in Japan needs to make a payment to you of $100. There is a route (one of many) that goes JP->DE->FR->CA->US. Hiro, Klaus, Jean-Claude, William Shatner, Severian. The only person of those you know or even trust at all is Cpt. Kirk. Now all those people just so happen to be willing to extend $100 of credit to the next guy in line except Jean-Claude has already given Shatner $50 dollars of that. So Shatner becomes the bottleneck and the network will find another route for the other $50. Hiro will now owe Klaus $50 which Klaus can ask to be settled as per the terms of their original agreement. The opposite situation will be true for you and the captain of the Enterprise. Jean-Claude needn’t even have any idea that anything has happened. Whether or not his computer is turned on, his network’s server will see that he is a link in the route, it will send a $50 IOU in one side and out the other resulting in no change for him and it will happen as fast as data packets move through any other computer on the internet. Ripple is less distributed than Bittorrent and can function the same without the intermediate clients actually being switched on. Perhaps Jean-Claude will set exorbitant interest rates rates but then the clients will just route around him if they’re set for frugality. More likely his neighbours would just drop a dick like that from the network.

Possibly. Financial irresponsibility has got people into trouble before. Albania and Japan have had disastrous results from fiscal stupidity. America and Australia are in awful situations except Australians don’t realise it due to the Chinese cash they are swimming in at the moment for all the minerals they’ve provided. Just remember, nobody you haven’t already decided is OK to enter into a relationship is going to hit you up for money owed or a loan in in a ripple system. Only William Shatner could come to you and say he needs some money from you. Those other guys are nobodies as far as you’re concerned.

18

Ahem. Obviously not. Income needs to be more than all your expenses.

19

I’ll have to take your word for it on the computer side of things. That stuff is beyond me.

The monetary base is central bank money: central bank accounts and banknotes. Zero percent of it is IOUs.

If you use a credit card, then you go into debt to the bank (the bank owns your IOU – not so readily negotiable because it’s designed to turn a profit, not for trade). The bank then pays base-money to the government. If you pay taxes out of your bank account, then you destroy bank money. The bank fulfills its obligation to you (the IOU money is gone completely) by giving the government base-money, which is the only form of payment that the government directly accepts. The government doesn’t receive IOUs. The government doesn’t accept IOUs.

The government already balks at accepting IOUs from banks. Banks pay base cash, not IOUs. There’s no way the government would accept IOUs from private individuals, when they refuse to do so from banks.

But going into Ripple debt with a bank, and then having the bank fork over the real cash to the government, is maybe a feasible solution. It might work out similar to using a credit card, except the Ripple debt would likely be a more negotiable instrument. I’m not sure what incentive banks would have to use this system, though, when they’re looking to make a profit from interest and transfer fees. Unless they see some other way to undercut competitors, they wouldn’t seem to have much reason to support a new system to transfer money in that way.

And the government is not the only institution that demands base money. Big financial institutions are happy to trade promises with each other when the weather is fair. This is big time IOU money, shadow money, a lot of it subject to much more lax regulations than what deposit institutions face. I don’t know a lot about this world, but obviously enough, trust eventually breaks down. Big projects sometimes fail. When that time comes, the IOU money no longer counts. Leveraged banks that are highly exposed to risk have to post collateral and pay redemptions: either real cash, or close-cash equivalents. No more IOUs from the bank are accepted. No more debt to pay previous debt. When trust is crumbling all around, payment must be made with instruments that are guaranteed to be valuable.

Only if the troubled bank can demonstrate its trustworthiness by coughing up the real deal can transactions again more forward. As we should all remember, sometimes a huge bank can’t manage to do it.