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Ripple, a Peer-to-Peer Financing Network, Could Make Bitcoin Great (Or Destroy It)

Until now, one of main flaws of bitcoin is that still relies on centralized exchanges.

Until now, one of main flaws of bitcoin is that still relies on centralized exchanges. For starters, it’s a philosophical dilemma for currency that is inherently decentralized, leaving bitcoin vulnerable to government intervention.

Moreover, while the concept of the currency continues to stand the test of time, the exchanges have been less resilient. The New York-based Bitfloor was robbed of $250,000 worth of bitcoins in September, Bitcoinica has been hacked multiple times, and MtGox, the largest exchange around, was breached in 2011 causing bitcoin prices to plummet.


These confidence-sapping breaches have hampered bitcoin's spread and made ordinary people wary, leaving the crytpocurrency banished to the nether-regions of the ‘net where it’s used mainly for drugs, sex, and generally dark arts, like child porn and Craigslist hitmen.

A concept called Ripple could change all of that, by essentially turning us all into our own banks, Facebook-style. First utilized by Ryan Fugger, a developer from Vancouver, Ripple allows users to extend credit to strangers through their social network. Or, in other words, you could extend credit to the friend of a friend, with the middle person acting as the guarantor. Explains IEEE Spectrum’s Morgan Peck:

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.

In other words, Ripple allows you to buy stuff through a revolving line of credit between you, your friends, and your friends of friends. It's peer-to-peer credit. What Bitcoin enthusiasts realized recently was that this decentralized network was the perfect platform to buy and sell bitcoins. It would not only make bitcoins easier to trade, it would make the alternative currency that much harder to shut down.

The marriage will be official in a few weeks when the latest version of Ripple is released, which will include a built-in exchange platform, according to Jed McCaleb, who was one of the original developers of MtGox.

There’s one caveat: Ripple could conceivably destroy Bitcoin, if it ever got successful enough. Since the concept of Ripple involves replacing actual dollar or asset transactions with lines of credit, that credit could end up replacing bitcoins altogether. While services like Paypal and Venmo must record a transaction for every order, Ripple could simply take the net sum, increasing efficiency by eliminating all of those transactions that cancel out. If Bob owes Sarah $40, Sarah owes me $40 and I in turn owe Bob $60, then I simply owe Bob $20. If the Ripple network ever got big enough, it would eliminate all of those in-between transactions, a contemporary form of closed-loop bartering.

That’s a big if. More likely, the two alternative finance systems will continue to complement each other and ultimately find their own niches. Sure, we won’t be splitting the check over bitcoins anytime soon, but they do provide a necessary foil for the centralized printing presses we’ve long been bound by. Whatever happens, that these futuristic forms of p2p financing and currency are gaining viability is a welcome sign for the future of money.