Thursday, February 21, 2013

How is Ripple NOT a Bitcoin Killer?

Let's talk about the elephant in the room. 

I get the impression that those behind Ripple are trying to be polite when they say that Ripple won't kill Bitcoin. If a system lets you send any currency of your choosing to anyone else for a very tiny fee, or even convert it to another currency on a peer-to-peer exchange, how could that possibly not disrupt Bitcoin?

Most of Ripple's critics are focusing on the "currency" used by Ripple, called "Ripples," (XRP) that protects the network from spam. The point of Ripples is to ensure that transactions have a cost, albeit a very tiny one. If that was not the case, the network would be overwhelmed by millions of spam transactions.

From the wiki: 
The ripple founders created the initial ripple ledger with 100 billion XRP. The founders gifted a for profit company called Opencoin 80 billion XRP. Opencoin intends to give away over 50 billion XRP. The remainder will be used to fund Opencoin operations, which include contributing code to the open source network and promoting the network.
Even if Opencoin should close, the ripple network will continue. Because the ripple is a P2P network, it is not operated by Opencoin but by the combined efforts of all the computers running the ripple server software. The ripple network can not be shut down without shutting down the entire Internet.
As of yesterday, OpenCoin has been giving away 50,000 XRP to everyone who replies to this thread, just as was promised in the wiki. They're trying to grease the wheels of Ripple to get people to use the system. There are 300+ replies in that thread; that's 15,000,000 XRP and counting. You can actually connect to the freenode network on IRC, go to the #ripple-watch channel and watch the distribution live.

Regarding Ripple vs. Bitcoin in terms of anonymity, Ripple does a good job, probably good enough for most purposes. It's possible that Bitcoin could hang on as the currency-of-choice for those wishing to operate in the black market, but in that scenario the exchanges would run the risk of becoming targeted by governments, and if they were to be shut down, Bitcoin would be crippled.

Remember, Ripple isn't about the XRPs; it's about providing a service that is supposedly the reason why we're all Bitcoin fans in the first place: it facilitates financial transactions outside of traditional banking networks. Sure, XRPs will probably increase in value as Ripple increases in popularity, and yes there might be an opportunity there, but that is a secondary consequence, and primarily benefits the founders. It's a benefit that they will well deserve, should the system work as advertised.

38 comments:

  1. I don't know man. How is it not a ponzi? I've been very suspicious of Ripple since I heard about it. They're basically trying to create millions out of thin air on the back of a nonexistent (so far) network of trust; their only use for the Bitcoin network is to nominally disassociate themselves with the lenders and borrowers who they're "letting" "mint" "currency". All three of those things in quotes. It's a disruptive concept but its value hinges on this opaque system of knowing whether the first and most-trusted people are really trusted, and aren't shills for the ponzi. I still regard it as a pyramid scheme, and unfortunately a really dangerous one that if it succeeds could and vanishes with all the money in transit could potentially gut the value of Bitcoins. They're basically guaranteeing themselves as lenders of last resort for a trust ring that they themselves will be the final arbiters of. If you don't trust the source you can't trust the web they build, and if I were a gamblin' man I'd say there's a more than 45% shot that Ripple takes a lot of people down with them...

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    1. You don't need to own more than a few pennies worth of the currency to use the system. XRP are the medium, not the purpose. The Bitcoin analogy needs to go away.

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  2. I still only know about how the credit model of Ripple works, but some articles..

    https://www.privateinternetaccess.com/blog/2013/02/vpn-accepts-ripple-the-first-true-bitcoin-competitor/

    .. claim that it supports debit transactions in a model that is 100% decentralized, instant, requires no proof of work and carries no counterparty risk. This in contrast to the credit system I first read about which is literally *made out of* (well managed) counterparty risk. What gives?

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    1. You understand the system correctly. This is a case of poor semantics.

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    2. Okay, what Jesse is saying is what I was led to believe Ripple was originally when it was explained to me a few months ago. Assuming it hasn't morphed into something else... and from their website it's hard to tell wtf they're selling since it looks like any other payment system... isn't that pretty dangerous if you don't trust the originators and guarantors, i.e. the people running the system?

      Is there some technical trick I don't know about that allows them to stop a bad loan cascade or sub-ponzi from issuing as much bunk currency as it wants and then collapsing? Or prevents them from stacking the deck with whoever they want as the underwriters for all this questionable value being passed around? They're trying to create a monetary system NOT based on proof of work, but based on trust which is really different; trust only works when the person who starts the circle is ultimately trusted by everybody.

      Call me paranoid, but hell I'm not nearly as skeptical as most Bitcoiners. What if the guys who started this are thieves or, like, i dunno, zhou tong / MNW level masters of disguise, or just idiots like Patrick/Bitcoin Consultancy? Why should anyone trust their web of trust... I mean, how do I know they aren't tampering with ratings and stuff like that? Or anything else that could be tampered with.

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    3. "The team is led by founder Jed McCaleb, who also founded the MtGox Bitcoin exchange and created eDonkey2000, and CEO Chris Larsen, founder of Prosper.com." These are hardly thieves.

      Absolutely, someone could issue their own currency and run a sub-ponzi, but blaming Ripple for that would be like blaming Satoshi Nakamoto for Pirateat40's scheme.

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    4. You can certainly issue as much worthless currency on Ripple as you like. The challenge would be getting people to accept them.

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  3. > "The Ripple client is open source. The Ripple server will be open-sourced shortly."
    From the FAQ, it sounds like Ripple is not actually a decentralized/p2p system, meaning it will be much easier to shut down than Bitcoin is. Their explanation of how they will achieve global consensus (https://ripple.com/wiki/Consensus) is based on "choos[ing] specific validators who we 'trust to not collude to defraud us'". This is not nearly as strong as Bitcoin's approach, which requires 0 trust.

    And if they end up adopting Bitcoin's decentralized transaction log, what advantage do they have over Bitcoin? The idea that loans are "rippling" through the system would no longer be the case, because the Bitcoin ledger is a complete replacement for that mechanism.

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    1. The server software can be run by anyone who chooses to... it just hasn't got to that point yet; remember, this is very early beta. It indeed will be decentralized and p2p.

      As far as consensus goes, if you read through the entire page you linked to, you will see that it would be extremely difficult to try to defeat the consensus system. Mathematically impossible? No, but so improbable as to be for all intents and purposes undefeatable. I guess that's not good enough for some people, but logically, there's no reason why it shouldn't be. How exactly would 1000 independent validators manage to collude against you?

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    2. Bitcoin doesn't require zero trust. You have to trust that people who hold 51% of hashing power won't collude against you. You have to trust that miners won't collude to change the block reward. Ripple lets you choose who to trust.

      This does have some disadvantages, that's trust. But it does have one big advantage -- it allows fiat currencies to behave somewhat like Bitcoins. So you can get the ability to move currency instantly around the planet at near zero cost, no chargebacks, open source, and so on, but don't aren't limited to transacting only in Bitcoins.

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    3. If I understand bitcoin correctly, even 51% of the miners could not change the block reward. Every full client (whether it mines or not) validates blocks, and a block with a 1000 btc reward is invalid according to the official client. Some large percentage of people would have to either run a lightweight client or some modified full client.

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    4. JoelKatz you are misinformed about Bitcoin. You don't need to trust anyone because you can run a full node which can validate all rules are being followed.

      A 51% attack can't defraud you unless you received bitcoins from those who own the 51% and only if they are willing to commit this obvious attack and subsequently destroy Bitcoin, the miners can't change any rules because your client would reject their blocks.

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    5. Hazek jr and Jeff: This isn't a good forum to discuss this. I'd be happy to discuss it with you on the Bitcoin Forum. But I stand by my comments.

      A 51% attack can defraud you if you rely on any transaction that contains a payment with coins from the block reward in any of the rewritten blocks. Or they can cycle Bitcoins through a large exchange and then rewrite their own transaction, invalidating many of the transactions that follow the reuse coins they churned.

      Enough miners can change the block reward (though I don't think this will ever happen, of course). All they do is state that as of a particular block they will make a hard fork and if people don't move to the fork with the changed block reward, they will double-spend on the block chain with the original block reward to protect Bitcoin from the damaging effects of a persistent hard fork with some people on one side and some on the other.

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  4. I have only spent about 10-15 hours studying Ripple so I do not claim to be an expert on it. But as I see it I think Bitcoin and Ripple have different fundamental purposes. Bitcoin is both the blood (monetary instrument - USD, gold, bitcoin, etc.) and the veins (payment network) while Ripple is focused more on being just the veins.

    Bitcoin is a tangible asset limited in amount by mathematical law. As such Bitcoin is an equity based monetary instrument like gold (http://www.runtogold.com/2012/11/why-bitcoin-is-tangible-digging-into-the-guts-of-bitcoin/). As such bitcoins, like gold, require no trust.

    Ripple is an inferior monetary unit because it is subject to counter-party risk; the financial ability of a counter-party to perform. Thus, ripple is more like a letter of credit or note. As such, the Ripple network requires confidence and trust.

    However, Ripple could be a superior payment network because it could have more interoperability than Bitcoin because of the trust network. It will be interesting to watch this experiment.

    If anything I think Bitcoin and Ripple could be complimentary.

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    1. This. Trace brought up the key point I was going to. You asked how Ripple is not a bitcoin killer, well here it is: Counter party risk. In Ripple, I have to surrender my underlying funds to a gateway and trust the collective credit of others while in the system. That is rife with all kinds of risk. I do agree it it can work as an exchange, but I'd want to get my funds in and out as quickly as possible.

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    2. Precisely. You have to have very reliable gateways or Ripple is not very usable as a store of value for fiat currencies.

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    3. Personally I don't see Ripple as a store of value, but a method for moving money. The question is, if Ripple becomes a superior method to Bitcoin for moving money, does Bitcoin become obsolete? Can Bitcoin exist as a store of value if its utility is second best; is that still good enough?

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    4. There is no counter party risk if you just use xrp

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  6. What will encourage people to run ripple servers? With bitcoin miners are rewarded with transaction fees and also a reward for finding a block.

    There is no guarantee that no more than 100 billion XRP will be created. Someone has the 'key' which may not have been destroyed. Maybe the computer has a virus. (Yes, a big if but bitcoin does not have this problem.)

    Ripple could still work though.

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    1. The same thing that keeps Bitcoin at 21million keeps ripple at 100 billion.

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    2. There are a few things that will encourage people to run Ripple servers. One is that they may wish to promote the system, help the underbanked, and so on.

      But the key thing is this, if you want to do sophisticated things with the Ripple network, you will need a high-speed path into it. Nobody has any obligation to provide this to you, however, they will provide it to you if you help them maintain their own high-speed path.

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  7. hm. Okay I took GoWest's advice and opened a Ripple account just to check it out. Now I am not a dumb person, as far as merchants or general users go, but I'm sort of at a loss. I tried to fund my account from Bitstamp. You can't fund it until you trust Bitstamp. So I tried to trust Bitstamp. But you can't trust them until your account is funded. This is obviously a huge barrier to entry.
    Bitcoin already has pretty serious barriers to entry for most users, and it's the difficulty of acquiring your first few coins (especially if you live outside the US) that I think is the big limiting factor on Bitcoin adoption. But at least if you're determined, you can actually BUY bitcoins somehow, you don't have to know somebody to give you some, and extend you trust first. I didn't realize Ripple required that, I thought anybody moving some money into the system would be "trusted" up to that amount. I guess I misunderstood.

    I don't think there's any way the average casino player is going to be adopting this anytime soon. I guess I could be wrong, but... I'm not optimistic about it.

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    1. Right now, XRPs are being rationed to control network growth as we shake things out early in the beta. Once they're plentiful, your gateway will be able to fund an account and arrange the extension of trust in a smooth way.

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  8. Bitcoin killer? Hasn't Ripple been around for like... 3 times as long as Bitcoin?

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  9. I don't really understand their "gateway" to get the money out of the system. Right now I'm paid to write articles and the owner insists to pay via Paypal, which takes its (big) share at each transaction.

    How would such a system avoid that? How can I get the money out ? Seems too obscure to me to become a widely used network.

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    1. At the moment there are two gateways, with more coming in the near future. For your situation, the two of you would each need to have an account at a gateway (the both of you do not need to be at the same gateway). From that point, money can be sent to you through Ripple. Keep in mind that the system is very new. You might want to hold off for a little bit, though there is no reason why it can't work right now.

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    2. Thank you for your answer. So you have to trust the gateway, basically. I think I will wait a bit to see where all this is going.

      But all those new ways to move money online...Very interesting!

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  10. I think Ripple is being marketed in a somewhat misleading way. The claim is that ripple enables you to "send any type of currency" around the world instantly. But this is not true - it doesn't send anything other than records of debts. If you send USD through Ripple, you're just sending IOU's, not actual assets. After such a transaction, there still needs to be a collections or clearing process.

    Bitcoin, on the other hand, actually sends an asset. It's true that you can also send "Ripples" with Ripple, but I see no benefit that Ripples affords over Bitcoin, and am very uncomfortable that Ripples are controlled/issued by a central authority (the Ripple company ie OpenCoin).

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  11. Putting cryptocurrencies into circulation is a major issue in itself. Devcoin has a positive attitude in that respect. But consider this: the major killer on our planet is plain hunger. Meanwhile, food surpluses are converted into ethanol for cars instead of donating them to the World Food Program, who canot complete its mission in war zones and famine stricken areas. So why not put crypto$ in circulation through the WFP (or any other humanitarian project)?

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  12. Q: I wanted to try and start an account and get a wallet and went to the opencoin website and all it lets you do is signup for emails, is that it and they eventually will tell me how to get a wallet/account?

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    1. Go here to create a wallet: https://ripple.com/client/#/register

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  13. to say I'm sceptical of OpenCoin is an understatement. I'd much rather deal in money which is an asset than deal with credit and debt. This goes for any money, crypto or not. Just look at the massive debt burdens weighing down all the western economies. When people can take on debt to pay for things they can't afford they do it. Thats why we need to forget debt as money and stick with commoditity type money like gold, silver and bitcoins, litecoins. If ripples becomes popular enough it will kill bitcoins, and then suffocate healthy economic activity.

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  14. >”And if they end up adopting Bitcoin's decentralized transaction log, what advantage do they have over Bitcoin? The idea that loans are "rippling" through the system would no longer be the case, because the Bitcoin ledger is a complete replacement for that mechanism.”

    I think this misunderstands Ripple. RipplePay is a system for decentralized *backing* of currency. Forget the XRP “ripples” - they are unimportant except to prevent denial of service attacks. They do not compete against BitCoin.

    The point of Ripple is to enable any alternative or local currency to be used - even backed currency such as my HogTozs - and to create a decentralized exchange for different e-currencies. See the classic RipplePay site for the ‘six degrees of separation’ and ‘everyone his own banker’ ideas. But I must say, the new Ripple site obscures these key ideas by focusing on the technical XRP mechanism rather than the two main points.

    The competition to BitCoin some worry about should be the future commodity backed currencies that will be enabled by Ripple.

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