Ripple: An Open Source Way to Send Money

The Ripple Protocol runs on a network of computers/servers across the world much like web servers that serve webpages. The computers in the network verify the transactions using the algorithm specified in the Ripple Protocol. They also help match the best prices and perform a number of other tasks that keep the system running smoothly.

One of the best things about the Ripple Protocol is that the network is direct and peer-to-peer. The direct peer-to-peer network eliminates the middle man and thus almost all the cost of sending money electronically.

For example, if I were to send money for a payment to someone else via Paypal, the person receiving the payment would be charged around 3% for the fee. With Ripple, it’s next to nothing. The reason why I say next to nothing, rather than nothing, is because a small fraction (100,000th) of one Ripple unit is used for security purposes in each transaction, but the cost is insignificant.

The key point is that Ripple makes any kind of currency exchange between users practically free of any charge.

While Bitcoin and Ripple share many similarities, one of the main distinctions is that Ripple is designed for the interchange of multiple currencies (including Bitcoin), and theoretically any currency to any currency. For example, in Ripple you can exchange dollars for yen, bitcoin for euros, and so on. You can do that all within the Ripple network. You could even theoretically trade things such as frequent flier miles for dollars.

On Ripple, you decide what your preferred currencies are, both for paying and receiving. When transacting, the protocol automatically finds a pathway for your currency so that the other user receives it in their preferred currency. For example, if you’re sending money to a relative or friend in another country, you could send it in dollars and they could receive it in euros, without any charges for currency exchange. The Ripple Protocol does everything quickly and securely through the wire and matches currencies on the fly.

On the other hand, Bitcoin is designed just for Bitcoin. Any exchange of Bitcoin into a different currency has to be outside of the network.

The fact that Bitcoin can be traded in Ripple to and from other currencies makes Ripple and Bitcoin great compliments to each other, rather than competitors.

In order for the Protocol to facilitate transactions between all currencies, there has to be an intermediary currency in the system at all times. Thus, the Ripple Protocol specifies Ripple units (XRP) as the main unit of currency. It acts as an intermediary between other currencies (when needed), and plays a role in security (ex: protecting against spamming).

At the point of Ripple’s creation, 100 Billion XRP existed in the system which according to protocol cannot increase and thus they’ll never experience inflation. The value of an XRP will fluctuate based on the free market, and if necessary, the XRP may be fractionalized, to allow for more Ripple amount options, (e.g. 1/10 of a Ripple) and therefore more users.

It has been fascinating studying digital currencies and I look forward to doing more investigation in the future. I hope you find Ripple and its protocol for transactions interesting. I think it it is a great example of open source innovation and it has the potential to vastly influence commerce.

If you like’d to find out more about Ripple or get started with it, check out their website or our How to Create and Fund a Ripple Wallet tutorial.