We mainly focus on open source with this blog, but we’re fascinated by technology in general.
I’ve been reading a lot about digital currencies lately and have been astonished by the innovation in this area. Bitcoin and related technologies are a glimpse into what commerce could be like in the near future.
This article is the first in a series of short overviews and tutorials on digital currencies.
I’m going to introduce you to Ripple, open source software that could become an essential platform for currency in the 21st century.
What is Ripple?
Ripple is a protocol for currency transactions.
You may have heard of SMTP which is a protocol for emails. SMTP allowed everyone to send emails to each other, even across different email clients. Ripple does the same thing for currency transactions.
Ripple is built by Ripple Labs, a San Francisco company that used to be called OpenCoin. Their stated goal is to enable “secure, instant and nearly free global financial transactions of any size with no chargebacks”.
Ripple is open source and has open API’s for developers to utilize. This means that the door is wide-open for developers and businesses to build integrations for Ripple. For example, people are already building an email bridge, an SMS bridge, and a bank-account bridge, according to their website.
In order to make the transactions work, Ripple needs to be several things:
- A network for transactions
- A currency exchange
- A digital currency
Here’s a more detailed breakdown of each of those features of Ripple:
#1. Ripple as a Network for Transactions
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.
#2. Ripple as a Currency Exchange
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.
#3. Ripple as a Digital Currency
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.