Ripple monetary system - AbsoluteAstronomy.com

Ripple is an open-source software project for developing and implementing a protocol for an open

Open system (computing)

Open systems are computer systems that provide some combination of interoperability, portability, and open software standards. The term was popularized in the early 1980s, mainly to describe systems based on Unix,...

decentralized payment network. In its developed form (it is not substantially implemented), the Ripple network would be a peer-to-peer

Peer-to-peer

Peer-to-peer computing or networking is a distributed application architecture that partitions tasks or workloads among peers. Peers are equally privileged, equipotent participants in the application...

distributed social network service

Social network service

A social networking service is an online service, platform, or site that focuses on building and reflecting of social networks or social relations among people, who, for example, share interests and/or activities. A social network service consists of a representation of each user , his/her social...

with a monetary honour system based on trust that already exists between people in real-world social network

Social network

A social network is a social structure made up of individuals called "nodes", which are tied by one or more specific types of interdependency, such as friendship, kinship, common interest, financial exchange, dislike, sexual relationships, or relationships of beliefs, knowledge or prestige.Social...

s; this form is financial capital backed completely by social capital

Social capital

Social capital is a sociological concept, which refers to connections within and between social networks. The concept of social capital highlights the value of social relations and the role of cooperation and confidence to get collective or economic results. The term social capital is frequently...

. Another possible direction for implementation is extension of the existing hierarchical banking system, providing alternate payment routes that do not pass through a central bank

Central bank

A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...

Background

Modern monetary systems

Fractional-reserve banking

Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...

are built on obligations of the participants to each other. Cash

Cash

In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...

and bonds

Bond (finance)

In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

are government obligations, and loan

Loan

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....

agreements are the personal obligations of borrowers. Bank account

Bank account

A Bank account is a financial account recording the financial transactions between the customer and the bank and the resulting financial position of the customer with the bank .-Account types:...

balances are bank obligations, backed by borrower and government obligations. For an obligation to have value, the holder must trust that the issuer can supply that value. Thus the banking network can be described as a trust network.

The primary method of making payment to another participant in the system is by transferring ownership of bank obligations electronically over a chain of accounts in the banking network from payer to recipient. The banking network is essentially hierarchical, with banks acting as sole intermediary between its account-holders, and central banks acting as sole intermediary between banks. This structure means that it is simple to route payments to and from any participants, but is inherently full of single points of failure

Single point of failure

A single point of failure is a part of a system that, if it fails, will stop the entire system from working. They are undesirable in any system with a goal of high availability or reliability, be it a business practice, software application, or other industrial system.-Overview:Systems can be made...

, which may also be characterized as single points of control.

Principle

The core idea of Ripple is that it should be possible to route payments through an open, arbitrary trust network, similar to how the internet

Internet

The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...

routes packets of data through an open, arbitrary computer network. The advantages of such a system would be that it wouldn't be reliant on a small decision-making body at the center to set monetary policy for the entire nation; instead, it would be set in a more democratic fashion by all participants, and in theory be more responsive to regional and community needs. There would be no need for a tightly regulated institutional trust hierarchy to control the behaviour of those participants near the center: like the internet, but unlike the existing global monetary system, the Ripple network would be designed to weather the collapse of a large number of its nodes.

Note that the Ripple protocol itself wouldn't preclude a hierarchical payment structure evolving, it just allows for the possibility of other structures.

Put another way, Ripple is a system of free banking

Free banking

Free banking refers to a monetary arrangement in which banks are subject to no special regulations beyond those applicable to most enterprises, and in which they also are free to issue their own paper currency...

that separates the payment routing function from the credit aggregation function.

Comparison with existing payment systems

Other alternative (to standard public clearing houses such as ACH

Automated Clearing House

Automated Clearing House is an electronic network for financial transactions in the United States. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit payroll and vendor payments. ACH direct debit transfers include consumer payments...

) payment/monetary systems already exist, including internet currencies such as BitCoin

Bitcoin

Bitcoin is a decentralized, peer-to-peer network over which users make transactions that are tracked and verified through this network. The word Bitcoin also refers to the digital currency implemented as the currency medium for user transactions over this network...

and Ven

Ven (currency)

Ven is a global virtual currency used by members of a social network service Hub Culture to buy, share and trade knowledge, goods and services globally. It can be spent at any Hub Culture Pavilion or used for micropayments on the Internet at large. The value of Ven is determined on the financial...

, currency networks like KlickEx

KlickEx

KlickEx is a smart market company whose "registered user only" interbank retail systems include a patent pending Private electronic market, providing low cost electronic foreign exchange clearing services to selected clients Australia, New Zealand and the South Pacific.From the Company...

, or local currencies such as LETS. Ripple is fundamentally different from hierarchical models in that it provides a level playing field that treats all participants equally. Both PayPal

PayPal

PayPal is an American-based global e-commerce business allowing payments and money transfers to be made through the Internet. Online money transfers serve as electronic alternatives to paying with traditional paper methods, such as checks and money orders....

and LETS are modelled on a single central authority that issues obligations based on its policy and handles the accounting of payments between leaf nodes. In Ripple, no node has any greater or lesser capability than any other node – this is acknowledgement that every participant in a debt-based monetary system

Debt-based monetary system

Criticisms of fractional-reserve banking have been put forward from a variety of perspectives. Critics have included mainstream economists such as Irving Fisher, Frank Knight and Milton Friedman. Within the economics profession today, most criticisms are from non-mainstream economic theories such...

does in fact issue their own currency (or obligations). A node's connectedness in Ripple is based on the trust of the other participants and nothing else.

In a sense, every Ripple node is like a LETS or a PayPal unto itself. Ripple could be used to connect existing alternative and mainstream payment systems into a single network.

External links

The source of this article is wikipedia, the free encyclopedia. The text of this article is licensed under the GFDL.

Background

Principle

Comparison with existing payment systems

See also

External links