Chris Larsen: Ripple is HTTP for money

Chris Larsen is no stranger to virtual finance. The Californian entrepreneur took consumer loan company e-Loan to a successful IPO te 1999, before setting up peer-to-peer lending webpagina Prosper. Last month, his fresh hard OpenCoin scored funding from investors including Andreessen Horowitz, FF Weerhaak, Lightspeed Venture Parnters, and Vast Ventures. Armed with this heavyweight backing, it hopes to boost its fresh venture, called Ripple. It’s a combined currency and payment network that Larsen hopes will make a big splash ter the math-based currency community. It’s like a protocol for currency exchange, or spil Larsen puts it, “an HTTP for money.”

“It’s analogous to the bitcoin networks. Any user can use the protocol just like they would HTTP. You can build on top of it without licensing it from anybody,” he says.

Larsen looks for three things te a currency: trust, utility, and liquidity. So far, the closest wij’ve got to that is gold.

“Why is gold trusted? It’s because it’s a math relationship of 79 protons ter a gold atom,” he says. So far, alchemy hasn’t enabled us to subvert that relationship. “Gold has awesome trust, but wij already moved beyond that. Gold doesn’t have utility.” It’s a good store of value, but it’s a poor medium for exchange: it’s hard to stir around and store.

Te Larsen’s world, everything before mathematics wasgoed political. He argues that gold and the dollar are fraught with politics, and it debases them. “Math-based currencies are attempting to address the eroding trust te thesis political currencies,” he says. Mathematics can be trusted. It’s open and translucent, and it also has ultimate utility.

Ripple consists of two parts: the currency (called ripples, or XRP), and the payment system. Both of them have to verify transactions, but Ripple does it te a fundamentally different way to Bitcoin. Bitcoin uses mining, which Larsen calls brilliant, but flawed.

“The mining is rewarding people to run supercomputers. Mining isn’t necessary – it’s simply a method to prevent dual spending. Wij thought that mining wasgoed fairly wasteful,” he says, citing the energy used, and its undemocratic facet. Bitcoin te particular relies on SHA-256 hashing, which permits people to simply throw more computing power at it by creating specialist ASIC miners. That means those with the fastest computers win.

He fails to distinguish Scrypt-based currencies such spil Litecoin, which are anti-ASIC, leveling the playing field somewhat by restricting mining to CPU and GPU users.

OpenCoin’s founders took their own treatment with ripples, by simply creating all of them already ter its general ledger. Ter bitcoin terms, they were effectively pre-mined, albeit there wasgoed no mathematical problem to solve. The founders simply created 100 billion of them.

“Since there is no mining wij can give away large amounts of the currency to spil many people spil wij can on the planet,” says Larsen. “That is a vormgeving objective because for maximum utility, wij need to get it to ems of millions of people.”

The other key difference with Ripple is that the currency is intrinsically linked to the payment system, which is what processes and verifies transactions. Te other math-based currencies, the currency itself is king, and the payment system is simply a means of exchange. Larsen thinks that the tail is wagging the dog.

“Ter our prototype, it’s the currency that enables the payment system. It’s kleuter of the switch roles,” he says.

One thing that makes the Ripple payment system’s first-class status clear is that it is currency-agnostic, it supports not only ripples, but any other currency – including those that they make up themselves. The key is that someone else has to be willing to trade ter it. To set up those trades, users create trust relationships with people. This enables them to send digital ‘IOUs’ to each other te the currency of their choice, along with payment terms.

“Ripple is lithe enough that you could have local currencies, or even neighbourhood ones. Spil long spil there are enough people trusting that fresh currency,” Larsen says. You could even have a currency just for your own family (Dan dollars, anyone?)

“Wij think the fatter use case, however, is around sending ripple and having gateways that produce balances te traditional currencies. That’s good for commerce,” says Larsen. “Most merchants will want to receive the currencies that they’re comfy with. You could hold your math-based currency, and you can send it and it will vertoning up spil a currency of the merchant’s choice.”

Gateways are what permit currencies other than ripples to get te and out of the system. Thesis are created by organisations including cryptocurrency exchanges, and – Larsen hopes – banks. OpenCoin recommends establishing trust relationships with gateways. Bitcoin exchange Bitstamp is among the largest gateways right now, enabling people to trade bitcoins ter and out of Ripple.

“Gateways are the regulatory point. That’s how you might redeem or trade XRP to dollars or euros,” says Larsen. “They go through the anti-money laundering (AML) or know-your-client (KYC) steps.”

Users can trade with each other – or with gateways – te either ripples, or non-ripple currencies. If trading ter ripples, they don’t need trust relationships with the other user – they can simply send. Ripples can also be traded for any other currency. When looking for exchange rates, Ripple will consider numerous payment paths to find the best option.

So, how are transactions verified ter Ripple? Te Bitcoin, transactions are verified spil miners calculate fresh blocks. Bitcoin blocks are solved every ten minutes on average, which is why it’ll take ten minutes for your transaction to go through. But Ripple isn’t mining. Instead, it works by overeenstemming.

The Ripple system isn’t operated by OpenCoin. Instead, it’s a peer to peer system, te which participating computers all connect to the network, spil knots. Some knots do nothing but make and receive payments for their users. Others operate spil servers, gaining quicker access to the network’s information. Servers are good at watching the network and determining what’s happening, which makes them good participants ter the overeenstemming process.

“Overeenstemming isn’t based on trust, it’s based on no-one colluding,” Larsen says. “You may not have to trust a server. MIT might run a server, the Handelsbank of India might, and the FBI might. What’s significant is that all those three parties are unlikely to collude with each other.”

But what are they agreeing upon? They’re looking at the ledger, which is a snapshot of transactions on the network. “The way to view Ripple is spil a global ledger,” says Larsen. “The entire world shares a common ledger.” Unlike conventional blockchains, the ledger isn’t a view of everything that everzwijn happened anywhere te the network – it’s simply a current state of play.

Knots te the distributed network update the ledger every 2-20 seconds with fresh transactions, but they voorwaarde agree on which transactions will be included. Not all knots participate te the overeenstemming process – that might not be scalable. But enough will to make it safe, according to Larsen.

But what happens if someone attempts to flood the ledger with lil’ transactions, designed to slow the network down or pauze it? That’s where Ripple’s native currency, (known spil XRP or ripples), comes ter.

To make any trade ter Ripple, a user vereiste have a reserve of ripples te their account, because it costs a puny amount – a little fraction of a ripple – to send money. Those ripples are demolished, meaning that the XRP ledger is very leisurely decreasing.

However, ripples also serve spil a native currency to Ripple, because they can be exchanged for any other currency on the payment system. “Ripples are the one currency that doesn’t need a gateway,” says Larsen. They’re effectively tokens for seamless currency exchange, which gives them value te their own right.

Here’s where some of the criticism has emerged about Ripple. All of the ripples were created by the founders, who talent 80% of them to OpenCoin. Of those, around 55 billion will be given away te some form or other. Another 25 billion will be used to finance OpenCoin’s operations. That still leaves 20 billion ter the founders’ pockets. If ripples build up te value, they stand to benefit.

Larsen is resolute. He’s attempting to build something big here, and isn’t afraid to take the prizes if it works. “Wij wished to ensure that the founders were the creators, and therefore the company wasgoed simply a recipient, and that way the company could stay more focused on being a software company,” he says, pointing out that the mysterious Satoshi wasgoed mining bitcoins for himself very early on ter the spel (he is estimated to have around $100m ter bitcoins today).

“Payments have not bot made consistent with where the internet is,” Larsen says, explaining that the payment network offers the chance to expand effortless payments globally, but that OpenCoin has to get enough support from merchants to make it truly useful. “If wij can do that, it’s good for the world, then I think prizes should come of that. If wij can’t do that, then wij toevluchthaven’t succeeded.”

Why would merchants bother? OpenCoin touts the benefits – no draconian account freezes, a global reach, and something that he hopes will appeal to everyone – lower transaction fees.

One problem with existing payment systems is that the banks who conduct transactions for users have to pay fees to other organisations, which he calls ‘payment spoorlijn’.

“Visa and Mastercard are payment spoorlijn that banks have to use and pay fees on too. Ripple is a payment rail that’s free.” The idea is that gateways will still charge some transaction fees, but they can be lower, because they don’t have to pass on expensive payment rail fees to customers. “You’re already eyeing that with gateways. Bitstamp does free creation and redemption of balances. They just charge 0.2% each time their balance is sent to someone else.”

This is all very well, but Larsen faces some challenges. The system is supposed to be open sourced, which is necessary to introduce transparency and build up user trust. But it isn’t yet.

“Wij have a duo of things that wij want to do to the network. It’s much lighter to do thesis tweaks before it’s open sourced,” he says, maintaining that open sourcing the system is an integral vormgeving objective. “Wij want to have a ondergrens number of users, but that’s quickly approaching, so wij think wij’ll get a position here too.”

Ter the meantime, OpenCoin has to fend off attacks from anti-Ripple sites, set up by skeptical naysayers to attack what he’s doing. “That’s always going to toebijten. There are undoubtedly some of the old Bitcoin people that don’t want to have another system. But there are slew of Bitcoin people who are very supportive,” he says.

“It’s natural. Wij tell the team to just build the best product wij can. You’re always going to have critics. That’s ok.”

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