Ripple is a distributed platform that allows more people to participate in finance in more powerful ways.
Beyond the basic payment uses, Ripple lets people go back to older forms of financial relationships — trust-based, reputation-driven, and conveniently local. But by providing an internet-based platform, Ripple lets these relationships extend across global distances in almost real time, and at almost no cost. What’s more, because Ripple is a distributed system connecting people to people, anyone can play a role.
Many prefer the simplest use of Ripple, but others may be interested in the rich possibilities it provides for getting more involved. See how you can use Ripple to facilitate more transactions within your network, act as your own PayPal, or buy and sell currency, below.
Trusted pathways and IOUs: enable more transactions
Ripple has an advanced function that allows people to create money pathways through each other and the people they trust. Otherwise, people must use a Ripple gateway (see below) or send money as ripples (XRP).
With these trusted pathways money travels in the form of specified-currency IOUs that people can hold, spend within Ripple, or cash out at a gateway. They can also be settled outside the network in any way the two parties decide. (The original person owed must then issue a counter-IOU to cancel out the first one. IOUs, once sent, are final.)
A series of trust limits strung together form a trusted pathway. You create a trust limit by declaring an amount in any currency that you are willing to let someone owe you. That is — you would accept an IOU up to that amount (e.g. $100) from that person, say your best friend. Since you trust your best friend, you feel good about that IOU being settled.
By combining everyone’s trust networks, you create pathways for IOUs even between two people who do not directly trust each other.
Let’s continue to use the hypothetical example of your best friend to illustrate how IOUs can travel:
Imagine your best friend is from another country and you have never met his sister, who still lives there. Say your best friend trusts his sister enough to be willing to let her owe him up to $50. So he would accept an IOU up to $50 from his younger sister.
One day your best friend’s sister comes to visit. You, your best friend, and his sister go out to dinner. Your best friend’s sister forgot her wallet, and to be friendly you offer to cover her portion, which comes out to $20. Your best friend’s sister now owes you $20.
Instead of waiting for your best friend’s sister to get to a bank or ATM, you use Ripple. Your best friend’s sister accesses her Ripple wallet on her phone and sends you an IOU for $20.
She can do this because there is a trust path between you in the network, through her brother: you said you were willing to trust her brother (your best friend) up to $100, and he said he was willing to trust her up to $50. So a $20 IOU can get from her to you, by passing through her brother.
The system works because everyone along the path has vouched for the person just directly before him in the pathway. He accepts an IOU from her and then issues an IOU of his own for the same amount to the next person in the path who accepts his. His balance then zeroes out and the IOU has moved along one more link in the pathway.
The more people you trust and the more people trust you, the more pathways there will be for IOUs to travel. The more IOU pathways available, the more transactions become possible without a Ripple gateway.
Importantly, Ripple is a “push”-only system. That is, you can only create your own IOUs and send IOUs to other people. No one can “pull” from you an IOU or make you accept IOUs from them (force you to trust them).
To use this unique Ripple function, click on the “Advanced” your Ripple wallet. Select the “Trust” tab on the left-hand side.
Within the Ripple network, money must travel as network currency (XRP) or in the form of IOU’s through trust networks (see above). But some people will want to send cash payments in traditional currencies and may also have no trusted pathway to the recipient. A gateway solves both problems by serving as the meeting point between the Ripple system and the outside economy, as well as between two Ripple users who have no trust path between them.
Indeed, many people may prefer to avoid owing or being owed money by their friends. They may choose instead to trust a gateway, knowing that most gateways will be trusted by each other and therefore offer a definite payment path. Then, the gateway can receive IOUs on their behalf, for which the gateway will give them cash. Or, the gateway can accept cash from them and issue an IOU to the gateway trusted by the intended recipient. In this way a Ripple gateway is much like PayPal.
But in Ripple, instead of one large service, there can be as many as there are gateways. Anyone can set up a gateway as long as they have a Ripple account. If you have an internet connection that could mean you. And while some people will need a gateway online, others may want one down the street. The openness of the Ripple platform will allow a diversity of gateways that will meet the varied payment needs of the whole world’s Ripple users.
Want to become a Ripple gateway? Learn the basics in the wiki Gateway Guide.
Or the nitty-gritty in the Gateway Integration Manual.
Distributed exchange: buy or sell currency
Ripple enables distributed currency exchange. Any Ripple account holder can place orders for buying or selling currencies straight from inside the Ripple platform. Because many of the payments within Ripple are global, there will be high demand for currency trades.
To start making your own currency trades, click on the “Advanced” your Ripple wallet. Select the “Trade” tab on the left-hand side.