RipplePay

I’m an advocate, but not yet a user, of “Ripplepay.”

A totally decent explanation is available at ripplepay.com

During conversations with friends a number of questions and concerns arose, and I thought I’d write a description of how some interactions might work, starting from some very simple examples and building up gradually to a more complicated system.
Imagine a world of barter. Everyone barters for goods.
As a shopkeeper, you might decide that the only person you can trust is the farm that neighbors your store because you can count the chickens from your top window.
And you only trust them as far as 1/10 of chickens you count every morning (say, 500 bucks worth of chickens). So when someone comes to buy something from you, they pay you in paper
IOU’s from that farmer. You’re okay with that, ’cause you know the farmer has enough chickens.
Every week, you go cash in your IOU’s. No problem. He’s always got plenty of chickens.
Here are some stories about how this could work:

Story A:
One day you wake up, and you see that most of the chickens are gone. You’ve got 300 bucks work of IOU’s from the farmer, but he’s only got 200 bucks worth of chickens. you go talk with him, and he got screwed on a deal. someone stole almost all his chickens.
As a shopkeeper, you only lost a hundred bucks. But you’re okay, because he’s just gonna pay you back over time, rather than this week, and he builds a stronger fence to stop people stealing his chickens.
You’re out this weeks chickens, but you know you’ll get ‘em eventually, because you trust your neighbor. If you decide that he was probably trying to screw you, then you stop accepting his IOU’s and you just try to redeem the ones you’ve got, perhaps through the court system… or maybe you give it up and write off the hundred bucks you lost. Now you can only sell your goods through barter. That’s sad. but lets assume, for now, that the first bit happens.

Story B:
A carpenter sets up shop on the other side of your store. you see him working in his lot every day, making chairs and tables and stuff. At first you’re not sure he’ll be around, so you decide you’ll take IOU’s from him, but only for 50 bucks. He’s really popular, though, and lots of people are trying to pay you in his IOU’s. You have to settle every day, and you end up taking home a tiny corner of the stuff that he’s got in his shop. So you up the limit to 200 bucks. Now you redeem every other day and you’re still only taking a tiny fraction of what he’s got lying around. Time goes by and he builds a larger workshop and hires more workers and sets up a mill and all sorts of things. You feel more comfortable that he’s got assets to redeem so you decide you’ll accept 5000 bucks worth of IOU’s. People come in
and take your goods and give you IOU’s from the carpenter. This trust has built slowly over time, and only due to reasonable reasons.

Continuing:
You’ve got suppliers from whom you usually buy your store goods, of course. You decide one day to expand your operation and start buying shovels. The shovel manufacturer doesn’t know you. You could drive out there in a big truck full of chickens and chairs and trade ‘em for shovels. But it turns out that the shovel manufacturer buys his handles from the carpenter, and he knows the guy is good for his
debts. so you pay for your shovels with the carpenters IOU’s. You also figure out that the shovel maker’s wife plays canasta with the farmer’s wife, so he will take the farmer’s IOU’s as well. Now you
can buy more shovels at a stretch. And you end up redeeming the iou’s for shovels, instead of chairs or chickens.

Okay. Now you want to go buy a boat. You’ve only got 5500 bucks worth of IOU’s, and the boat costs 7500. So you decide that for a time, you’ll accept a slightly greater amount of risk and you’ll take
IOU’s from the carpenter up to 7000. You talk with the boat dealer, and he’ll accept 100 in IOU’s from a stranger, 1000 from a business with no prior relationship, 5000 from a business with a prior relationship, 100,000 from ‘BADBANK’ and 100,000 from ‘GOODBANK.’ You think this is odd, because you think banks are terribly untrustworthy, but that’s okay. You don’t trust the bank,
but you don’t have to. You’re not accepting currency from them, after all. You go to open an account at BADBANK so you can pay the boatmaker. The bank makes you fill out some forms to verify you are
who you are and yada yada yada. You get your goods together and make a deposit (like at a pawn shop) and they give you a balance. You feel a little weird about it… the goods in this case are the 7000 you
redeemed from the carpenter and the 500 from the farmer. They just take ‘em and throw them on a giant pile. But you don’t care. They just gave you the money. With the 7500 in IOU from the bank, you go
to the boatbuilder and buy your boat.

You immediately drop the amount of IOU’s you’ll accept from the carpenter back to the regular 5000. You accepted a small amount of extra risk for the moment to increase your purchase power.

With all your business dealings, the farmer and carpenter will take IOU’s from you. Now the ‘BADBANK’ bank will too, but they’re scary to you, so you still don’t take IOU’s from them.

A few months later, you decide you’re going to to buy another boat. So you go to the boat dealer and he’s really sad. Apparently the BADBANK was not really solid. When people deposited stuff there, the
bank just went and put it in a big pile and issued the IOU. Then there was a fire and all the stuff and other people’s IOU’s burned up. So the boat guy is sitting there with a huge pile of worthless paper.
Man. It sucks that he trusted BADBANK. Now you can’t get that boat, ’cause he can’t buy his materials.

Okay… these have been some rather simple transations… lets bump it up a notch.

One way:

You decide that now that you’ve got a boat, you want a trailer to hitch it on. You have to drive a long ways out to get to the trailer maker. He doesn’t know you, he doesn’t trust you. He doesn’t know your carpenter or farmer either. He does know a truck driver named perry who knows the carpenter, though. He’ll take IOU’s from Perry and Perry will take IOU’s from the carpenter. So Perry comes over and you negotiate the transfer. Perry writes out the IOU to the trailer maker and you hand Perry the 800$ IOU from the carpenter.
Now, it turns out that Perry was a truck driver with a meth habit andhe’s not actually good for that 800 bucks. He spends all his money on speed. But you didn’t know him or care about it. You got your trailer. The trailer maker ends up being really sad, and breaks off his business relationship with Perry. He sends out an email to his business associates telling them not to trust him anymore. You get it
and agree not to deal with Perry anymore.

Another way it could happen:
You decide that now that you’ve got a boat, you want a trailer to hitch it on. You have to drive a long ways out to get to the trailer maker. He doesn’t know you, he doesn’t trust you. He doesn’t know your carpenter or farmer either. He does know a truck driver named perry who knows the carpenter, though. He’ll take IOU’s from Perry and Perry will take IOU’s from the carpenter. So Perry comes over and you negotiate the transfer. Perry makes out the IOU to the trailer maker and you hand Perry the 800$ IOU from the carpenter. As soon as Perry gets his hands on the carpenter’s IOU, however, he bolts for the door and you’re left without the IOU, and without the trailer.
You call up the carpenter, however, and tell him the serial number on the stolen IOU. He agrees to void that one and issues you a new one right there over the phone. He also suggests that the trailer manufactuer not deal with Perry anymore and you agree. Nobody deals with Perry anymore.
In the meantime a new customer comes into the store and the new customer will take the carpenter’s IOU and the trailermaker will take his IOU. So you negotiate the transfer with this new node in the
network, and mention to her not to trust Perry ’cause he screwed the deal. Everyone’s happy. Except Perry, the criminal, who now nobody trusts, so he has to actually give physical things to get his goods.
No more IOU’s. It sucks for him, but he survives.

New Scenario:
You work for a small company making widgets. Your company pays you in corporate IOU’s good for 500$ worth ofwidgets every week. They’re sold mainly overseas and nobody locally
stocks them. You go to your local store with your corporate swipe-card. The computer figures out that the electronic gizmo’s store that stocks them in Ethiopia is willing to take 15,000$ worth of IOU’s for widgets (they anticipate a huge and growing demand for them) and that they in turn will issue IOU’s on a variety of other electronic products. One of those products manufactuers (megacorp) will take their own IOU’s and redistribute on any of their other products for an unlimited amount. Megacorp’s Zoobo is huge locally, and your local store plans on buying some. The computer also found 75 other paths for the transaction to take, but this one has the fewest number of links and the lowest cost, so it’s the most effiecient.You can therefore buy at your local store, with only a very small overhead due to the inefficiency of the market. Certainly less than inflation would cause. You notice problems around your work. Things are going bad. You start to think that your company is going to go under, so you insist that they find another currency to pay you in. They have to pay you in IOU’s from your local grocery franchise, you insist. They say they can only pay you $450 a week in that currency because of overhead. You make the trade in your head and decide that it’s worth it. You trust the local grocer more than your employer, and it’s worth the nominal 50 bucks a month to know that you’ll have the food
to feed your family. Time goes by. The company recovers and you agree to go back to being
paid in company iou’s. Then the ethiopean chain store that was buying your goods has problems – their whole banking system over there exploded and many of the stores (which were legally required to accept iou’s from the government banks) found that they could no longer afford rent and other local costs. So now when you go to the store, there is more overhead and your company IOU’s need to find another path to the store. It turns out that the new most efficient path goes through three links in russia. So now your 500 dollars in widgets is really only worth about 495, because one of the links in the chain demands 1% interest on every dollar that passes though. After a few days, the computer has found a new path that doesn’t charge any interest and you get your goods for 500 again.

Also, think about that. The whole ethiopean economy collapsed, a massive market for your personal goods, and most of the people in your neighborhood didn’t even notice. You noticed that you didn’t get quite as much for your widgets, but that only makes sense… your widgets are a highly specialized good, and the collapse of a foreign market will have some effects. When some big chunk of nodes goes down, people will have an incentive to set up new nodes to route around those problems.

Every link has an incentive to keep the charges low because the higher the charges, the lower the number of links, and the less money made. Only really huge, really reliable links can get away with charging anything. Also note that employer-employee links are going to be free, because who would work for a company that charges them to receive a paycheck? Then you’ve got the massive friend network – friends will not charge friends to forward money – you wouldn’t put a tax on your buddy Frank if he wanted to give you 5 bucks to give to your buddy Harry. Corporate transactions will similarly have low charges. GM doesn’t want to charge their suppliers for using GM as a proxy payment system – it’d discourage people from being a supplier. There are situations, like taking out a loan, where a financial entity will charge interest on the transaction. But that’s a very specific type of situation. That is not like going shopping at the store, where you only need as much as you can borrow from friends anyway.