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Saturday, August 06, 2005

Ripple: P2P money

Ripple is a

[d]ecentralized peer-to-peer IOU payment through chains of trusted intermediaries in existing social networks. Social capital as currency. Specification and a Java servlets implementation of a simple, generalized monetary framework using XML over HTTP.

An example:

Suppose Alice and Bob grant each other $100 credit on the Ripple network, and Bob and Carol do the same. Now suppose that Alice wants to buy a $10 item from Carol, whom she doesn't even know. Ripple finds that Bob is a one-link chain connecting Alice and Carol. Alice pays Bob by passing him a $10 IOU, and then Bob passes Carol his own $10 IOU (not Alice's). In the end, Carol is owed $10 not by Alice, whom she doesn't know or trust, but by Bob, whom she trusts enough to loan up to $100. This is fine with Bob, since he knows the IOU he has from Alice balances what he now owes Carol.

How does this so-called "payment" do Carol any good? Suppose she wants to buy something for $5 from Dan, a complete stranger to her, but a friend to Alice. Ripple will find the connection through Bob and Alice, and then she will pay Bob by cancelling $5 of his $10 debt. Bob will pay Alice by cancelling $5 from her debt, and Alice will pay Dan by passing him a $5 IOU. After all that, Alice owes $5 Dan and $5 to Bob, who owes $5 to Carol.

What does this change?:

The economic prescriptions and principles that work for industrialized countries and even for the capital cities of developing nations break down when it comes to bringing prosperity to an area with no infrastructure and a hungry population. The usual prescription is the stimulation of SME - Small and Medium-sized Enterprise - activity, but the bottleneck is credit availability.

Let's speculate for a moment. Would it be possible to bypass that financing bottleneck and activate productive local exchange by creating an independent local currency and payment system that does not depend on any outside "credit"?

And that is exactly what Ripple does.

(Via this article in the Mutualist Blog).

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