Ripple is a project based on a small free software that pursues the development of a credit system based on the peer-to-peer paradigm. Each Ripple node functions as a local exchange system, so that the whole system forms a decentralized mutual bank. Taken to the extreme, the Ripple network is a distributed social network service based on honor and trust among people in real-world social networks. In this way, financial capital is supported by social capital. A reduced version of the ripple network would consist of an extension of the existing hierarchical banking system, in which alternative payment paths would exist that would not pass through a central bank.
Modern monetary systems are based on obligations between participants. Coins and bills are government obligations. Loans are the borrower’s personal obligations. Bank accounts are obligations of the bank, with the help of laws and government obligations. An obligation has value if the owner expects to receive the value of it. Thus, we can see the banking network as a trusted network.
The main method of making a payment to another participant of the system is transferring the ownership of the bank bonds electronically over a chain of accounts in the banking network, from the payer to the collector. The banking network is a hierarchical network in which banks are merely intermediaries among their clients. In turn, central banks are intermediaries between banks. This structure implies that it is very easy to establish a payment route between any participant, but it is full of single points of failure, which we can also see as single points of control. Ripple seeks to generate similar revenues to those of facebook and for that reason is being spread like a project similar to the one of a network of marketing.
There are other alternative monetary systems, such as Internet currencies (Paypal) and local exchange systems. Ripple is different from these systems, since it treats all participants in the same way. Both PayPal and local exchange systems have a central authority that gives the obligations based on its policy and is responsible for making payment between the “leaf nodes”. In Ripple, no node has more capacity than the rest, since it is decentralized.
In a way, each Ripple node is like a local exchange system or a PayPal in itself. Ripple could be used to connect traditional and alternative payment systems on a single network.