What is Ripple and why does it matter?
Ripple is a decentralized (like bitcoin), open-source payments network in which any currency can be exchanged seamlessly and without the need of a third party intermediary. The network is able to settle transactions nearly instantly, and without counter-party risk.
The question now is, how can we update our payments network so sending one currency and accepting any other can be done as easily as sending an email?
Bring in the Ripple Transaction Protocol (RTXP). The Ripple network sets up a way for distinct financial systems to communicate with one another. It is like SMTP in how it standardized a way to email distinct providers. We don’t even think about what happens when we send an email from an @Gmail address to any other address. It just seems like this is how things should be done.
Bitcoin accomplished some of this in that it is able to break down international barriers to allow for a more efficient way to send money. If I wanted to pay my friend in India today using conventional methods, I would have to go through a convoluted payments network and pay a fair amount of fees to get this done. Bitcoin allows me to send money easily, and it can reach my friend almost instantly. However, the problem here is that there are very few people who will send or even accept bitcoin.
Taking this a step further, RTXP standardizes a way for various financial systems that operate differently to transact seamlessly with one another without the need for an intermediary.
We go from this -
To this –
PayPal sort of did this by allowing people to buy into their ledger with any currency, and then debit and credit users’ accounts with the appropriate value. But the problem is PayPal is the sole owner of the escrow service between buyers and sellers. The Ripple network decentralizes this system and spreads the responsibility of verifying transactions across the millions of computers on the network.
Hypothetical: Using the same payment provider / currency makes it easy to send money to and from users. But what if I use Payment Provider A and I want to send money to my same friend in India who uses Payment Provider B? There are two different currencies and two different payment networks involved. With Ripple, this is possible because the network sets up a system that automatically connects someone who operates as an exchange to make this transaction happen. Let’s say someone in Spain doesn’t mind having a USD balance because he frequently transacts in dollars, and he already has some Rupees in his account. So, the network will automatically send my USD to this person in Spain, and he will automatically send the equivalent value in Rupees to my friend in India. This connection is done automatically through the Ripple network and transactions are almost instantly verified (compared to the several days it takes to process FX transactions now).
But, where are the fees?! This person in Spain should be compensated for facilitating this transaction. Since the network allows anyone to operate as an exchange, there will be plenty of liquidity for all of these FX transactions and it will inherently push the fees down.
If all financial systems operated on the Ripple network, it would allow for a very seamless way to send or receive USD, Bitcoin, Pounds, Yen, Euros, Pesos, etc. Separately all of these systems are very different. But, the Ripple network provides them with a safe, trust-worthy, and standardized way for any payment system to operate with other systems.
