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The origins of ripple
It may come as a surprise, but ripple actually originates from a payment protocol originally developed in 2004, five years before the first bitcoin was mined. This RipplePay.com community based payment system aimed to 'provide secure payment options to members of an online community via a global computer network through the use of traditional currency and virtual currency'. Put simply, the goal was to take the concept of credit lines with a bank, and apply them to a trust network between friends and communities, and rely on the six degrees of separation concept.
How ripple works
Before we look at ripple, we need to look at the concept of the RippleNet, the network ripple transacts with.
Imagine you and a friend are on holiday, and you meet up with your friend’s cousin and their friend, who neither of you have ever met. The four of you have a meal at the airport on the way back, and you decide to pay for everyone. You trust your friend will pay you back so you accept an IOU from him, but you don’t really know his cousin or friend. You do however know that your friend trusts his cousin, and that his cousin trusts his friend. You therefore accept an IOU from them. This is the basic principle of the Ripple network – a web of trust between parties who know each other and trust each other by association, to deal their own personal ledger and ‘debt’ (IOU’s), without a need for an intermediary.
With this concept of debt in mind, you can go one step further with the ripple network. Imagine after getting home you want a haircut, and the barber you go to also knows your cousin. He would be willing to accept the IOUs, as he knows you and your cousin, and by association the trust with the other two (your friend and your cousins friend). You can then offload the debt to effectively pay for your haircut.
If you extrapolate this basic concept, allow the network to be multicurrency and cross border, and make it near instant, you have the fundamentals of the ripple network. All users trust and debt balances are updated simultaneously and automatically, causing a ‘ripple’ effect across all trusted associates.
Is ripple a cryptocurrency?
The digital currency which lives side by side with the ripple network is known as XRP, and acts as a bridge between multiple different currencies. Simply put, you can send GBP to someone on the other side of the world who has a USD bank account via RippleNet via a number of ‘gateways’ which automatically convert any transaction or exchange. The path may look roughly like this: send GBP via the GBP/XRP gateway to convert GBP into XRP. This XRP then gets sent over RippleNet and hits the USD/XRP gateway to convert back into USD, and the USD then hits the recipients account. It basically allows different financial institutions to communicate directly, and rather than act as cryptocurrency it acts as a settlement, or remittance provider.