Corrections and clarifications: gateways and the value of XRP

My previous article, about Ripple and its currency attracted some criticism from some in the Ripple community. And it deserved it, so here I’m going to correct and clarify what I said earlier.

Ripple and its currency

In my previous article, I talked about a potential peer-to-peer money transfer system, and the problem of how to get such a system started: Why would you be the first of your friends to join such a system? It wouldn’t be useful until you had well-connected friends to connect to the network through. I suggested that this problem might be alleviated by strapping such a money-transfer system onto pre-existing decentralized social networks.

Well, since then, I’ve read more about the recently rejuvenated Ripple, and I’ve discovered that they have a different, very clever solution to this problem. Their solution has other benefits, too, including a currency that I argue isn’t necessarily backed by debtors, as every country’s fiat currency seems to be.

Money transfer via social network

At the moment, most of your income and expenditure probably goes through your bank (or, perhaps, banks). Here in New Zealand, only a handful of banks dominate the market, and I think the processing of EFTPOS and credit card transactions involves even more market concentration.

This centralization of money transfers has several downsides. Fewer players means less competition, greater risk of fraud by employees of the big companies, and obvious targets for malicious hackers. So how could we decentralize money transfers?