Quote from: OpenCoin on February 22, 2013, 07:38:58 PM

tldr: Ripple doesn't require anymore trust than bitcoin

I see a lot of people misunderstanding the way Ripple works so I'm going to attempt to clarify.

There are two pieces to the ripple system, XRP and IOUs.

XRP works essentially like bitcoin. No counter party risk. You can send xrp to anyone with a ripple account. No trust etc.

The IOUs are more complicated. Every IOU has an Issuer and a Currency. The Issuer is simply a ripple account. You can only hold IOUs from issuers you have agreed to trust.

A gateway is some business that has agreed to issue and redeem ripple IOUs. You take your money to a gateway and the gateway gives you a ripple IOU. You can send this IOU to other people, trade it for XRP or BTC or whatever. You can take your IOU back to the gateway and the gateway will send you money. This is essentially what paypal or dwolla or banks do now.

This is the same as sending USD to mtgox. You are trusting mtgox to the amount you have sent in. You can send that USD to another person that has chosen to trust mtgox in the form of a mtgox code.

So you can see that Ripple doesn't require more trust or counter party risk then you are already used to.

The powerful thing is that Ripple links all these gateways and that there is an exchange in Ripple where you can swap these various IOUs so you can trade between all kinds of currencies and issuers.

We hope to explain things better on ripple.com soon.

So how does the system protect against credit default swap shenanigans? I never understood that with the original Ripple system, and I don't understand it with the current one.

In the lead up to the 2008 downturn, significant sums had to be spent to change regulations to enable the swaps and create loopholes to consolidate banking power. But Ripple is devoid of those protections by default, so it seems the system would actually make the mortgage crises default chain several orders of magnitude cheaper to implement.