I would call trust-based financial relationships a counterparty risk....I don't think you can misrepresent the probability of an I.O.U. default.
I agree with you 100%. I said that
XRPs have no counter-party risk (this is direct from the wiki). Of course the gateway IOUs that get swapped around the Ripple network will have counter-party risk. But the XRPs are every bit as secure as Bitcoins are. XRP occupies a privileged and special position in the Ripple system: it is the only currency transmitted by the system that has no counter-party risk.
Users will always prefer to transact in XRPs over IOUs (because XRPs have no counterparty risk). Take a look at the BitStamp order book for BTC/XRP. It has a fair amount of depth. Now look at the order book for BTC/USD. Not much there.
We don't know if this is true or not. As it is set up now, with just a single website, XRP/ripple has infinite counterparty risk.
Ah yes, of course you are right. I will update my post to reflect the assumption that the Ripple protocol will be decentralized and that its algorithms will withstand rigorous mathematical analysis.