Seems I was under the wrong impression that ripple was not open source, dunno why.
The server is not open source yet. Once the server is open source, we'll have to obtain a consensus on every feature change that affects what transactions are valid or what effects they have, just like Bitcoin does. I used to say we sometimes make those kinds of changes three times a day. We're probably down to once a week at most now.
Do you need to have pre-established social connections with people that you trust for settling debts etc?
Only if you want to use Ripple as a platform for social/community credit.
What happens if your buddy defaults?
If you choose to trust someone and they default, then you lose whatever money you trusted them to borrow from you or hold for you. We're not promoting Ripple as a social/community credit platform right now but rather as a payment and exchange system. (Though I have high hopes for it in the future.)