As for the credit network functionality, my primary gripe with "ripple type" systems is that they break the fungibility of money. I no longer have X amount of coins, I have a portfolio of credit lines of varying solvency. So instead of just trusting the bitcoin network (developers, miners etc.), I have to trust the ripple implementation (Opencoin, etc.) and on top of that I need to trust individual credit issuers when accepting credit from them and that their credit lines will remain solvent for some time until I will spend them. When you say "X dollars in ripple", the "dollar" there just fulfils the "unit of account" function of money. It's not a store of value and it's not a (fungible) means of exchange, in other words I can't reliably express my time and purchase preferences as I can with a dollar or a bitcoin.
When you say that you have a dollar, for most people this actually means a dollar in the bank rather than in their pocket. So basically they have an IOU from the bank. Ripple just provides a way of transferring this IOU securely without the cooperation of the issuer. It also provides a secure exchange (have you seen Advanced->Trade?), where the distributed system will guarantee that you get the IOU you're bidding for and not be ripped off.
When I say I have a dollar, most people understand that I either have a dollar in my pocket, that I have a dollar in a FDIC insured bank account, held by a bank regulated by the government and expected to adhere to minimal reserves and liabilities matching their assets, which requires a collateral and does risk assessment before lending money, and for which the Fed is ready to print unlimited amounts of green bills to stop a bank run. If I tell people that "an unregulated ecurrency market called BitInstant, ran by a 22 year old, with no financial oversight owes me 5000 dollars" they will ask me "so... when will they give you the money" ?
Absolutely. This is where I think the Ripple website doesn't do them justice. They're well aware of that. This is a more unified and open system of what's going on at the moment. And while it's far from completely open due to XRPs it's still considerably more open that what's in place.
Without disagreeing with you, that's what I saying: the steady state for a ripple credit network is something similar to our current banking system, only without the state's (OpenCoin's) emergency assistance. A very brittle shadow banking system issuing heterogeneous money substitutes (that's an economic term). The size of Bitinstant does not matter, the amount of trust people have in Bitinstant does not matter, the fact that Bitinstant doesn't make out loans does not matter. If it walks like a bank, it smells like a bank. For all we know, all coins that Bitinstant owes have been stolen or poorly invested in Bitinstant2. And we won't know that until a bank run is under way, there is no way for the market to discover what's really in Bitinstant's coffers.
Again, completely agree, but the argument is that that's the state we're in at the moment anyway. For one thing there's no reason that the entities have to be Bitinstant, they can be PayPal or BoA and have whatever regulation they want. If there are regulated portions they don't have to trust unregulated portions.
I've seen the secure exchange, from what I gather it's mainly a way to bring money into the system and pump the XRP, that's what Opencoin really cares about.
Well, I certainly agree that Opencoin can only be trusted to care about Opencoin. However, the exchange doesn't have to involve XRP (apart from the transaction fee, i.e. one side doesn't have to be denominated in XRP). To be fair, you're saying you've seen it but you flat out asked where it was a second ago, which is the only reason it was brought up.
Even if Opencoin should close, the ripple network will continue. Because the ripple is a P2P network, it is not operated by Opencoin but by the combined efforts of all the computers running the ripple server software. The ripple network cannot be shut down without shutting down the entire Internet.
That's just half of the story. If Opencoin spends all it's XRP and fails, then yes, the network will probably continue without it. But how could Opencoin fail with such a large endowment ? I'm much more worried that the majority of coins in existence will continue to be held by Opencoin for the foreseeable future and will act as a sword of Damocles over the currency. They will have practically unlimited power and thus could act as a proxy for other entities, such as world governments.
I'd really need to do some research and maths. As I understand it all the fees and figures are set by consensus of the set of nodes that end up most trusted. So, if there was later a movement against opencoin the fees and reserves could be adjusted by consensus so that whatever had already been distributed was sufficient to run an economy. That said OpenCoin's control of the XRP supply is a clear avenue of attack against the system. Also, apart from XRPs all the debts in Ripple represent actual debts and can be removed from the Ripple system if Ripple becomes infeasible. If ripple is actually no better than what's in place at the moment then there would be no massive problem doing that.