is a trust based system the right way to go in redefining the global transaction system?
Yes. Think about what happens when you buy Bitcoins. You deposit money into MtGox, and you receive "MtGox USD IOUs". Which really means that they have your money and all you have is an entry in a database. Now you buy some Bitcoins on MtGox. You aren't receiving Bitcoins, you are getting "MtGox BTC IOUs". Still, all you have is an entry in a database. Only when you withdraw your Bitcoins, or wire the U.S. dollars, from MtGox do you get back something which is not an IOU (although some might call the USD an IOU).
Ripple works exactly the same way. The difference is that when you deposit your money into a gateway, you have control over those IOUs. You can send them to other people, hold them, or exchange them for other IOUs (or XRPs).
With Ripple you first extend trust to a gateway (this is like depositing money at MtGox). Then, you can withdraw those funds as IOUs into the Ripple network and use them to perform transactions in a decentralized way. It's a great system.
This is a good example of why I say I am only 10% of the way there -- and ironically I actually had read this post of yours previously. What you are saying in your example is that the key in my wallet that represents Bitcoins is not fungible with other brokers (like a USD would be) as the transactions are really internal to Mt. Gox's account? Essentially, you are saying that the funds are held in the equivalent of the "Street's name." Is this the correct understanding? If so, I guess I really hadn't understood the broker side of this equation. I had assumed that they were merely a matching engine like NASDAQ. To put it in the vernacular -- this blows.
