The first sentence on the ripple.com "Send money in dollars, euros, yen or Bitcoin. No added work or fees for foreign transactions." However how this works in practice is pretty much unexplained in the ripple.com or at least I could not find it.
Could someone write or draw a complete explanation how the currency exchange feature works. Lets say Alice is newcomer to ripple but she has yen bills in her pocket and wants to buy a computer from a webshop that wants to see no other currency than USD but has previously done business with a ripple gateway.
The explanation should cover the issues that what is the full set of what ripple-introduced currencies or IOUs are possible to be involved in the process and what choices Alice has to herself how to use the system?
The wiki does not clearly explain what are all the places that have any significance where XRP is used and for what? I heard from someplace that it funds all OpenCoin functions generously, but wiki says OpenCoin only gives them away for free and the only place they are ever used in the whole system is for silly small transaction costs. Somehow I don't think I understand. The same for various IOUs? Does the distributed ledger track all various IOUs or only XRPs? What is a role of user-IOUs? Do such things exist in the system?
What happens to the external currencies? Where does the yen bill end up to? Where do the dollar bills to the merchant come from? How does the gateway business operate in typical moneyflow? I mean what is the typical business of how a gateway connected to a very big merchant operate? How does some gateway that refuses to serve any merchants and only accepts ordinary people that typically want to deposit their paycheck in dollars to buy stuff from some outside rippleshop operate as money-flow in all different kinds of currencies/IOUs that a gateway should handle? For simplicity you could assume only one type of fiat money accepted per each gateway.
What exchange rates are used in each step? What mechanism sets them and where?
Where and by whom is what XRP is worth in dollars determined? How much is an 1USD-BobsGatewayIOU worth in dollars? Where do the gateways get their profit or cover their expenses fulfilling the promise on the first sentence of ripple.com that there are no fees.
What is the complete list of parties that Alice must trust in this example one transaction? Who are the parties that the webshop needs to trust? Who are the parties that either gateway needs to trust? I mean for example which entities could leave Alice with a headache if they do some oddity including suddenly disappearing or claiming they have been hacked and lost all data and funds to thieves? What information Alice has to make judgement about these entities? Is it expected and typical that people are able to make sound decisions based on that amount of information? The answer could include examples from bitcoin-world. Which entities in bitcoin-world are such that there is enough information some random person is able to make an informed decision on and just not guesswork that they seem to have operated for a whole year meaning they must be good? What improvements are planned for ripple? OpenCoin could be in a position to force a minimum standard to all players. For example information about are the gateways financially healthy? Has a gateway been recently sold to a price that is a fraction of the user funds they are storing to some strange person nobody has heard of increasing the chance they are soon experiencing a declaration of a hack and loss of the funds?
These from just the top of my head. I did try to find answers to these but no success so far.