Quote from: TradeFortress on May 19, 2013, 02:04:04 AM

Okay, I see where I was wrong. You would not be getting my IOUs if you have not trusted me, you would have got the IOUs of someone who you trusted who trusted me's IOUs which are really being backed by my IOUs. This distinction does not change the fact that:

i) you're still affected
ii) your bitstamp IOUs could have being substituted for someone's IOUs, still based on my IOUs
iii) a large enough default will leave people who you trusted being unable to repay

There's no way for your friend who you trust very much to repay IF he lost every single asset because it was replaced with worthless IOUs.

There is a difference between IOUs on an exchange, and actually trading around IOUs in an infinite web with Ripple substituting your IOUs even through they have a different value. Take this example:

You trust Bitstamp for 20 BTC.
You trust your friend Bob for 20 BTC.

You have 15 Bitstamp BTC. Your friend Bob just went on a holiday for a couple of weeks. Out of the blue, the Ripple system has decided to substitute your 15 BTC-Bitstamp for 15 BTC-Bob - because the Ripple system will not work efficiently without this substitute. You want to redeem your BTC, Bob's on a holiday, you'll have to try and trade your BTC back to Bitstamp but there may not be paths.

15 BTC in 3 weeks is different from 15 BTC now, and that's not even considering the fact that you can never trust someone 100%. Ripple thinks they are the same, and they'll substitute it each other - because OpenCoin Inc's system is more important than you.

Interesting example as a thought exercise. The BTCs of Bitstamp are different from the BTCs of Bob or the BTCs of party X.