3. Toxic IOUs
Let's say you have two or three larger networks of trustful people in which users trust each other and there are connections between those networks and the system "ripples" orders, so [person A], which belongs to [trusted network 1], which is somehow connected through trust to [trusted network 2], which is somehow connected to [trusted network 3], could get an IOU from [person B], who belongs to [trusted network 3]. What happens, if [person B] now gives trust to villain [person C], which has many many toxic IOUs which aren't backed up by anything (i.e. TF BTCs). Wouldn't that compromise all three networks? Is there a way to see, if a IOU is toxic or was issued from a legit gateway? Is there a way to prevent the system to "ripple"?
I posed this question to a Ripple employee at the Bitcoin Conference this weekend. He told me that you can indeed prevent the system from "ripple"ing, but the option is not in the current client (and it's on by default). So my followup question is, does ripple still work in practice if this default is switched to "off"?