Bitcoin 2.0: Can Ripple Make Digital Currency Mainstream?

The bitcoin logo (Photo credit: Wikipedia)

The company is trying to create an online money system that is easy for everyone to use, not just the insiders who feel comfortable trading in Bitcoins. It’s all built on a massive system of personal trust.

It has been a nail-biting year for people who hold Bitcoins, an open-source digital currency that has quickly gained traction in the tech community. Last June, Bitcoins were worth $5. By April 2013, they were up to $266. Then they dropped to $70 in April. They were back up to $108 by May 7. Bitcoin is volatile. We know that much. It’s also vulnerable. Mt. Gox, the biggest Bitcoin exchange (where users go to exchange Bitcoins for other currency)–was recently faced with multiple DDoS attacks , shutting down the site temporarily.

But here’s the thing about open-source currencies: they’re open to improvement.Ripple, a platform that just received funding from Google Ventures, Andreessen Horowitz, Lightspeed Venture Partners, and others, has created both an alternative to Bitcoin and a distributed currency exchange for Bitcoiners (and others) who aren’t comfortable using only Ripple’s currency, known as XRP.

Bitcoiners could have reason to be suspicious of Ripple right off the bat. Whereas Bitcoin was created anonymously and relies on a foundation to standardize and protect the currency, Ripple is the product of OpenCoin, a public-facing company that just raised funding from a number of firms. OpenCoin plans on holding 25% of all the XRP in existence–the idea being that as the currency becomes more valuable, the company will have more resources to fund its operations (and presumably, to make its founders quite wealthy). There’s nothing intrinsically wrong with OpenCoin wanting its currency to rise in value, but the system is dramatically different from Bitcoin.

OpenCoin co-founder Chris Larsen believes that having a central company behind the currency is to its users’ benefit. “Bitcoin does a great job with a group of folks working through a foundation, and ad hoc contributions,” he says. “We thought we could get that too, and also get a core group to nurture this thing for a few years.”

THE MECHANICS OF RIPPLE

The Ripple platform serves two purposes: it’s a distributed open-source payment network, and it’s the home of the newly minted XRP currency. As a payment network, Ripple provides free global payments without chargebacks (minus a $0.0001 per transaction network charge), the ability to pay in any currency using a distributed currency exchange, and an open protocol that any developer can use. “The Ripple network is a protocol. It’s like HTTP for money. Users, merchants, anyone can use it for free without a license,” explains Larsen.

Participants can exchange dollars, yen, Euros, and even completely made-up currencies, all of which are entered into the system via “gateways.” Larsen says: “A UI designer and myself can be a gateway to each other. A gateway can be a friend, neighborhood, a group. Most gateways will be larger. It’s like the way Paypal works–you give them $100, they create a $100 balance.” The largest Ripple gateway right now is Bitstamp, which is used to buy and sell Bitcoins.

If one gateway is taken out by a hacker, users can move on to the next. And as McCaleb pointed out to The Verge, the Ripple gateways can’t seize or freeze accounts (unlike Bitcoin gateways), so they require less trust to use.

The only currency that doesn’t need to be entered into the Ripple platform from a gateway is XRP. This is an advantage over Bitcoin: Ripple is its own currency exchange–so it doesn’t have to rely on outside exchanges like Mt. Gox (Jed McCaleb, the creator of Mt. Gox, is a co-founder of OpenCoin).

While Bitcoin relies on anonymous exchange, Ripple supports an IOU system.

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