This is a graph of the value of Bitcoin yesterday, Wednesday. It’s hardly a secret that bitcoins are a very volatile asset class. As a result, relatively few eyebrows were raised as the price rose from an opening level of $ 230 to a high of $ 266. An intraday swing of more than 15% is pretty normal for the Bitcoin price these days. But then came the crash: within a few hours, bitcoins around the world had lost well over half their value and were only trading for USD 107 apiece. That’s not normal – and it just underscores how bad Bitcoin is at whatever it is supposed to do.
Bitcoin is clearly not an effective store of wealth – just look at how quickly that wealth can be evaporated. It’s also not a useful payment mechanism considering how quickly its value can fluctuate. Currently, it can take an hour for a Bitcoin transaction to be deleted. This means that when the transaction is deleted, the value of the transaction can differ radically from its value at the beginning. Bitcoin only works for payments if you can be fairly certain that its value will remain reasonably constant for at least the next hour or so.
At the end of my great article on Bitcoin, I come to the conclusion that we need “a universal payment system with no friction or exchange costs” that can learn from Bitcoin’s mistakes. And this morning the company responsible for one possible such system – OpenCoin, which is responsible for developing Ripple – announced that it had completed its angel funding round with support from Andreessen Horowitz, Lightspeed and Founders Fund.
I’ve played around with Ripple a bit and find it extremely promising. It’s very early on, but Ripple already has clear advantages over Bitcoin, and as various traders and developers start moving closer to the Ripple ecosystem – which, like Bitcoin, is all open source – then it could become the first real possibility in my opinion for everyone in the world, to pay everyone else in the world immediately and about as smoothly as possible.
Ripple was founded by geeks including Prosper founders Chris Larsen and Jed McCaleb of Mt Gox. As a result, it currently has a bit too many features with too little usability. It supports a virtually infinite number of different currencies, including Bitcoin; and while it is easier to use than Bitcoin, it is still not particularly user-friendly. But that will come in time – and in fact, I would be happier if the people who develop the user-friendly front ends for Ripple weren’t OpenCoin. OpenCoin is a for-profit company that makes good money when Ripple takes off. I’ll get back to that in a moment. So it’s very important that much of the rest of the Ripple ecosystem isn’t created by OpenCoin: as long as OpenCoin is the only company that really chooses Ripple, the entire program won’t go anywhere.
Ripple has a lot of resources on its website that explain how it works at different levels of detail. I will not try to duplicate these efforts. But the end result feels a bit like Bitcoin in many ways. Users are anonymous (or technically pseudonymous), for example: If you want to send me money through Ripple, you now have to pay racoLWuh2GtC72i1gV7ib14Jqgx3SLmwKc and not just Felix, my email address or my Twitter handle. It’s all open source too: OpenCoin doesn’t have privileged access to the way people pay each other. The fees are minimal, just enough to prevent DDoS attacks and the like. There’s even a built-in cryptocurrency, Ripple, with a fixed amount of money. The great thing about the Ripple system, however, is that individuals don’t have to pay each other in Ripples. Instead, they can pay each other in almost any currency in the world: waves, yes, or dollars, or yen, or euros, or even bitcoins.
For example, here is a screenshot of my Ripple wallet: It shows that I own 3,052 Ripples, $ 13, and 0.0284 Bitcoins. If I want to send a payment in one of these three currencies, I can do so pretty much for free. When I want to send a payment in another currency, the system will choose the best exchange rate for me based on different companies that offer currency conversion services on the Ripple platform.
Every time you trade in currencies other than Ripple – which in practice always will be – you have to go to the Ripple system via “gateways”. Ultimately, these gateways could be PayPal, Citibank, or Western Union, but that can take a while. At the moment they are smaller institutions and you probably don’t want to move large amounts of money through them.
Everyone who uses a Ripple account has some Ripples in their account to add to the system and there will always be people creating a market and converting Ripples to real currency and back again. The good news, however, is that ripples are not becoming speculative investment vehicles like bitcoins. That’s because all of the existing Ripples – 100 billion of them – have already been created and, as a first approximation, all belong to OpenCoin, which is essentially the central bank of the Ripple economy. OpenCoin will be giving away billions of ripples for free to anyone who opens an account just to get the system going and get people to trade with one another. There’s little reason to hoard a few thousand ripples when 100 billion of them are just waiting to flood the market.
It is therefore in OpenCoin ‘s interest to carefully calibrate the rate at which ripples are introduced into the active money supply and to keep the value of a ripple relatively stable. Currently, the dollar has roughly 750 ripples, which theoretically means that OpenCoin’s 100 billion ripples are worth over $ 100 million. OpenCoin will want this number to slowly increase as Ripple becomes more popular – but it doesn’t want to encourage hoarding: on the contrary. It wants as many transactions as possible to go through its network so that, in Larsen’s words, it really becomes “http for money”.
Given the connection with Andreessen Horowitz and many common interests between the two companies, I will first look for a third party confirmation of the Ripple idea, namely the startup Stripe for hot payments. I’ve had long conversations with Stripe CEO Patrick Collison about Bitcoin, international payments, and frictionlessness, and in theory there is no reason why he shouldn’t include Stripe with a pay-with-ripple option alongside the more conventional credit card and debit option. Card payments.
As with all of these things, there is a first mover problem here: there is no point building a Ripple-based infrastructure if no one is using Ripple, and no one is going to use Ripple if there is no infrastructure. OpenCoin’s solution to the problem, which I really like, is to simply give away billions of Ripples for free, all of which are worth real money, and thereby incentivize people to use them. I hope it works, and I hope that the number of gateways in the system will soon be expanded from the current list of relatively obscure sites like Bitstamp. Ripple hasn’t made it yet. But at least – unlike Bitcoin – it has real hope for it.