An Introduction for Community Currency Advocates
While Ripple bears a lot of resemblance to other community currencies, the concept can still be difficult to convey. This page describes Ripple for advocates and others familiar with community currency systems.
To start with, let's look at two different functions that Ripple serves:
Note that "currency" here refers to the actual value, not the units used to measure that value.
1. Ripple is a way to make payments across currencies
Think of Ripple as a way for a user of one community currency to pay and accept payments from users of other community currencies. Ripple allows someone who uses two currencies to easily act as a broker or intermediary for transactions between the two currency communities of which he is a member. But more than that, Ripple is a protocol for discovering chains of two or more of such intermediaries, so that payments can be made between two currency communities that have no members in common. All this can be done quite seamlessly to the end user.
Integrating Ripple into a community currency means that the power of that currency is no longer limited by the number of people that accept it, but rather by the number of people in the Ripple network that it is connected to. This allows the smallest community currency to become just as useful for payment as a national currency, and overcomes the primary advantage of a national currency over community currencies.
A LETS Example
Take a LETS with an hour-based currency and 100 members. Each member would have a "node", or software agent, on the Ripple network, and there would also be a central LETS node run by the organizing group which issued the LETS currency. Each member would accept currency issued by the LETS, and the LETS would accept IOUs issued by each member. That is, each member would have a mutual credit account with the LETS.
This can all be done without adding any complexity for the end user. The underlying Ripple structure actually facilitates allowing users to participate in several currencies through one interface.
To pay another LETS member, one would instruct the central LETS node to adjust one's balance downwards, and adjust the other member's upwards.
Suppose Sue, a member of the LETS, wanted to use her LETS hours to pay for a sweater from Joan, who saves health-care points in a nearby community. Ripple will search and find that Bill is a member of both the LETS and a local supermarket's royalty points scheme, and that Dan collects supermarket points and health-care points.
Sue now can pay 5 LETS hours to Bill, who will pay 1100 supermarket points to Dan, who in turn will pay 130 health-care points to Joan, who considers that payment for the sweater. The actual payment message will go from Sue's node, to the LETS node, to Bill's node, to the supermarket's node, to Dan's node, to the health-care centre's node, to Joan's node, all automatically without any of them having to lift a finger, except Sue, who initiates the payment sequence by entering Joan's ID and the amount to pay. Both exchanges are made at rates determined ahead of time by Bill and Dan. If Sue doesn't like the exchange rates, she will tell Ripple to search for another chain of intermediaries with a better overall rate.
2. Ripple allows anyone issue their own currency
A currency issuer could be defined as one who acts as a payment intermediary between subscribers to that currency. It does this by vouching for the currency put forward as payment between two subscribers, and agreeing to make good on the debt it represents.
Since Sue, as a LETS user, has a Ripple node that functions exactly like the central LETS node, she can use it to keep track of an IOU (ie, mutual credit) account with anyone else who has a Ripple node. She could keep track of her personal debts with friends and join other Ripple-enabled community currencies. She could even manage her bank account or bank loan at her node, if her bank decided to operate a Ripple node.
Every other Ripple node she connects with has the opportunity to accept the IOUs she issues. The purpose of managing many of Sue's debts at a single Ripple node is to give the holders of her IOUs the opportunity to use them to pay, through Sue, anyone else who accepts her IOUs. In effect, Sue is issuing her own currency, just like a LETS. Note that Sue's different debts may be measured in different value units, but, since they are all based on the same trust in Sue, they can be automatically converted into one another as permitted by Sue.
Every Ripple node is like a LETS system, in that it operates as a payment intermediary, vouching for payments between its neighbouring nodes, just like a LETS system operates as a payment intermediary between its members. Ripple allows all these separate currency issuers to connect to a larger payment network without interfering with the operation of their individual currencies. Ripple makes no assumptions about how a currency is issued, except that balances be electronically stored by the issuer.