It’s no coincidence that Ripple Labs was formed in 2012 to be a part of a payments revolution.

In 2013, the price of bitcoin hit a high that many had not thought possible, creating a sentiment that new and distributed technologies could change the global financial order on a fundamental level.

This enthusiasm is the driving force behind Ripple, and one of the reasons that it has already raised $6.5m in angel and seed funding from the likes of Andreessen Horowitz, Google Ventures and Lightspeed Venture Partners.

The company says it has raised capital in its early stages because it aims to build the best global payment protocol, and it needs to hire talented people to do so.

“You need a big team,” explained Ripple CEO Chris Larsen. “If this is really going to be a global protocol, it needs that [team].”

He added:

“In the bitcoin world I’d say a lot of that value is going into mining. Whereas we’re focusing that stream of monetization towards building that team.”

Consensus

The concept of bitcoin mining is what has made that network itself so powerful.

At the time of writing, bitcoin’s global network power is around the 48PH/s mark. However, all of that mining power requires electricity (and money) in order to complete blocks and transactions.

With the Ripple protocol, that type of consensus is conducted without any monetary incentive and instead relies on gateways to move money along with something called validators, which establish trust within the network.

The company’s CTO Stefan Thomas says that unlike Ripple, bitcoin mining could potentially result in serious issues down the road:

“The nice thing about not having an incentive is you avoid a whole string of economic problems where people are trying to game the system just to get to the incentive.”

People who have an interest in seeing Ripple succeed are better off with its protocol than a monetary incentive, at least from Ripple Labs’ perspective.

Thomas makes a comparison with the concept of ISPs. They are ‘stakeholders’ in the internet, but do not directly own a piece of it. This, Ripple believes, is a prime example of how a truly global payment protocol should operate.

Its open-source nature also means that Ripple could change this in the future, although it doesn’t plan to just yet, Thomas added:

“If we need an incentive, we can add one. But its reasonable to start out without one and see how far you get.”

Removing barriers

Even with today’s technology, it remains unrelentingly difficult to move money around the globe. Ripple plans to change this by building the best currency-agnostic payment protocol for financial companies to use.

According to the company, an international bank transfer today from the US to India might look something like this:

Ripple’s use of distributed gateways and market makers could make this process much easier.

It would also benefit the community within a system that supports the Ripple protocol instead of banks just making fees from clearing, settlement and currency exchange:

What appears different at face value is that one company essentially replaces the role of several banks.

But the reality is that Ripple Labs’ plan is only to develop its payment protocol, and allow an ecosystem around it to take the place of the traditional banking system to create shorter transaction paths. Thomas added:

“What Ripple looks for is the shortest connection between your account and the other person’s.”

XRP

A payment system of any kind needs a unit of account. Existing digital payment systems, such as PayPal, use fiat money like the US dollar.

But here’s where PayPal runs into a problem: with so many countries using different forms of government money, PayPal has to separate its businesses by each country that it does business in.

This makes for a relatively inefficient global platform. For example, with PayPal, one person cannot send Chinese Yuan to another who wants to receive bitcoin.

However, Ripple can do just that, and it uses its own method of account called XRP to help facilitate “pathways” to find a route of least resistance to move value around.

Because there is no mining, XRP, also known as a Ripple, has already been allocated within the protocol.

According to the company-owned Ripplecharts, there are approximately 100 billion XRP within the system. The idea is that as the protocol becomes popular, XRP will be needed as a unit of account for stakeholders to push value through the system.

XRP, in this way, is not designed to be an effective currency. “It’s designed for a very specific purpose, it doesn’t have to be very fancy,” said Thomas, the CTO.

He added:

“It [XRP] doesn’t have to be very good [as a currency] in order to fulfil that anti-spam measure purpose for which it’s designed.”

Gateways and the protocol

XRP’s use is to help build up Ripple as a protocol, but without Ripple gateways there wouldn’t be any way to move money in and out of the system.

Gateways are similar to what exchanges do for the Bitcoin network in the way it allows people to trade currencies.

Right now, the most popular Ripple gateway is owned by Bitstamp, the exchange that has reportedly raised $10m from Pantera Capital, an all-bitcoin investment fund backed by Fortress Investments, Benchmark Partners and Ribbit Capital.

Gateways are the key to regulatory hurdles that many new financial technologies such as Ripple face. Thomas added:

“The idea is that rather than us worrying about some global compliance strategy we provide the language, the graph for the different relationships. And then the gateway operators, they know their local jurisdiction.”

Identity and compliance

With compliance comes the question of identity verification. And that poses another potential problem Ripple is trying to tackle: leaving know your customer (KYC) to all of its gateways would prove rather problematic.

Anyone who has done business with more than one bitcoin exchange has dealt with verifying identity documents over and over again. This is an issue that Ripple is working to solve.

Greg Kidd, Ripple’s chief risk officer and a former director at Promontory Financial Group, said:

“There’s sort of the balance between security, knowing everything about everybody. And then there’s privacy, knowing nothing about anyone.”

The idea Ripple has is to use OpenID connect to be able to allow people to have a digital payments profile. This would give people ownership over their own financial history – and it could potentially be used globally, even for people in countries that don’t use credit scores.

Said Kidd:

“It means everybody in the world can have a payment identity. And they own it – that’s the cool thing, not the government, not the bank.”

Moving money

Since Ripple wants to be a payment platform, it is courting developers and bitcoin enthusiasts to get involved.

Some cryptocurrency investors have realized the potential to move cryptocoins and currencies from one place to another, said Thomas:

“Our biggest constituency and the people who get the most value out of the system are bitcoiners trying to move money between different exchanges.”

Andrew White, who won a Ripple contest at a developer event for his ‘One Million Gateways’ concept, believes his idea is an example of the potential that exists for the protocol to be used to move money much easier than every before:

“I believe One Million Gateways will be used for prototyping services by enterprises looking to get into the space.”

Services that could use the concept include remittances businesses, currency exchanges and payment processors.

Users don’t necessarily need to know that Ripple is being used as the “pipe” but companies could use Ripple to facilitate these types of transactions.

Smart Contracts

Several efforts already exist to implement smart contracts that don’t require a third party.

Ideas like Ethereum and colored coins exist because block chain technology allows for a system of enforcing contracts to protect the average person like never before.

The rise of legal technicalities like arbitration clauses have inadvertently taken away rights from consumers to fight contracts in court. However, smart contracts offer more logic and less legal minutiae.

Ripple is working on a smart contract enforcement system that will compliment its payment protocol.

Said Thomas:

“You have to come up with interfaces, between the sandbox where these contracts are running and the rest of the network functionalities.”

If smart contracts are to be adopted, they have be trusted. This is something that Thomas has spent over two years thinking about, and the best system that he has found relies on x86 machine code that is very tight, meaning it has no flaws conceptually.

Thomas says that Ripple will use Google’s Native Client, a solution that directly uses hardware-based machine code:

“What Native Client does, the sandbox that it uses, it relies on this mathematical model which means that you can verify that it won’t break out of the sandbox.”

Native Client could be the best way to enforce a digital contract with low-level control, by using a very small codebase as a “sandbox” to protect from any abnormalities that could happen at a higher, web-based level.

Focus on protocol

There have been numerous detractors that have dismissed Ripple because it doesn’t operate like most other cryptocurrencies.

But other than bitcoin, litecoin and perhaps dogecoin, most crytpocurrencies aren’t payment mechanisms anyhow.

Ripple’s focus on developing an open-source core payment protocol is different because there is no central figure directing the course of development. The company currently has eight core protocol developers, and is looking for more.

There is also a startup accelerator. CrossCoin Ventures, an independent entity but up two floors from the Ripple HQ, is looking for talent that can leverage the protocol.

LibraTax, a company that does virtual currency tax returns, is the first tenet there. The impact of having a protocol prepared for mass adoption is something that developers should not dismiss, according to Larson, the Ripple CEO:

“The protocol can just exist. That kind of macro opportunity should not be wasted.”

Relying on a community of developers, investors and financial companies is what Ripple is trying to foster. At the same time, focusing on the core technical aspects of its payment protocol is the company’s real goal.

Ripple is hoping that the rest will be taken care of by those who seek an opportunity to change the current system of financial payments and contract enforcement.

“That’s the beauty of it,” said Asheesh Birla, the company’s head of product. There are a lot of options to be involved with Ripple: Gateway, market maker or app developer leveraging the Ripple API, he said:

“You can either do all of it, or you can separate it out and leverage the existing ecosystem.”

Featured Image by CoinDesk