I just learned of Ripple and it still seems a bit fuzzy to grasp the concept, but from what I gathered so far its a decentralized exchange that basically has the potential to overtake Bitpay and Mt.gox. I read that there are Gateway points that do the currency conversions from bitcoin to fiat. Now the other question I have is how does Ripple derive the bitcoin exchange price if everyone starts abandoning traditional exchanges that kind of dictate the price exchanges from fiat to btc. Obviously not everyone is going to abandon those exchanges anytime soon.
Ripple supports a distributed currency exchange; anyone can offer to exchange from one currency to another. These offers are taken when a counter offer the same or better is made.
Like any exchange between two parties, the price would be based on supply and demand, world events, what the market will bear, etc.
The advantage is there’s no single point of failure that would cripple the market. We’ve seen what happens to bitcoin when Mt. Gox goes down or is under a denial of service attack. That’s obviously not a problem with decentralized exchanges.
And with the new Bitcoin Bridge feature of Ripple, you can pay anyone in Bitcoin from a Ripple wallet. The currency exchange is done by an organization (a.k.a a gateway I believe) running the freely available Bitcoin Bridge protocol, like Bitstamp. You can see as of this moment, the Bitstamp rate is $98 per Bitcoin. You can see the exchange rates of the exchanges at Bitcoin Average.
Bitpay and Mt. Gox (or any other currency exchange) are fundamentally different. Bitpay is not a currency exchange. Bitpay is a service for merchants who wish to take payment in Bitcoin and receive a daily payout in the currency of their choice (including Bitcoin), at an exchange rate that is fixed at the time of the initial transaction.
Ripple is something else again, a distributed currency exchange and payment protocol. As a payment protocol, it is a competitor to Bitcoin, but not directly to Bitpay as a company. Ripple labs, the company, provides a different set of services. Looking at their website, it looks like there is space for a hypothetical company "Ripplepay" to provide the same technical support and guaranteed exchange rate that Bitpay offers.
My views do not reflect the views of Bitpay as a company. I just work here.
You derive the exchange price by simulating attempting the exchange and seeing what it cost you.
For example, say you have 1 Bitcoin and you want to get the exchange rate to USD:
You could look for someone willing to take that Bitcoin and see, among all such offers, who is offering the most USD. You may need to combine several offers if there are people offering to take only a fraction of a Bitcoin.
But is that the best you can do? Maybe, maybe not. Perhaps you could trade that Bitcoin for Euros and then use those Euros to buy USD. Perhaps the best rate is to do a little bit of both, taking advantage of the best offers on multiple exchanges.
This is precisely what Ripple does using pathfinding.
You can think of the Ripple ledger as a giant pool of liquidity. There are balances for each account in whatever assets they hold, and order books containing offers to trade one asset for another. Pathfinding looks at this giant pool of liquidity to perform exchanges or cross-currency payments.