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I am struggling with some concepts in the Ripple system.

As I understand it:

After an American user goes to a gateway and loads $ into the Ripple system that he wants to send to Cambodia, the money will be sent through the Ripple Network by modifying the accounts of ripple users between the sender and the receiver of the money. At the point it reaches the Cambodian, if he wants to access the real world fiat money, he will go to another Gateway and redeem the money so long as they have a store of $.

The questions that I have are:

How do individuals set who they 'trust' to ensure that accounts remain active and the flow of debts remains valid?

How does the system respond if a user goes bankrupt and becomes unable to pay any debts that he has?

What happens in the situation where there is no line between the sender and the receiver of money or where there is no Gateway that the receiver can use to redeem money?

  • I think the idea is that the gateway is a bank or exchange, and that the gateway needs to have put funds in itself in order to cover the IOUs. But I wait for a fuller answer from some who knows. – T9b Dec 17 '14 at 11:15
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How do individuals set who they 'trust'

Not sure what this means; each individual decides on his own who to trust. For example, I already (in a general sense) trust Bitstamp if I have USD or BTC deposits with them. Ripple just allows you to make this trust explicit in an open ledger. The meaning of this trust is, if I specify a trust level of $100, that the system will allow me to hold up to $100 of Bitstamp IOUs.

How does the system respond if a user goes bankrupt

The system doesn't respond at all, as it merely keeps track of the IOU amounts - it does not, and cannot, enforce these claims. If one is willing to hold the IOU, it's probably because they believe it represents a claim that's enforceable in a court of law.

What happens in the situation where there is no line between the sender and the receiver of money

Where there is no trust line, a transfer is not possible at all. If finding a trust path is difficult, one option is for them to offer liquidity in XRP - the only Ripple asset without counterparty risk. Then anyone who, on his own end, has path access to XRP will be able to send funds - the XRP acts as the 'trustless' bridge or vehicle currency.

Note that this is the role played by bitcoin in many situations today; for example bitcoin is used as a vehicle currency in various remittance models, and is able to offer advantages precisely because of its low trust requirements.

In the end, XRP and BTC will compete for liquidity; whoever has the higher liquidity will have the lower costs.

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How do individuals set who they 'trust' to ensure that accounts remain active and the flow of debts remains valid?

Ripple has a "TrustSet" transaction that does exactly this. Other than XRP, Ripple does not permit an account to hold an asset it has not agreed to hold.

Account holders can drop their trust to zero at any time. This will prevent them receiving any more of an asset they no longer trust. They can also sell off whatever of the asset they hold, assuming it still has value.

While there can certainly be benefits from taking on risk, you can use Ripple in a completely risk-minimizing way. Just limit your trust to gateways you can enforce a legal claim against.

How does the system respond if a user goes bankrupt and becomes unable to pay any debts that he has?

The system itself doesn't presume that assets have any particular value. There is no problem with worthless assets existing in the system because there is no way to get such an asset to someone who didn't agree to take it.

Like most other payment systems, Ripple only controls what goes on inside itself. It can't compel people to do things outside of the system.

The risk-averse way to protect yourself from this is to trust only reliable gateways. The more adventurous way to do it is to trust only people whose Ripple network has value in such a way that they can't betray your trust without giving up their Ripple network. This is the basis of community credit, which really isn't ready for prime time just yet.

What happens in the situation where there is no line between the sender and the receiver of money or where there is no Gateway that the receiver can use to redeem money?

You can send anyone XRP. However, to send any other asset to someone, they must agree to hold it. If someone has not agreed to hold any asset denominated in US dollars, then you simply cannot pay them US dollars. If they have agreed to hold any reasonably liquid asset denominated in US dollars and you hold any reasonably liquid asset in any currency, Ripple's pathfinding engine can find a path to make the payment work. Users do not need to have gateways in common to pay each other.

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