What is Payment Protocol “Ripple” and How Does it Allow for Physically Backed Digital Gold Currency Exchange

I’ve known about Ripple for close to a year now. I’ve been meaning to write a post on it for several months, but since doing so is such a difficult effort I kept putting it off. The most accurate expression I’ve seen to-date describing the daunting task of explaining Ripple to someone who has never heard of it is the following line published in a recent Bitcoin Magazine article:

If you’re ever explaining Bitcoin to someone and they’re getting it, start talking about Ripple, just to confuse them again.

That was precisely how I felt when a friend of mine first introduced me to Ripple. I had only recently really gotten behind Bitcoin, and now I had to try to understand something else? Even worse, something that seemed far more complicated. While I was interested in the idea right off the bat because I have a huge degree of trust in this person’s opinion on technology, it seemed overwhelming so I put the entire thing to the side.

My perspective changed later in the year when another friend of mine asked me if I knew about Ripple. It turns out he is friends with the head of Markets and Trading at Ripple Labs, Phil Rapoport. Since Phil is based in NYC, and I was headed there, I decided to set up a meeting and develop a more informed opinion on the subject.

By the time I met with Phil, I had put a lot more thought into Ripple in order to ask good questions by the time he showed up. I was highly skeptical for many reasons.

Ripple is not particularly embraced within many areas of the Bitcoin community, and I can understand why. Going in, I had many doubts. It is first and foremost a payment protocol, and secondly a “math based currency.” Since I couldn’t grasp the payment aspect until my meeting with Phil, I had spent all of my time thinking about the currency aspect of it, and that part was not appealing to me when compared to Bitcoin.

First off, the currency is pre-mined. This means that all the units are already in existence from day one and controlled by the creators, as opposed to Bitcoin, where the currency is mined over time by computers confirming transactions and ensuring the system runs smoothly. The distinction is important since the distribution process for Ripple is entirely opaque, while the distribution process for Bitcoin is far more transparent. While you do not know who exactly receives the bitcoins as each block is created, you do know how many are being distributed and at what pace until that moment in 2140 when the very last BTC is mined. With Ripple (the native currency of the protocol is known as XRP), the only thing we know is that there are 100 billion in existence (the most there will ever be) and that the founders kept 20 billion for themselves. The remaining 80 billion have been allocated to a company called Ripple Labs, which is in charge of distributing the remaining XRP as they deem appropriate. To-date, about 9.5% of the 80 billion have been distributed and you can track the progress here.

From a business standpoint, I can understand why this would be the case. They can sell some of it into the market to pay day-to-day expenses (Ripple already has a total valuation of about $1.4 billion), they can allocate it to employees as compensation, they can give it away via charity such as their partnership with the World Community Grid, and most importantly they can gift them to strategic ”Gateways” (more on those later) in order to grow the payment system into what it needs to become in order to succeed.

One of the things that I and many others in the Bitcoin community have loved about Bitcoin is the fact that some poor computer nerd could have started mining bitcoins from his home computer several years back and now be a millionaire. It is very grassroots in that way. The people who saw its potential early on had the ability to participate in what was kind of like a decentralized IPO. All you needed was a little vision and some computer chops. There is something brilliant and beautiful in that distribution process. While mining is now a very expensive affair and out of the reach of the average person, this wasn’t the case in the beginning when there was far more risk involved in the entire experiment.

With Ripple, a somewhat equitable early distribution process was never on the table. The founders have/are allocating the currency in a highly centralized and opaque manner. There’s something about this that rubs many in the crypto-currency community the wrong way. Moreover, because Bitcoin is such a grass roots creation, it is simply much more political than Ripple is or ever will be. Buying Bitcoin and supporting it is for many of us an expression of disgust with the Federal Reserve in particular, and the legacy banking system in general. While many supporters of Ripple will most definitely harbor similar sentiments, buying XRP isn’t really a statement, while buying and spending BTC very much still is.

So those are some of the “negative” aspects of Ripple. I think they represent much of the skepticism in the Bitcoin community. They certainly reflect many of my own sentiments before I learned more about the tremendous potential of the payment system.

I will now explain how I overcame my initial skepticism on Ripple and saw the enormous power and benefit of the payment protocol itself. Earlier, I described some of the main differences between Ripple and Bitcoin. I called your attention to many of the aspect of Ripple that folks within the Bitcoin community tend to dislike. I think it is also important to understand some similarities they share.

One major similarity is that they both represent new payment systems that at their core allow for transfers of value from one person to another across the world at essentially zero cost. Both run on open source code and empower merchants and economic growth generally by eliminating the middlemen currently taking anywhere from 2%-3% for merely processing payments. The tens of billions of dollars spent on such fees can be repositioned as fuel for the global economy and put to more productive uses.

They were both released to the world for free. This represents a huge revolution not just in payments, but in potentially how some startups might choose to fund themselves in the future. Within Bitcoin, the unit of exchange, BTC, is needed in order to participate in the payment protocol. In that way, bitcoins, can be seen as the equity of the network. Early adopters bought or mined bitcoin, and as they increased tremendously in value, many of them have used their wealth and knowledge to greatly advance the protocol to where it is today.

Ripple also has a currency, called XRP, which can also be seen as the “equity” of the payment system. Here is where we start to see a major difference between the two systems. Within the Bitcoin network, you will use BTC, whereas the Ripple network is currency agnostic for the most part. The system does not discriminate between one currency or the other. Using Ripple, you can send payment to someone quickly and at essentially no cost whether it is USD, gold, XRP, or bitcoins.

That said, the currency XRP does play two major roles in the system.

1) Since it is the native currency on the protocol, it is the only currency traded or exchanged on the system that does not have any counter-party risk. Anyone with a Ripple wallet can send anyone else XRP at any time with no exceptions, sort of like Bitcoin. By contrast, in order to receive any other currency or asset of value on the system you must trust certain “Gateways.”

2) There is also a certain amount of XRP that is destroyed with every transaction on the system. The amount is a negligible .00001 XRP (a extraordinarily tiny fraction of a penny), and is used to prevent spam transactions from clogging the protocol. As such, each wallet on Ripple needs to have a minuscule XRP reserve balance of 20, which is at total of $0.28 at current prices.

In a nutshell: XRP has value as the reserve currency of the payment system. It is the grease in the wheels of the whole thing.

Ok, so I probably lost a lot of you above with the whole “Gateway” and “trust” concept. Let me explain.

First of all, no other currencies or items of value are actually held within the Ripple payment system. Gold traded on Ripple will be held in a vault somewhere, and U.S. dollars (USD) traded will be held in some sort of external financial institution, a bank, credit union or whatever. This is where “Gateways” come into play. “Gateways” are essentially companies that serve as the custodians for non-XRP assets that trade on Ripple.

To make this easy to understand, I will use the USD example. If you are a U.S. citizen and want to hold USD in your Ripple wallet the best “Gateway” to use at the moment is SnapSwap. SnapSwap has a bank account at Bank of America and you “fund” your Ripple wallet with USD by sending the currency to SnapSwap’s bank account. At that point your USD enters the Ripple network and you can purchase XRP and send it to anyone, or you can send your USD to anyone on the Ripple network who also “trusts” SnapSwap. As I mentioned earlier, you don’t need “trust” to send or receive XRP, you only need “trust” to send other items of value that have counter-party risk. Since there is obviously counter-party risk associated with your USD (risk resides at both SnapSwap and Bank of America) a Ripple user must conduct due diligence to determine whether or not they “trust” SnapSwap in order to receive USD via Ripple. The choice is yours.

For more information on how SnapSwap funding works, I suggest reading this explanation.

This brings me to what I think is one of the most exciting parts of Ripple, the ability to trade physically backed, deliverable precious metals. All you need is a “Gateway” with a vault (or access to one) that is willing to allow the metals to trade instantaneously and in fractional amounts on the payment system. While my mind was already excited about this potential after I met Phil in NYC, one of the things holding me back from writing this article was the lack of a solid option for doing so. Well that option arrived in January with the launch of Ripple Singapore as a “Gateway” in late January.

In the press release describing the service they explained:

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Video of the Day: Shit Bitcoin Fanatics Say

Back in 2012, I introduced you to a hilarious video created by my friend Dan Ameduri titled: Shit Gold Bugs Say. If you haven’t seen it, I definitely suggest checking it out. I even make a brief cameo appearance at the 0:57 mark.

Today I bring you a new video. Similar concept, different item and also very funny. Introducing “Shit Bitcoin Fanatics Say.”

Enjoy.

 

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Highlighting the LLC IRA – Own Gold, Silver or Bitcoins for Your Retirement

I have brought the guys at Perpetual Assets to your attention once before, following my meeting them at the Liberty Masterminds conference in Dallas (check out my speech here)( this past summer. While these guys sell bullion, they do a lot more than just that. In fact, what separates them from others relates to the innovative products they bring to the table for precious metals holders and others who merely want to take control of their individual financial destiny.

One of these which I have highlighted in the past is the company’s LLC IRA product, which allows you to truly be your own asset manager for your retirement. You know, kind of the way it should be. With this product you can hold almost anything you can imagine in your retirement account. From gold and silver, to Bitcoin. In fact, they will even accept payment in Bitcoin to get the whole thing set up.

Ever since Barry O came out with his latest used car salesman gimmick, the MyRA, the guys at Perpetual Assets have told me interest and sign ups for their LLC IRA product have exploded.

Click on the banner below for more information and definitely feel free to get in touch with them. They’ll be happy to walk your through the whole process.

In Liberty,
Michael Krieger

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May The Farce Be With You – Janet Yellen Compares Bernanke to Obi-Wan Kenobi

Just in case you had any lingering doubt about how hopelessly screwed the world’s monetary and financial system really is, all you have to do is learn that in a series of ceremonies (because that is so appropriate with a record number Americans on food stamps) celebrating Ben Bernanke in recent days incoming Fed head Janet Yellen likened Bernanke to Obi-Wan Kenobi, the wise, experienced Jedi Knight mentor to his protégé Luke Skywalker in “Star Wars” movies.

There’s nothing that makes you feel more warm and fuzzy inside than the recognition that the soon to be most powerful person in the world thinks that printing trillions of dollars and giving it to criminals at zero interest qualifies as attributes of a intergalactic Jedi Master.

On the flip-side, this right here is what 95% of Americans think of Bernanke and his criminal cartel.

Not from The Onion, but from the Wall Street Journal we learn that:

Officials held a series of ceremonies honoring Mr. Bernanke in the past few days. At a dinner Tuesday evening among senior officials, Ms. Yellen likened Mr. Bernanke to Obi-Wan Kenobi, the wise, experienced Jedi Knight mentor to his protégé Luke Skywalker in “Star Wars” movies. She jokingly imagined Mr. Bernanke advising her to trust in the Fed’s statement of objectives, a document that lays out its goals for inflation and jobs, according to someone familiar with the event.

Mr. Bernanke received a standing ovation from Fed officials at the FOMC meeting in its boardroom earlier Tuesday. And he was toasted Thursday by hundreds of Fed staff packed into an atrium at the Fed’s Eccles Building, where they were served peanuts, popcorn and crackerjacks in honor of Mr. Bernanke’s love of baseball.

Kill. Me.

Full article here.

In Liberty,
Michael Krieger

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Video of the Day: F*ck the Fed

On this day, when the banker-cartel commonly known as the Federal Reserve is set to announce its latest decision in central planning, I thought it would be wise to revisit an old, yet classic video which calls out this neo-feudal institution for the state-sanctioned criminal enterprise it is.

Neal Fox summarizes my sentiments exactly with three simple words that say it all: F*ck the Fed.

Enjoy.

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Jeffrey Lacker: “Fed Has No Interest in Stopping Bitcoin”

While I don’t believe a word the professional criminals at the Federal Reserve say about anything, this is nonetheless an interesting clip from CNBC earlier today. The guest was Jeffrey Lacker, the President of the Federal Reserve Bank of Richmond.

Of course, I do note that after Lacker says his statement about the lack of imminent Fed intervention, he does mumble “at this point” under his breath.

The first thirty seconds is all that’s worth watching.

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The Times of India: “Almost Every Passenger on a Flight from Dubai to Calicut Was Found Carrying 1kg of Gold”

Watching Indian bureaucrats attempt to halt more than one billion human beings’ desire for gold has been one of the more entertaining and pathetic stories of all of 2013. It is one that I have covered on many occasions, the latest being my post from earlier this month:  Gold Smuggling Increases 7x in India and Surpasses Illegal Drug Trade.

Well it appears the trend continues, potentially at an accelerated rate, as we just learned that, incredibly, “almost every passenger on a flight from Dubai to Calicut was found carrying 1kg of gold.” As I have said many times in the past, if an Indian wants their gold, they will have their gold. 

CHENNAI: Faced with curbs on gold imports and crash in international prices leaving it cheaper in other countries, gold houses and smugglers are turning to NRIs to bring in the yellow metal legally after paying duty. Any NRI, who has stayed abroad for more than six months, is allowed to bring in 1kg gold.

It was evident last week when almost every passenger on a flight from Dubai to Calicut was found carrying 1kg of gold, totalling up to 80kg (worth about Rs 24 crore). At Chennai airport, 13 passengers brought the legally permitted quantity of gold in the past one week.

“It’s not illegal. But the 80kg gold that landed in Calicut surprised us. We soon got information that two smugglers in Dubai and their links in Calicut were behind this operation, offering free tickets to several passengers,” said an official. The passengers were mostly Indian labourers in Dubai, used as carriers by people who were otherwise looking at illegal means, he said. “We have started tracing the origin and route of gold after intelligence pointed to the role of smugglers,” he said.

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Paul Krugman Once Again Irrationally Attacks Bitcoin…Here’s My Response

The last aggressive anti-Bitcoin tirade I recall from Paul Krugman was written on April 14th of this year. It was such an irrational piece of drivel that I decided to respond to his Op-ed nearly paragraph by paragraph in my piece, Paul Krugman Goes on the Attack: Calls Bitcoin “Antisocial,” which I strongly suggest you read if you haven’t already.

What is most interesting about that previous article in hindsight is that he wrote it right after Bitcoin experienced its first major crash of 2013 (there have been two thus far, both after greater than 10-fold increases in the price). While I know Krugman periodically attacks Bitcoin, it’s interesting that this latest Bitcoin hit piece also came directly after the second crash. For those who are holders of Bitcoin, this should be taken as a very positive price signal going forward. Krugman’s prior article was written the day before the abolsute low price for the decline was reached at $50/btc on April 15th. It seems that Krugman becomes particularly comfortable slamming Bitcoin only after a price crash.

In any event, his latest Op-ed is almost as bad as the first one, and so I thought it’d be worthwhile to highlight his ignorance, irrationality and blatant use of statist propaganda once again. So let’s go.

From the New York Times:

This is a tale of three money pits. It’s also a tale of monetary regress — of the strange determination of many people to turn the clock back on centuries of progress.

The first money pit is an actual pit — the Porgera open-pit gold mine in Papua New Guinea, one of the world’s top producers. The mine has a terrible reputation for both human rights abuses (rapes, beatings and killings by security personnel) and environmental damage (vast quantities of potentially toxic tailings dumped into a nearby river). But gold prices, while down from their recent peak, are still three times what they were a decade ago, so dig they must.

The second money pit is a lot stranger: the Bitcoin mine in Reykjanesbaer, Iceland. Bitcoin is a digital currency that has value because … well, it’s hard to say exactly why, but for the time being at least people are willing to buy it because they believe other people will be willing to buy it. It is, by design, a kind of virtual gold. And like gold, it can be mined: you can create new bitcoins, but only by solving very complex mathematical problems that require both a lot of computing power and a lot of electricity to run the computers.

In the three paragraphs above, Krugman in employing a strategy that anti-gold people have used for years if not decades. That it is wasteful and environmentally destructive to mine for gold since it has no real purpose. Interesting. What purpose do diamonds have Paul? Did you buy your wife a diamond ring for your engagement? Did you make sure it wasn’t a blood diamond? Aren’t people likely raped and exploited in the mining of diamonds? I wonder how many articles Krugman has written on the destructiveness of diamond mining, a gem that isn’t even rare to begin with.

I tend to notice a huge hypocrisy from statists that in reality hate gold because it is a competing monetary asset, but then attempt to explain away their disdain using another, more publicly palatable rationale such as environmental destruction. After all, gold should get some credit for having at least has two hugely significant historical purposes. It has been valued for both its beauty and durability as jewelry, as well as for its monetary attributes. Diamonds have one primary purpose only recently established due to extensive marketing efforts (also in drills but you get the point), which is as a status or wealth symbol, so you’d think Krugman and other statists would get far more hot and bothered about blood diamonds than gold; but do they? No, they don’t. The hypocrisy is obvious.

The second thing Krugman does in the latest Op-Ed is to take this faux criticism and then attach it to Bitcoin. See the following paragraph:

Hence the location in Iceland, which has cheap electricity from hydropower and an abundance of cold air to cool those furiously churning machines. Even so, a lot of real resources are being used to create virtual objects with no clear use.

No clear use? Really, Krugman? There is nothing useful about essentially costless transfers of value on a peer-to-peer basis? There is no value to monetary transfers that eliminate expensive and parasitic middlemen? There is no value to using a public key as a way to ask for payment, thus reducing  enormous security concerns caused by providing all your private information to hundreds of merchants using credit cards? No value to being able to send millions of dollars across the globe in minutes rather than days? No value to free market currencies competing with state currencies? No value to economic freedom?

There are plenty of valid criticisms of Bitcoin, and a clear and thoughtful expression of those criticisms can only help the marketplace improve free-market crypto currencies in the future. Yet the irrational, ramblings of a statist who clearly hasn’t taken two minutes to objectively analyze Bitcoin is of no use to anyone and a disgrace to a supposedly highbrow newspaper like the New York Times.

His full Op-Ed is here if you have the stomach.

In Liberty,
Mike

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Video of the Day: Greenspan Calls Bitcoin a Bubble

I have to admit I was starting to get a little worried in recent days as certain folks who’s opinions I hold in very low regard started to rethink their prior clearly poorly researched opinions on Bitcoin. Personally, I would prefer small thinkers and professional media trolls to continue to mock and bash Bitcoin at every step.

Fortunately, many of my concerns were completely eliminated today, as the most destructive person in American history, Alan Greenspan, went on Bloomberg television and called Bitcoin a bubble. The best part is the way his obviously senile mind attempted to legitimize government fiat by comparing it to a very rich person writing a check. What is this nut job even talking about? In any event, if there was every a reason to hold on to your Bitcoins, this may be it.

In Liberty,
Mike

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