On the previous post various challenges faced by a Bitcoin based remittance systems were evaluated. Namely volatility neutralization costs and transaction delays as side-effects of Bitcoin underlying consensus process. In this post we will take a look at Ripple, one of the permissioned ledger systems, as a possible workaround. For an explanation of Ripple, take a look at Richard Brown’s intuitive explanation.
Ripple, Bitcoin, Apples, Oranges, Papaya
Ripple discussion tend to spark Bitcoin vs Ripple debates. These two are fundamentally different. Bitcoin was designed as an electronic cash system allowing for anonymous validators whereas Ripple is designed as general purpose ledger with known validators to manage liabilities in accordance to compatible trust links, as Richard Brown succinctly describes it: “… a way for a person to hold funds issued by issuers he or she trusts and to pay anybody else by transforming those funds into balances issued by issuers that the recipient trusts”
How much do you trust me?
Ripple introduces the concept of a trust line, this is implicitly established when you connect to a Ripple gateway where fiat is deposited in exchange for gateway issued IOU. This IOU can then be transferred in the Ripple system to whoever is willing to trust in the willingness and ability of the issuer to redeem the IOU. Trust in this context is not binary. I can for instance trust Bitstamp issued IOUs up to $5,000 and SnapSwap for $10,000. Alternatively, I can perform my transactions with Ripple native crypto-token XRP eliminating completely counterparty risk in exchange of tolerating volatility risk of XRP
Build your own clearing and settlement system
In the context of remittances, Ripple could be used as clearing and settlement mechanism. IOUs would serve as cryptographically secure receipts for tracking remittances for a real-time or future settlement. Speed, is an immediate benefit of this mechanism vis-a-vis using crypto-currency system such as Bitcoin, since the underlying consensus in Ripple would only require seconds as no cost intensive consensus such as Proof-of-work is required. The second benefit, is the removal of crypto-token volatility is removed. Assuming for such clearing system the IOUs represent fixed fiat amounts. Risks still exists on this approach as discussed in the post on settlement risk
Eastern Union
On a discussion with Luis Buenaventura from Philippines based Rebit, Luis formulated the idea of creating a network that would allow a more efficient move of remittances by leveraging already existing trust relationships between various remittance operators. Since most of the participants in mind happened to be in Asia he wittily suggested “Eastern Union”
Let’s use an example on how such a network could be implemented if we were to use Ripple. Assume that a Singapore operator has 2 existing agreement/trust relationships, one with a Taiwanese operator and another with an Indonesian operator. To facilitate remittances in the Singapore-Indonesia corridor the Indonesian operator, handling the cash-out of the remittance, would setup a Ripple gateway issuing USD denominated IOUs which the Singaporean partner is willing to accept on fiat deposits into the gateway. For each Remittances originating in Singapore the equivalent amount of IOUs are sent back to the Indonesian operator for disbursement to a beneficiary in Indonesia, effectively executing a partial redemption of its IOU holding
Assume Taiwan wants to get into the action to service Indonesian remitters working in Taiwan. All the operator needs to do is use its existing relationship with the Singapore operator without needing to connect directly with the Indonesian remittance operator. In this scenario, the Taiwanese operator will hold Singaporean Gateway issued IOUs and remittances originating in Taiwan destined to Indonesian, would “ripple” through the Singaporean operator gateway to the Indonesian gateway and finally to the recipient via the Indonesia operator
This flexibility would allow for participants to have access to multiple corridors without having to arrange for individual agreements for each remittance target operator.
Alternatives to Ripple
Ripple is one of several competing permissioned ledgers, on future posts will contrast other permissonless system and evaluate what tradeoffs they present