Topic: Why Ripple has failed. - page 4. (Read 10936 times)

Ok, found some old numbers here: (DIF Balance Sheet - Fourth Quarter 2008)

http://www.fdic.gov/about/strategic/corporate/cfo_report_4qtr_08/balance.html

It seems the biggest number is "Investment in U.S. Treasury obligations". Yeah, that is really smart.

Someone should check the FDIC assets. Browsed their site, but could not be bothered to find the real  answer. A 2% number was mentioned. I wonder, are some of the assets bank deposits?

So in the end again you don't trust your bank, but the FDIC (in the US for example) that they have always enough funds available at all times to guarantee you at least 250000$ in your account. I'm using absolutes here, because any even tiny doubt would reduce the worth of the IOU from face value to below it.

Any kind of more beneficial terms (e.g. higher interest) then makes the IOUs more attractive - but that just means you are willing to take on more risk for a potentially more rewarding IOU. This just offsets the loss in value because of less trust to bring it up to face value because of more rewards. Why shouldn't this be possible in Ripple too?

In most countries, retail deposits below a certain threshold are guaranteed by the central bank.
So the lack of trust would lead to people with total cash above that limit to spread the money around between different banks to always stay below the limit at each one.
Given the availability of these guaranteed accounts, people would only use less safe ones if they offered large incentives, such as much higher interest rates. That is the way they offer you more than 1 USD balance for 99c depositied.

Well, how much do you rate USD at your bank account? If it is face value, that means you believe that your bank can NEVER EVER fail, go down or be bankrupt. If it is less, how do you convince your bank to give you 1 USD balance on every 99 cents deposited (for example)?

I didn't think about counterfeiting, only the solidity of the issuer and endorser. It their solidity can be questioned, the IOU will be worth less, because there is some risk of getting nothing.

You still have a direct relationship between your borrower (= your gateway) and the lender (= you). You have an account there, hopefully did due diligence in checking if they are actually paying out if you send them IOUs, checking if they are useful in your jurisdiction or your preferred currencies etc.

I am not sure about your terminology, with "borrower" I mean someone getting/holding an asset (e.g. a gold bar), and a "lender" is someone holding an IOU (e.g. a note saying "hand this note back at ... to receive 1 gold bar") for that asset that (s)he previously might have owned, but gave away to the borrower for later redemption.

Then why does the price of BTC change that much if not that much happens in the BTC-ecosystem? Why do bubbles happen if everything is valued upon usefulness alone?

I have terms only with my personal gateway and will only accept/receive IOUs denominated by them. Kinda like the bank that I have my account at. Even if someone from a bank whose name I can't even spell and whose currency I haven't even ever heard of sends me money, I will end up with some balance on my bank account, denominated in EUR, which means my bank now owes me a few EUR more.

I don't know your bank, I don't care about your bank and I certainly don't care about having any contracts with them. Still its IOUs might be worth something to some people. As long as you hand them to someone else at the same bank, they would likely value them at the same value as you do. You do nothing else when handing them to a liquidity provider, which is just a person who has 2 bank accounts - one at your bank, one at mine. He takes your balance and hands you a balance that I accept. That might be done for free or at a fee. Still there is nothing radically new or different about this, it has worked also for millennia like this when travelling to other countries that have different currencies for example.

As long as you are lending out e.g. BTC to only one borrower (e.g. Bitstamp) and trading only there, why would you care about anyone else? As soon as you need to pay in different IOUs (e.g. in CNY.RippleCN), you need to trade on the open market and that's where people come into play who take the risk or work of trusting more than 1 entity and can get a fee for that service. Still I could care less if someone only accepts 100% fraudulent BTC (e.g. by TradeFortress), as long as there is a way to trade mine for these, it will be found and the cheapest one will be used by me. I never get exposed to anything and the only person(s) that might get burned are the liquidity provider(s) inbetween that willingly trusted TradeFortress and the person that accepted them in the first place.


I am still unsure what your actual criticism is - maybe it would help if you scetch a small network with 2-3 gateways, users, liquidity providers etc. and point out where what according to your theory goes wrong. As it seems somehow you think gateways might be able to run fractional reserve: At least in the EU issuing e-money is a VERY regulated business and you are definitely NOT allowed to run fractional reserve at any point of time.

No, the contract says: "I, [gateway_name] give anyone who hands me this note [amount] of [currency]"

On Ripple itself you only state "I [user_name] accept up to [amount] of notes in [currency] from [gateway_name]"

This is all you will end up with as a balance and the only IOUs you are concerned with, are the gateways you are trusting. I don't see how a liquidity provider (who is simply someone who is a customer at 2 gateways) would "break" anything in there.

Again, please provide a small sample network that clearly demonstrates your point of failure, as I fail to see it honestly.

This "limited number" is about 80% or even more of all Ripple nodes. This number is already RIGHT NOW higher than the number of servers you need to take over to severely mess with Bitcoin (which is about 2-3 pool servers). Also the NSA does not police the world - they would need to break into a lot of servers at the same time to pull this off. It would be easy for example to put only a handful of servers from the US into your UNL and mostly trust servers stationed in other jurisdictions. Also collusion is quite visible on the network too, if only a subset of servers always insists that foo_suspicious_transaction is included... You could for example have some "staging" area where you put NodeIDs of untrusted servers and watch them for signs of collusion if you want to download a huge list of random nodes from the net.

I agree that choosing a proper UNL is difficult, however this is far from impossible and if for example Bitstamp signs their NodeID with their issuing address, this is a VERY strong sign that this message is actually coming from them. Choosing a random subset of all known NodeIDs is of course not the smartest thing to do as you said, clustering them according to certain criteria and choosing some representative NodeIDs from these clusters however might already improve security a lot. Also bringing online a huge amount of nodes all at the same time might work once (when the source code gets released) - after that it would already raise a lot of suspicion too.

That is very much the idea with Ripple. It decentralizes exchange so that IOUs can be traded freely. Contrast with conventional exchanges who maintain total control of their IOUs (remember when MtGox removed their function for USD codes?) and nobody knows how many they've issued (on ripple this is public information. bitstamp's current gateway capitalization is $263,911 USD and 2,560 BTC).

The point about paper-checks not working when passed around through complete strangers is because you cannot trust a stranger not to counterfeit and double-spend a paper check. Issuing and trading IOUs are cryptographically signed transactions on the ripple ledger, so double-spending and counterfeiting IOUs is prevented just as it is with bitcoins on the blockchain.

There is a real life version of this in the bearers cheque or Wechsel (german) or "Bill of exchange", where the wechsel can go from hand to hand, and the intermediate holders endorse the debt. If there are many names on the back of the wechsel and you know all of them (or some of them) to be solid merchants, or there is a bank guaranteeing it, it is just as good as money. The value is the principal less the interest until the maturity, less a little expenses and less the fact that the receiver always prefers money directly.

The point is that you know at least some of the intermediate holders, it would not work with complete strangers.

There is still a systemic risk, for instance if all the merchants trade at different levels of completion of the same end product, they can all go titsup at the same time. In such a scenario, the IOU's will be worth less and the money worth more.

I don't know if ripple can mimic this, but of so, I think it will be useful.

It's that your point is invalid.  I didn't say it wasn't possible, I said why would they do it?  More importantly, why would you do business with them?  You're trying to suggest that every gateway must operate in some fractional way.  That's just not the truth.  You can continue to create your worst case scenarios and live by them, you're certainly entitled but that doesn't make them the norm as it relates to Ripple.

I haven't witnessed many criticisms of Ripple's reliance on trust, yet to me this is one of its major weaknesses. It is meant as a way to fend of Sybil attacks; but bitcoin achieves this through proof-of-work; which requires absolutely no knowledge of the nodes, so how is not the bitcoin way an advantage over Ripple's solution?

If you believe in the IOU system... then you could potentially fork Ripple to remove their weak system of consensus and replace it with a mining-based system of transactions, while keeping the IOU aspect. If the IOU system is a problem, then I don't see anything good in Ripple.

You're missing the point, but to answer your irrelevant question for giggles;

What are you talking about?  "Photocopy the contract?"     Why would an IOU issuer create 8 different $1 IOU's to represent an actual $1 asset?

*sigh*

*SIGH*

Yep. If someone photocopies a contract 8 times, distributes it among 8 people, and they all sign it, those 8 people could trade those contracts around and just replace the signature with their own.

SIGH!

If "Market Maker" = "Liquidity Provider", then no. It's not going to happen.

Should not have bothered...

There is a kind of grandeur that creeps into their naiveté. It's like the Voynich Manuscript; everything is so nonsensical that one starts to imagine that it must contain some novel insight that the reader is just missing.

Also like with the Voynich Manuscript, if such an insight does exists, no one can find or understand it.

One major drawback of Ripple is that it relies on clients to maintain lists of nodes that are trusted not to collude. Bitcoin is not reliant on this assumption that nodes are not colluding. I could see a scenario where the NSA forces some of the most commonly used nodes to collude in order to comply with the law; even if users would suspect such nodes to have nothing to do with one another. In bitcoin, the NSA would have to take over the mining power. In Ripple, the NSA would just have to force a limited number of nodes to comply, since in order to ensure non-collusion between nodes, the client must choose from well-known nodes. If a client was to simply choose from a random set of nodes, there is no assurance of non-collusion. Ripple claims that this does not require trust, because we only need to be sure that nodes are not colluding, but it basically amounts to a dependence on a set of trusted nodes, because untrusted nodes cannot possibly be trusted to not collude. ie. Where are you getting your list of trusted nodes from?.... it has to be a trusted source. If you take your list of nodes from a public pool of nodes, then there is the potential for someone to contaminate this pool with a large number of colluding nodes.

I don't know why you're talking about loans.  Nobody is talking about loans.  Legitimate IOU's are backed by actual assets.  It doesn't matter who holds the IOU, as long as the actual asset exists and you can trust the IOU provider to redeem the IOU for that asset.  It's really not that difficult to understand.  If I trust Bitstamp, you trust bitstamp and 8 other people trust bitstamp we can pass a $1 USD IOU from me, to you and all other 8 people with no issue because the actual asset that backs that $1 actually exists at Bitstamp.  The last holder in this scenario can redeem the IOU at Bitstamp, the same as the first and anyone in between.  Each person creating a new IOU before they pass it?  I don't even know where you got that from.  You're making this significantly harder than it needs to be.


Says who?  Some gateways will only be gateways and some will actually be market makers as well.  This is where you can determine who is best for you to do business with.  

You and graceza have made this objection after I've rebutted it as a Red Herring, and I'm not sure how I can be any more clear about it.
http://en.wikipedia.org/wiki/Red_herring

Imagine that the IOU was a written contract that is literally passed down line of people.

The contract says, "I [name] owe [name] [principle amount]".

I'm saying, "That's not enough information to make any kind of rational loan."

You say, "But wait a minute, each person in the line creates a new IOU and passes that onto the next one, the first person in the line doesn't make a contract with the last person in the line."

I say,"That's a red herring, that doesn't have anything to do with my objection. The asset holder here at the end of the line can't make a rational decision about the loan based on, 'I [name] owe [name] [principle amount]'. It doesn't help that he knows and trust the person next to him, because even he doesn't know the objective, length of the loan, collateral, or credit rating of the actual borrower."

You say, "No it isn't."

I say, "Yes it is."

What else can I say?

Edit:
Then you really go into the woods. You bring in an outside party from the line (A Gateway), and say, "Look, the last person in this line can lend to this guy (the Gateway), and there isn't any trust problem."

Of course there isn't. I didn't say there was.

The contract between a Ripple Gateway and the user can be as nuanced as the Gateway and lender like because the Gateway is not a Liquidity Provider.

Wow!  Stunning rebuttal.    Seeing that you continue to fail to recognize that you can't be forced to accept someone else's IOU's that you don't trust, I'd venture to say that it's your argument that is flawed, not Ripple.  If you trust some guy on the street corner with a sign that says, "bank here" and you give him your money, you deserve to lose it.  That's not a flaw of the banks, that's your flaw.  But who does that?  We use real, trusted banks for that.  If you send your BTC to some random, no name exchange claiming to be safe and secure to trade your BTC, you deserve to lose your BTC.  We use trusted exchanges for that.  Same is true in Ripple.  If you're going to accept IOU's from some untrustworthy joe smoe, you deserve to lose your money.  We use trusted gateways for that.  And since in both examples, the bank and the exchange both operate in IOU's, the attempt to paint Ripple any differently is ridiculous at best.  

This clown have been spamming every Ripple forum for months with 100s of posts.

OpenCoin indoctrinates Ripple Zombies like this creature... and spams the world with FUD.

A common example of an IOU worth something higher than the principle is a CD or Bond.

The difference is that for millennia the lender and borrower had a direct relationship and the lender could make an accurate determination of the risks he takes on when he lends by getting as much information as he can from the borrower. He can also determine the interest that would make it worth the trouble.
In ripple, this relationship is severed, making accurate determination impossible, rather than difficult.

Two consequences of this jump out at me;
1.) Trust lines will be determined by how much the lender is willing to lose, no questions asked, without notification, and without remuneration.
2.) People can and will abuse this system, and all of the most trusting/gullible will suffer the most from it.

As a direct result of this, trust lines -if they exist at all- will a combination of extraordinarily short and in tiny amounts.

Everything is valued based upon it's usefulness, not its "inherent value". When Austrian Economists talk about intrinsic value, they are only referring to the intrinsic properties of the item in question that has value, subjectively, to certain people.

No, but a different phrasing of my argument would be;
IOU's cannot retain value as they are passed along a Ripple Web of Trust because the terms of the loan, which determines the value of the loan, is vaporized by the first Liquidity Provider.

That doesn't work because the mechanism by which lenders can make these determinations in the market do not exist in Ripple over Liquidity Providers.