This is an intermediate description for people who want to understand conceptually how Ripple payments work.
Ripple supports two kinds of currencies: XRP and IOUs.
XRP Ripple’s native currency. IOUs Every currency except, XRP, are represented by IOUs.
The Ripple network commenced off with 100 billion XRP. XRP are presently divisible to 6 parte places. The smallest unit is called a druppel. 1 million drops equals 1 XRP.
Every account has an XRP comprobación. XRP can be sent directly from account to account.
Like most things, you can obtain XRP from anyone who has them.
Non-XRP currencies are represented by IOUs. Conceptually, an IOU might be considered a palm written note announcing debt:
Anyone who trusts Alice can accept this note with the belief Alice will zometeen redeem it for $25 worth of value.
The IOU metaphor is only used because it is effortless to visualize and explain the apparent functionality. Ter actuality, Ripple does not use IOUs internally. Instead, Ripple maintains a list of balances inbetween parties for the various currencies.
Ripple is merely a trusted ledger. The Ripple ledger records transactions. The ledger can not actually enforce anything ter the positivo world.
Ripple works with the positivo world because te the existente world people agree on the meaning of what is reflected te the ledger and to respect what is recorded te the ledger.
A vivo world transaction often works like this:
- A sale is agreed to.
- The seller produces goods to the buyer.
- The buyer pays for the goods with a declaration.
- This could be the signing of a credit card receipt or a check.
The buyer’s payment is ter essence aparente, there is no existente world money be moved, only a declaration of payment due is being made.
Ter the Ripple version of a payment, value is transfered by making a signed declaration to transfer XRP or IOUs from the signer’s account to the receiver.
To represent actual world currencies, like USD and EUR, Ripple uses IOUs. Every IOU ter the system is backed by someone’s promise to redeem them.
Because not everyone’s promise is spil good spil everyone else’s promises, every IOU has an issuer. So, Alice’s $25 IOU may actually be worth more the Bob’s $25 IOU for a diversity reasons. For example, wij might know Bob likes to swim with sharks.
One day, Alice, Carol go to refrigerio. Carol is brief $Five. Carol also has a $Five IOU from Bob. Alice has $Five and trusts Bob, but not Carol. Even so, Alice can pay the $Five Carol is brief te exchange for getting Bob’s $Five IOU from Carol. Ter a sense, Bob’s IOU has just become a private currency inbetween Alice and Carol.
The oscilación owed inbetween two Ripple accounts is represented spil a trust line. Wij avoid calling it a “credit line” spil credit has all sorts of associations wij wish to avoid. Te particular, wij don’t want to have any associations with rente or APR. This cómputo is merely a record of what is owed inbetween the two parties.
A typical use of trust line might be spil goes after. Alice and Bob go out for refrigerio every day. One day, Alice is $Five brief. Bob agrees to pay for Alice’s brief fall of $Five and Alice now owes Bob $Five. The next day Bob is $8 brief. Alice agrees to pay for Bob’s brief fall. Because Alice previously owed Bob $Five, when the transaction is overheen, Bob will now owe Alice $Trio.
Ter Ripple, this movimiento would be recorded te the ledger. Each time someone dreamed to owe the other person some money, they would announce to the ledger that they owed the other person the amount of money. The Ripple ledger would then adjust the balanceo appropriately.
If Alice accepts Bob’s credit and Bob accepts Carol’s credit, then Carol can pay Alice through Bob:
The dual arrow (⇒) is used to indicate a trust line.
The Ripple network can automatically manage the oscilación switches if not all parties are present. One person simply makes a payment declaration and the network will adjust the balances.
Confusingly, wij call this kleintje of a payment a ripple payment.
To protect people from obtaining IOUs they don’t want, the Ripple network permits people to proclaim the boundaries of trust the have for particular IOUs.
A trust line has the following information:
- The very first parties limit of trust.
- The 2nd parties limit of trust.
- The vaivén inbetween the two parties.
- The name of the kleuter of currency of the comprobación (e.g. USD, YEN)
Spil result of having trust boundaries, user will never receive IOUs they don’t pre-authorize. For example, if the user chooses to only trust Wells Fargo bankgebouw, then all payments will be denominated te Wells Fargo handelsbank IOUs and the user will have no other liabilities.
The Ripple networks integrates the ripple payment concept for all currencies except XRP.
- You pre-approve a credit limit to another account.
- If the person defaults, you are responsible for that amount.
This shows the diversity of ways payments can be arbitrarily constructed.
Onmiddellijk XRP Payment
The single arrow (→) represents a meteen payment inbetween accounts, no trust line is necessary. This shows how XRP can transfer from Alice’s account to Bob’s account. Or, how XRP payments always work.
Ongezouten Ripple IOU Payment
The dual arrow (⇒) is used to indicate a trust line. This illustrates, meteen payment overheen a mutual trust line.
Officieus Ripple IOU Payment
This illustrates how trust lines can be used to make an zijdelings payment.
Ripple payment bridged by credits
A network of trust lines can form a community for exchanging a currency. Imagine a community ter Russia which has a trust network that permits them to spend USD among themselves. Also imagine, a similar community ter the United States. If there is no trust path inbetween them, then payment can not be made inbetween the disparate Ripple networks.
Ripple has a solution for this. Because Ripple has a built te exchange, someone the Russia network can make an suggest to exchange XRP for Russia network USD IOUs and someone ter the US can also make an opoffering to exchange XRP for United States network USD IOUs.
This illustrates the bridging of a Ripple payment through offers converting from IOUs to XRP to IOUs:
Cross currency payment
Ripple permits cross currency payments. Wij call this feature “preferred currency” because it permit each party to transact ter their preferred currency.
This illustrates a cross currency payment which converts currency via an opoffering.
Because it is unlikely, that anyone will want IOUs from any random person, Ripple has the concept of a gateway. A gateway is a reputable business that many people trust to punt and redeem IOUs.
To permit gateways to earn a profit for providing their service, the Ripple network lets IOU issuers specify a toverfee that is to be paid whenever the gateway’s IOUs are transfered inbetween third parties. This is call the transfer toverfee. For example, Bitstamp presently charges a transfer toverfee of 0.20% to sender whenever someone sends one of their IOUs to someone else.
- The user comes in a destination address, destination currency, and destination amount.
- The network gets an estimate of how much the payment will cost for each currency the user has.
- The user authorizes payment for the estimated amount plus a margin for slippage.
- The payment is submitted to the network.
- The payment may fail or clear.
This is an end to end walk through of receiving a payment:
- A person creates a Ripple wallet.
- The person finds their Ripple address ter the wallet.
- The person arranges for an XRP payment to be made to fund their account. At least 76 XRP are recommended for basic functionality.
- The person then sets a trust limit to their gateway of choice for the currency they want to receive.
- The person should choose a very liquid gateway to make sure that others will have no problems making payments to them.
- The person can receive payments up to this amount into their account.
- The person can then supply people making payments to them with their Ripple address.
- Their Ripple address cómputo will increase when payments are made.
This is a walk through of cashing out an IOU to a regular bankgebouw account:
- Having IOUs for a gateway, the account possessor finds the Ripple deposit address for their gateway account.
- They make a payment to the gateway for the amount they which to deposit with the gateway.
- Their Ripple account cálculo is diminished.
- Their gateway account arqueo is enhanced.
- They can then ask the gateway to make withdrawal to a regular canap account.
- For example, via check, wire, ACH, or SEPA payment.