Ripple monetary system -- trust based, social network mediated lending system

By Howard Rheingold, published at 10 May 2007 - 8:12pm, last updated 10 years 40 weeks ago.

Browsing the cooperation tag on del.icio.us often yields juicy goodies like Ripple, a sharing economy service enabled by online technologies of cooperation. Here is an excerpt from the Wikipedia entry for Ripple monetary system

Ripple is an open-source software project for developing a peer-to-peer. distributed social network service. with a monetary honor system. based on trust that already exists between people in real-world social networks.

National monetary systems rely on trust in large financial institutions as banks. Ripple cuts the banks right out of the picture by allowing anyone to act as a bank and grant credit within the Ripple system to anyone they know. The system keeps track of the source of all IOUs. (I owe you's), so that debts that are not repaid are automatically borne by the issuer.

Each participant indicates which other participants he or she trusts, by offering to accept their IOUs up to a certain amount, like a line of credit. To make a payment to someone who trusts you, you simply adjust your IOU balance with them to indicate that that you owe them the amount of the payment. So the whole system acts as a distributed mutual bank.

To pay someone who doesn't trust you, the Ripple system finds a chain of credit connections between you and the payment recipient. Then you pay the first person in the chain, who pays the second person, and so on until the recipient gets paid.