Why Ripple Isn’t a Scam: Debunking RippleScam.org

In many ways, the bitcoin community is one of the most forward-looking communities in the world. But when it comes to ripple (XRP), bitcoiners hastily jump to conclusions and gloss over facts. In some ways, that’s fine, as I’ll continue to build up a position in XRP. But I also want to make sure I’m not deluding myself into believing in a scam. That’s where this report comes in. I’m going to take an in-depth look at the arguments levied against ripple and rebut them all.

The following arguments against ripple are drawn from Ripplescam.org and Coindesk comments.

Ripple scam argument No. 1: Ripple is centralized

Ripple is two things: 1) A currency called XRP; and 2) An open-source protocol. No one “owns” or “centralizes” protocols. No one owns HTML, for instance. Ripplescam.org claims there are only five ripple servers operating and includes an ominous-looking image that gives the impression that Ripple Labs controls those five servers:

In fact, ripple’s server code is open-source (see below for more). Feel free to set up a ripple server in your bedroom if you’d like (check out their directions on setting up a ripple server). A big difference from bitcoin that is worth noting: running a ripple server does not generate income. There is no mining process with ripple, so it’s a lot less attractive for hobbyists to set up ripple servers. It can be done, though, and ripple start-ups routinely set up their own ripple servers to get secure access to the network and for testing purposes.

I must admit, there is one aspect of this argument against ripple that’s true for the moment: Ripple Labs currently controls the servers/validators that get used by the network. This is temporary until all major features of the network are developed. Per Ripple Labs’ Stephan Thomas writing on Sept. 26, 2013 on BitcoinTalk:

Running the core group of validators lets us close security holes much more quickly, which is very important at least until major feature development is completed. The last of these major features left is contracts.

So to recap, the general plan is to focus on contracts next and once their API is reasonably stable focus on building out the tools and testing needed to move to a fully distributed network topology.

That said, we do encourage interested parties to start running validators immediately – this is your chance to build a history and reputation as a reliable validator so people will later be more likely to add you to their UNLs.

Ripplescam scam argument No. 2: Ripples (XRP) are “artificially-printed tokens”

“Artificially-printed tokens” is a propagandist phrase that could just as easily describe bitcoin. Ripple (XRP) is a digital currency that’s secure, open-source and can’t be double-spent. There is no requirement that says an alternative currency requires mining.

Ripple does operate on an IOU system for non-XRP currencies. This is similar to how banks operate today with dollar-based transactions (more below).

Ripplescam scam argument No. 3: Ripple hasn’t released its source code

I’m not sure when Ripplescam.org launched, but ripple’s client source code has been public for six months, and it’s server code went public in September of 2013.

Ripplescam scam argument No. 4: Ripple’s consensus system ensures there is only one ledger

Having one ledger is fundamental to ripple – just as it’s fundamental to every other digital currency. It would be a disaster to have several different bitcoin blockchains on the loose. Likewise, ripple needs a network that agrees on a single ledger. In it’s ultimate incarnation, this doesn’t mean the network is controlled by a centralized force. It’ll be controlled by a network of validators that have built up trust based on past validations.

Ripple Labs does maintain a list of preferred validators, but this can be overridden by ripple clients. You can choose whichever nodes you’d like to validate your transactions. As stated on the ripple wiki:

In real world terms, people should select a UNL (Unique Node List or Validator) list of 1,000 validators. They should choose 200 validators from 5 different continents. They should choose a mix of validators with different interests: merchants, financial firms, non-profits, political parties, religious groups, etc… By choosing a large number of reputable parties who are unlikely to lie or be coerced as a group and that are unlikely to collude to defraud us we can be assured the ledger is accurate.

In practice, most people will use the default UNL supplied by their client. But, the software will enable them to choose specific validators if they’d like.

Ripplescam scam argument No. 5: Bitcoin on ripple is not real

I believe this argument stems from the verbiage ripple uses to illustrate how currency trading works on the platform. Ripple allows currency swapping via “IOUs.” The same concept is used every day by every bank in the country. For example, your employer might deposit your paycheck in your account on a Friday afternoon. Since your bank trusts that deposit, you’re able to spend that money right away even though the payment hasn’t necessarily went through an ACH clearinghouse. The bank is lending you money (or, conversely, you’re issuing the bank an IOU when you spend that uncleared money).

Ripple works in the same way. If I buy bitcoin with my ripple, I execute the trade through a market maker like Bitstamp and receive a bitcoin IOU. This is just as good as a bitcoin within the ripple network. I can cash it out as bitcoin, or I can spent the bitcoin IOU within the network.

The IOU system is part of the brilliance behind the ripple network. It’s what allows nearly instantaneous transactions no matter what the currency you’re trading in. If you don’t like the IOU system, you don’t like the core concept behind ripple, and you may as well go back to the days of centralized ACH clearinghouses, which could take up to 14 days for your payments to clear.

Of course, there is some counterparty risk in this model, just as there is counterparty risk when you put your money in your local bank. Your currency is only as secure as your ripple gateway, and I believe that within a few years your bank will be a ripple gateway whether you want it to or not.

Ripplescam scam argument No. 6: When you add trust, you’re automatically a “liquidity provider” and you trade ripple automatically

According to RippleScam.org, “If you trust multiple ‘gateways,’ the Ripple client treats both gateways as equal. … You automatically become a ‘liquidity provider,’ which means that you will automatically trade tokens of one type for another, 1:1, with no fee. You take on significant risk for no gain.”

First of all, there is server-side support for users to set preferences for specific gateways within ripple. Although it hasn’t been implemented yet in the client, it is on the horizon. Secondly, by valuing all gateways equally, the ripple network becomes far more efficient. Trust lines for specific gateways can get swapped between users to facilitate transactions. I view it as a net positive.

For the system to work, users will need to trust one or more gateways. This is similar to today’s banking system. Most of us trust personal checks that we receive without even looking at the issuing bank. We could care less if it came from Chase, PNC or Bank of America. Over time, ripple gateways should build up that same sort of rock-solid trust. Ultimately, I’d love to see ripple gateways get FDIC insurance just like other banks to protect consumers against gateway defaults.

Ripplescam scam argument No. 7: Ripple includes fees that can be levied on your money

Gateways (and anyone holding currency on the network) can impose transit fees in exchange for usage of their IOUs. This is one of the benefits of operating a gateway. It’s similar to the fees users pay for bitcoin transactions (a nominal amount that will increase over time as mining rewards decrease).

Ripplescam scam argument No. 8: Ripple pre-mined its coins

Ripple is a math-based currency – not a cryptocurrency. You can’t say the coin was “pre-mined” if it was never intended to be mined. It’s a digital currency with a completely different model than bitcoin.

Ripplescam scam argument No. 9: Ripple Labs functions like the Federal Reserve

At the moment, I would agree that Ripple Labs does function like a miniature Federal Reserve for ripple. It’s releasing its currency (XRP) in a steady and controlled manner to prevent bubbles and price collapses. As the marketplace for ripple deepens and matures, Ripple Labs will control an ever-decreasing percentage of XRP until their influence is entirely replaced by market forces.

It’s unfortunate that there isn’t a predefined schedule for the release of ripple, but Ripple Labs is actively releasing ripple in support of non-profits and scientific research as promised.

Ripplescam scam argument No. 10: Ripple is the “corporate/bank/government” version of a revolution in currency

The bitcoin community lauds the coin as revolutionary – as something that governments, banks and politicians can’t control. Then, at the same time, the community wants everyone in the world to use bitcoin. Unfortunately, you can’t have an international currency that doesn’t involve bankers, politicians and governments. Bitcoin will be regulated if it’s going to enjoy widespread usage. So will every other aspiring altcoin including ripple. The notion that bitcoin is “untraceable” and “beyond the control of governments” seems laughable to me. If you really want bitcoin to succeed, you want the government to support and regulate bitcoin. It’s not going to be widely used if the government decides to attack it. The same’s true of ripple. Corporate-backing doesn’t change ripple’s usefulness, and I’d argue it’s going to help the network grow a lot faster than it would otherwise.

Where do we go from here?

It’s going to be a long and protracted fight, and I’m betting on ripple and bitcoin. They make each other stronger, and I believe the world will realize that over time.