Sunday, April 09, 2006

Ripple: An Online community currency system

I've been interested in community currency systems for awhile, and was pleased to discover Ripple-pay while reading the Mutualist Blog. For more info, check out "about ripple-pay", the "Ripplepay FAQ", and the Ripple Project sourceforge homepage.

I'll cover two issues in this post: first, why Ripple is better than other community currency systems that I've heard of, and second: why we should bother developing community currency systems.

Ripple is special because anyone can get into the system just by opening an account with the website/server. However, you can't do anything until you get someone to extend a line of credit to you (either a merchant or a friend) or you agree to accept someone else's IOU in exchange for services. This feature is dependent upon the main innovation of Ripple: there is no centralized organizer for the system -- it is based on one-on-one relationships between users, and the community dynamics develop from the network created by pairs of users. Consequently, each individual can understand the system and his own role in it.

However, this still allows particular users (accounts) to serve as connector nodes-- for example, a merchant may be willing to accept IOUs from many of his customers (so he can move his wares quickly), and likewise many of his customers may be willing to accept IOUs from the merchant because they know that they can exchange those IOUs for the goods that he sells. Another type of connector would be a credit-rating agent-- a trusted intermediate-- who makes a living from judging whether individuals are creditworthy and then exchanging his own, (widely-accepted) IOUs for their IOUs.

Why bother with community currencies? I believe that people should have control over their own lives, and that means that they should have control over the material items and social institutions that are necessary for their survival. Most of us need money to put a roof over our heads and food in our bellies, so it bothers me that our money system is controlled by distant, effectively anonymous bankers in NYC and politicians in Washington who are hardly accountable to regular Americans. In America and around the world, these elite-run monetary systems have repeatedly failed and driven millions of regular people to desperation. The most recent example in the USA was during the Great Depression, but these currency crises still happen on a regular basis around the world, and I doubt the politicians when they claim that the USA has developed the magical system that will never fail.

I prefer to have a system that lets me know where my dependencies lay, and gives me control over maintaining them, and rebuilding them in the case that there is a systemic breakdown. That's why I support the development of community currency systems.

Addendum: To paraphrase Douglas Adams : "If a system is labeled as 'unbreakable', you can be sure that there will be no way to fix it when it breaks".

Additions: Some similar credit systems from the article "The virtual moneylender" . However, these are profit oriented.


Robot Economist said...

This may be my inner hedge-fund manager speaking, but this idea of RipplePay sounds a lot like a debt securities market to me.

Looks like it just inolves debt swaps for now, but I am interested to see how long it takes the concept to grow futures and options markets.

Ricketson said...

That's probably true.

The innovation here is that the "debt securities market" has beeen designed for use by us commoners, rather than financial big-shots, thereby empowering us commoners.

Also, by taking it down to the level of a regular person, it can be linked to day-to-day commerce. It can take advantage of natural social/economic networks, rather than relying on networks that are formed specifically for this sort of interaction.

It may be handy if "personal debt security market" could develop out of the existing financier's debt security market, rather than developing it as an independent system.