ripple-is-not-a-scam

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:

ripplescam-myth

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.

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15 comments

  1. PirateButtercup

    It’s good that you took the time to write this all out.

    It may be too late, but I’ld recommend changing your article’s title from “…Rebutting Ripplescam.org” to “…Debunking Ripplescam.org”. The first seems argumentative and thereby lends credibility to TradeFortress’s assertions. Using ‘Debunking’ connotes that you completely undermined his claims and proved demonstrate them to be falsehoods.

    Cheers!

  2. Christian G. Warden

    Regarding number 6, you neither need to act as a liquidity provider nor do you need to trust the IOUs issued by different gateways as equivalent.

    The ripple-client already supports the Allow Rippling option when setting up trust lines to prevent your assets from switching from one issuer to another.

    You can set the discount rate for the IOUs of different issuers through trust line quality, just like bank notes from different issuers used to trade at different discounts, but it’s not supported in ripple-client yet.

  3. Michael

    “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”

    One of the servers in the picture is “s1.bitstamp.net”. Also the text in the picture gives examples of the third parties operating servers, “eg: Ripple, Paypal, Amazon”.

    To me, the fact that you need permission from a server at all, to send or receive a payment, is enough by itself to choose bitcoin over Ripple.

  4. Maurits

    Since the Ripple system isn’t here yet in it’s most complete form I find it unfair to compare the future Ripple with the current state of Bitcoin.
    Some benefits given of Ripple over Bitcoin is the fast, instantanious transactions and being able to exchange almost anything for XRP.
    However I think it should be fair to include the fact that decentralized exchanges are currently being built for Bitcoin, Buttercoin exchange even allows for 15.000 trades / second.

    Anyway altough there seem to be some benefits over what Ripple offers over what Bitcoin currently can offer you, I still want to express the following:
    Bitcoin solved the following / has the following characteristics:
    – THRUSTLESS system
    – no counterparty risk
    – decentralized
    Ripple re-introduces the risks and liabilities systems have which require thrust, which have counterparty risk and which is not decentralized.

    • Fred Marion
      Fred Marion
      Author

      Thanks for the great comments. My thoughts:

      – Ripple does require trust. But so does your local branch of Bank of America. Yes, Bank of America is FDIC insured, but hopefully Ripple can land a major bank as a gateway this year (like a BOA, Chase or Wells Fargo). I think that’ll alleviate a lot of the trust issues people have with Ripple.
      – Ripple is free of counterparty risk if you’re just using XRP (ripple’s native currency) for transactions. IOUs for other currencies do involve counterparty risk. There’s simply no way around it.
      – Ripple has open-sourced its code, which means anyone can run ripple servers. There are several start-ups doing that, so decentralization is here/arriving as we speak. That said, it’s no where near as robust as bitcoin’s decentralization. I don’t think it ever will be unless ripple transaction fees (and/or the value of XRP) go up.

      • Ron E.

        So I just recently started looking into Ripple, I’ve been a BTC / LTC user for some time, kept hearing Ripple, knew it was a currency and finally decided to start looking into it. I have to say, the minute I see a pre-mine it’s game over for me for that coin. Regardless of if mining takes a central roll or not, XRP is required to use the network. Since Ripple Labs and it’s investors currently own 20% of the XRP that will ever exist, this fact is a huge turn off for many, including myself. On your first point, the entire reason behind the existence of a crypto is so that there is no counterparty risk, so Ripple has achieved nothing more than creating a fancy interface to an exchange. It can still be shut down or stopped by any gov (if you need proof of this, see Turkey shutting down social networks), therefore Ripple’s non-decentralized (yet, distributed) nature is it’s weakness.

        • Fred Marion
          Fred Marion
          Author

          Thanks for the thought-out response. My main reply is that mining wastes an incredible (I’d even argue unconscionable) amount of resources. We feel guilty leaving our house lights on when we leave, yet we’re willing to set up a bitcoin miner that doubles our energy consumption every day? That’s not a victim-less act. Unless you live near hydroelectric dams, that action has devastating effects on our environment.

          Ripple is math-based, so mining is unnecessary. I like that.

          I also don’t think that the entire existence of a crypto is to eliminate counterparty risk. That may have been one of the motivations, but eliminating inflation and removing the ability for entities (i.e. governments) to manipulate a currency were probably stronger motivating factors. Ripple does both of those, too, with XRP.

          The other benefits are far more interesting to me, though: namely cheaper, faster, borderless transactions. Ripple’s a protocol, not a fancy interface. It enables users to trade anything of value instantly in whatever currency they’d like. I believe that’s revolutionary.

  5. tymat

    Seems like the author is getting paid by Ripple to shill their crappy product. The fact is the counter-party risk is a very strong motivating factor for moving into cryptocurrencies and he’s trying to downplay it because Ripple simply cannot overcome it. He also overlooks the fact that running ripple servers also require electricity to keep running. In order to scale Ripple transaction volume these servers would most likely have to be scaled horizontally and vertically as well.

    Ripple does not solve any of the real world problems it purports to solve. It does not remove any risks involved in the transfer of value and only moves the risk from one place to another.

    They are not borderless transactions either since the servers have to run at a data center which can be seized by an aggressive nation state that’s desperately trying to impose its capital controls.

    • crypter

      I would argue that the electricity used for Ripple servers makes sense because they’re not performing unnecessary hashes (like bitcoin servers). Ripple servers can also be set up by anyone. I think I’m going to do that so I can blog about it and dispel the myth about ripple not being open-source…

  6. Pingback: Breaking news: corporation finds productive use for altchain; world does not end | Preston Byrne

  7. Ozlanthos

    This may or may not have been covered on some sub-reddit or other message board, but as I have yet to have seen someone else say it, I am going to show why I think Ripple IS A SCAM!

    One of the best things about Bitcoin is that it is global in distribution and use. Unfortunately, at this time, there is relatively little of it out in the open market. As it’s distribution and creation is limited, any real changes, or challenges incurred in this space, have volatile effects on the price of Bitcoin. Now, people who have no idea about economics, have a real problem with that volatility. They don’t understand that such volatility is not only a reflection of what is going on in the cryptosphere, but also reflections of price-action inducing events in the FIAT currency realm as well!!! Let me put it to you in terms you can understand. While Bitcoin was rising at a steady deterministic rate of about 17%/per month (that really is it’s natural rate as compared to dollars while in a non QE-Infinity FRN era) no one noticed it. Then the disbursement of TARP funds started sputtering to an end (during which time Bitcoin had risen to around $40 per coin), and the FED’s policy of QE began hitting the banks. Suddenly Bitcoin began doing all kinds of parabolic action, always trending upward! Suddenly it broke $100, Then it broke $200! Then it broke $500? $1000!!!

    Now sure, some of that was in fact growing interest, and growth in participation, however the MAJORITY of it was due to the fact the Federal Reserve started engaging in QE-INFINITY, and was issuing an additional $85 BILLION ADDITIONAL FEDERAL RESERVE NOTES EVERY MONTH! YOU CANNOT DISBURSE THAT MUCH ADDITIONAL LIQUIDITY EVERY MONTH, AND NOT CAUSE THE VALUE OF THE FEDERAL RESERVE NOTE TO DECLINE! You can’t! You may think you can, but eventually the market is so glutted with frns that you can no longer give them away.

    Enter Ripple, and why I think it is a scam. If I were to have put my 5 Bitcoin on a Ripple node while it was valuated at $50 per Bitcoin, and did not withdraw it until 2 months later (after it spiked to $220), I wouldn’t get 5 Bitcoin back, I would get $250 worth of Bitcoin. See, Ripple doesn’t discriminate between currencies, it divests the currency unit (regardless of what it is) of it’s value, and returns to the user the amount or “value” invested at the time of deposit. I could have kept my Bitcoin in my wallet, and watched it increase in value to roughly $1100, but because I cared so much about securing my funds from VOLATILITY (that oddly enough has consistently trended HIGHER) I ended up losing MY BITCOIN to Ripple! Can you see why I think it’s a scam?

    -Oz

  8. Daniel

    The literacy and opinion based review from an unknown doesn’t instill any confidence in Ripple and I will not use it. Setting up a Ripple server is basically impossible due to approval criteria set internally. Use Ripple if you wish to switch/exchange between altcoins and cash but store a balance at your own risk.

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