Ripple: A pre-mine? Does it matter?

[misterbigg]

Note: The following analysis assumes that the Ripple system eventually becomes open sourced, gets decentralized, and that rigorous mathematical analysis proves that the system is robust and fulfills its technical promises.

From the Ripple wiki

XRP are the only currency in the Ripple network that has no counter-party risk and can be sent to any account without a trust relationship.

When the Ripple network was created, 100 billion XRP was created. The founders gave 80 billion XRP to the OpenCoin Inc. OpenCoin Inc. will develop the Ripple software, promote the Ripple payment system, give away XRP, and sell XRP.

Let's review some facts:

* XRP is a cryptocurrency implemented in the Ripple system
* Only 100 billion XRPs can ever exist
* XRP must be expended and destroyed to perform transactions
* An XRP balance is required to fund an account
* It is claimed that the purpose of XRP is to prevent spam

There has been a fair amount of discussion about methods of XRP distribution for preventing spam. For example, to automatically fill each newly created account with some nominal amount of XRP. It should be obvious why such a scheme cannot work to prevent spam; all a spammer need do is repeatedly create accounts to harvest any amount of XRP and produce transactions. As the representatives of OpenCoin have pointed out numerous times, distributing XRPs evenly is a difficult problem. It is safe to conclude that:

XRPs must be scarce to prevent transaction spam

XRPs have similar properties to Bitcoins:

* They are divisible to many decimal places
* They are easily transmitted electronically
* They are fungible and homogeneous

XRPs have advantages over Bitcoins

* They cost less to transmit electronically
* They have intrinsic value (they enable transactions)
* They are truly deflationary (they get destroyed when used as transaction fees)
* They operate on a network that can scale almost limitlessly

XRPs have all of the attributes that define a good currency

The Ripple network implements a self-issued credit system that leverages transitive trust relationships to enable the broad circulation of digital IOUs. These money substitutes require risk management on the part of every user, as they need to trust at least one other entity in order to participate. But the XRP currency that circulates in Ripple system is special compared to the gateway IOUs:

XRPs have no counter-party risk, and transmitting them doesn't require gateway fees

In a fashion similar to Bitcoin, XRPs are secured by the consensus algorithm and cryptographic properties of the system. There is one big difference between Bitcoins and XRPs:

XRPs are distributed by a central authority

From the Ripple wiki entry, the founders keep 20 billion XRP, while OpenCoin distributes a fraction of the remaining 80 billion for free to bootstrap the system (a task currently being carried out). Whatever OpenCoin does not distribute for free, it will then sell. How much of the 80 billion is needed to bootstrap the network? If they give away 1,000 XRP to one million early adopters, that only consumes 1 billion XRP. This means that 99 billion of all the XRP that will ever be created is in the control of the authors of the system.

XRPs will trade for real currencies in an open market

Given that XRPs have no counter-party risk, miniscule fees, and all of the other properties:

Users will prefer XRPs as part of a trade over any IOUs

From all these points:

XRPs are superior to Bitcoins as a crypto-currency.

When asked directly about these disturbing facts, OpenCoin representatives give us vague answers:

So, can we get a straight answer?
...

Unfortunately, no. I am prohibited from discussing that.

This analysis brings us to one very disturbing conclusion:

The founders of Ripple will control over 99% of the purchasing power of XRPs for hundreds if not thousands of years.

Despite the lack of any significant goods and services enabled by the fledgling Ripple network recently opened to the public, there is already a robust trade in XRPs for other currencies like Bitcoin, US dollars, and foreign currencies:



To preserve XRPs function as an spam prevention, OpenCoin foundation must maintain the scarcity of XRPs by limiting their supply. This is also what creates the market for XRPs and gives them value. It is not possible to have XRPs be both worthless and also useful for preventing spam.

Combine all these facts with the odd statements and the carefully managed customer-facing facade of OpenCoin representatives and we have all the volatile ingredients necessary for the Next Big Cryptocurrency Drama.

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[TraderTimm]

From the ripple project website https://ripple.com/working-with-ripple/ it states:

Beyond the basic payment uses, Ripple lets people go back to older forms of financial relationships — trust-based, reputation-driven, and conveniently local. But by providing an internet-based platform, Ripple lets these relationships extend across global distances in almost real time, and at almost no cost. What’s more, because Ripple is a distributed system connecting people to people, anyone can play a role.

I would call trust-based financial relationships a counterparty risk. I'm on the fence about its utility, but I don't think you can misrepresent the probability of an I.O.U. default.

[alexkravets]

OP's post is mostly about the privileged status of XRPs and their issuer relative to all the other IOUs inside the ripple system.
XRP's (inside that system) may end up having no counter-party risk, but instead perhaps ripple as a whole is subject to Systemic Risk.

Here's one scenario:

Divorce of one of the holders of the keys to XRP Fort Knox forces disclosure or master secrets by soon-to-be ex-wife's lawyers and despite her best economic interest she decides to dump her 50% of all XRPs she's entitled to simply to destroy her ex's legacy :-)

[galambo]

XRPs have no counter-party risk

In a fashion similar to Bitcoin, XRPs are secured by the consensus algorithm and cryptographic properties of the system.

We don't know if this is true or not. As it is set up now, with just a single website, XRP/ripple has infinite counterparty risk.

[misterbigg]

I would call trust-based financial relationships a counterparty risk....I don't think you can misrepresent the probability of an I.O.U. default.

I agree with you 100%. I said that XRPs have no counter-party risk (this is direct from the wiki). Of course the gateway IOUs that get swapped around the Ripple network will have counter-party risk. But the XRPs are every bit as secure as Bitcoins are. XRP occupies a privileged and special position in the Ripple system: it is the only currency transmitted by the system that has no counter-party risk.

Users will always prefer to transact in XRPs over IOUs (because XRPs have no counterparty risk). Take a look at the BitStamp order book for BTC/XRP. It has a fair amount of depth. Now look at the order book for BTC/USD. Not much there.

We don't know if this is true or not. As it is set up now, with just a single website, XRP/ripple has infinite counterparty risk.

Ah yes, of course you are right. I will update my post to reflect the assumption that the Ripple protocol will be decentralized and that its algorithms will withstand rigorous mathematical analysis.

[alexkravets]

Another way XRPs are privileged is that no path finding or intermediate fees (beyond tiny tx fee) will ever be required to transact in them

[misterbigg]

Another way XRPs are privileged is that no path finding or intermediate fees (beyond tiny tx fee) will ever be required to transact in them

Good observation, I will update the OP.

[Ignore@YourPeril]

I would like to see a discussion of any anti-currency properties considered for Ripple, and why they were rejected.  Like having a huge extra tx fee for transferring Ripples from one account to another, effectively forcing any Ripple trade to go only one step: from miner to antSpamRipple user.

https://bitcointalk.org/index.php?topic=145743.msg1555554#msg1555554

"You start off with premine of 1000 trillion antiSpamRipples. You sell them for 1 US cent (or a few sathoshis) each, or give them away for 3 years - the rest is destroyed. After these 3 years replacement of the destroyed ripples will be by demurrage, like Freicoin, about 5% every year. This is the miner grant for making new antiSpamRipples to somewhat replace those destroyed, and to have a distributed way of securing the network. Tulip mania is averted by making antiSpamRipple useless as a currency by having an extra large destruction of antiSpamRipples transferred from one Ripple account to another, above the mandatory tx fee. Like 10%: enough for you not to shrink from sending a few to your auntie and nephew, but enough to prevent any speculation on it becoming a currency. "

[Monster Tent]

I dont understand how ripple prevents spam since XRP is virtually worthless. If the cost of 1 XRP is less than the benefit a spammer gets from spamming how can you combat it ?

[misterbigg]

I dont understand how ripple prevents spam since XRP is virtually worthless.

XRPs must be scarce to prevent transaction spam
...
Users will prefer XRPs as part of a trade over any IOUs
...
...there is already a robust trade in XRPs for other currencies like Bitcoin, US dollars, and foreign currencies...

Do you call this "virtually worthless?"



If you control the issuance of a currency, you can control the exchange rate. Bitcoin is popular precisely because no one directly controls the issuance of the currency. Ripple is troubling for the opposite reason.

[Monster Tent]

I dont understand how ripple prevents spam since XRP is virtually worthless.

XRPs must be scarce to prevent transaction spam
...
Users will prefer XRPs as part of a trade over any IOUs
...
...there is already a robust trade in XRPs for other currencies like Bitcoin, US dollars, and foreign currencies...

Do you call this "virtually worthless?"



If you control the issuance of a currency, you can control the exchange rate. Bitcoin is popular precisely because no one directly controls the issuance of the currency. Ripple is troubling for the opposite reason.

It definitely looks like a classic alt coin pump and dump.

[galambo]

If Ripple is not vaporware the biggest risk is the legal risk of running everything under one for profit umbrella, OpenCoin Inc. As a veteran of the filesharing industry at least one principal of OpenCoin has a history of viewing the legal system as a technical problem. They only aim to fit exactly within the specification and tolerance. For an example that others in OpenCoin feel this way, Joel will basically respond "I do not acknowledge that Ripple has any market value" in the other thread about Ripple. He probably mistakenly believes this will allow him to avoid scienter if Ripple is doing something illegal. This guarantees failure upon scrutiny, because the legal system is more interested in seeing that actors are trying their hardest to do the right thing. Ideally the point is to soar into the net. Ripple seem to want to bounce off the goal post on their way in.

Personally, I'm glad Ripple is here to act as the canary in the coal mine for similar projects. We can at least agree they are running a lot more "hot" than Freicoin is.  Freicoin's distribution method does not involve us holding onto any tokens. To me it betrays the point of trying to make a more fair and decentralized economic system as an experiment. Keeping a large portion of the initial coins is greed with little reason. Ripple is building a dizzying array of well designed web services on their site. Why not distribute all the coin and "earn it back" by charging for their web services?

[nethead]

Personally, I'm glad Ripple is here to act as the canary in the coal mine for similar projects. We can at least agree they are running a lot more "hot" than Freicoin is.  Freicoin's distribution method does not involve us holding onto any tokens. To me it betrays the point of trying to make a more fair and decentralized economic system as an experiment. Keeping a large portion of the initial coins is greed with little reason. Ripple is building a dizzying array of well designed web services on their site. Why not distribute all the coin and "earn it back" by charging for their web services?

Please stop referring  to your failcoin, it has nothing to do with ripple anyway.
OpenCoin got the coins and distributes (some of) them via giveaways, you, on the other side, are "collecting" taxes from miners work, without even a faucet made by you and without doing anything actually.

YOU have NO right to speak about GREED and you know why (i guess.. if not, re-read all the failcoin threads)
And btw, wasnt you that was defending ripple the other day on some thread?

[misterbigg]

...at least one principal of OpenCoin has a history of viewing the legal system as a technical problem. They only aim to fit exactly within the specification and tolerance. For an example that others in OpenCoin feel this way, Joel will basically respond "I do not acknowledge that Ripple has any market value" in the other thread about Ripple. He probably mistakenly believes this will allow him to avoid scienter if Ripple is doing something illegal.

Now this is an interesting observation which attempts to provide some explanation for partially opaque replies.

...Freicoin...

But then you mention Freicoin which I think cheapens the discussion. Freicoin is nothing more than a toy currency that tries to piggyback on the greater works of others. Freicoin is flawed because it pretends that market participants have no time preference. It tries to push its social engineering agenda in a way that ignores economic principles.

Please don't turn this into a discussion on Freicoin. Let's stick to the question of the Ripple pre-mine.

[nethead]

Let's stick to the question of the Ripple pre-mine.

Its not a premine as its not an actual coin imo, the correct word would be creation, as no mining is involved

[galambo]

And btw, wasnt you that was defending ripple the other day on some thread?

I was defending Ripple's decision to not use a 100% proof of work distribution. I'm not sure about the rest of Ripple. It's kind of a decade old vaporware project and its hard for me to get that out of my mind when trying to think about its implementation. Basically its hard for me to pay attention to because I remember its history.

[misterbigg]

...Where do you come up with your idea that we reject this idea? Freicoin...

I don't want this to turn into a Freicoin discussion. Please delete your thread and re-post it as a new topic.

Let's stick to the question of the Ripple pre-mine.

Its not a premine as its not an actual coin imo, the correct word would be creation, as no mining is involved

Yeah, I suppose that's technically accurate but I believe it has become common to use the term "premine" to refer to any cryptocurrency where the creators of the system extract some or all of the wealth before the system is published.

[misterbigg]

Can anyone refute or otherwise provide counter-arguments to the points I listed in bold?

[markm]

With "pre-mined" currencies such as the U.S. dollar, the Euro, and in general pretty much all fiat, gift cards, queues, IOUs and so on, the value seems in the long run to come from how reliably the issuers can be trusted to buy back their currency when its market value starts to decline.

UKB, CDN, GMC, GRF, MBC. NKL and UNS are all 'full pre-mine" coins, each of them except NKL being the standard 21 million coins, following the tradition established by Bitcoin. NKL has 20 times as many coins, with the idea that that should result in it being worth about 1/20 of a "normal" (only 21 million ever minted) coin.

I thought none of them would ever "Catch up" to Bitcoin, let alone "surpass" it.

http://galaxies.mygamesonline.org/digitalisassets.html

It will be interesting to see how things go, both with those coins and with Ripple.

Maybe Ripple will turn out to be a better platform for them to run on than the current Open Transactions implementation, at least until/unless they do ever attain sufficient volume of transactions to be able to attract merged-mining miners. (Enough transaction-fees to attract enough miners to secure them as blockchains again which is what they were originally before the disinclination of miners to merged-mine additional chains led to the realisation that blockchains are just too hard to secure without massive transaction volume.)

-MarkM-

[ploum]

I think we should also provide possible solutions and ask why they don't choose to do it.

For example, they could giveaway 99,9% of the XRPs. Why only 80%? And how can we prove that there are really doing that?