I have been following, and keenly interested in, Bitcoin and other alternative currencies for some time now; apparently I am in good company. Bitcoin has been getting lots of press, both good and bad, especially the wild swings in the conversion rates and the Mt Gox DDoS attack.
But an alternative format (for lack of a better term) has been around for a while, called Ripple. The company behind Ripple’s protocol and network, OpenCoin, is the one that received the Andreessen Horowitz backing, and is co-founded by one of the founders of Mt Gox, the largest Bitcoin exchange around today. Ripple is an exchange network that functions similarly to Bitcoin, yet allows direct interactions in “real-world”, i.e. national fiat currencies. Yet I have been struggling to understand why Ripple is necessary, what it adds to the conversation. While I am all for as much competition as possible in any market, Bitcoin is hardly mature; why leave Mt Gox and start something so similar? What did Andreessen Horowitz see in OpenCoin/Ripple that was unique? So I can exchange USD for USD or CAD for GBP over the network? That is so great?
I had the pleasure of a long, late Thursday evening conversation with a very smart consultant out of the UK, Carl Rahn Griffith, when I began to understand it. All currencies, Bitcoin included, serve two purposes:
- Means of Exchange: they allow me to acquire bananas or iPhones or cars from you, and transfer then to others. Money itself really has no value, beyond its use as paper and ink, except as that means of exchange. If I work for a client and receive $1,000, and use it to buy an airplane ticket to London, all I really did was exchange my labour for an airplane ticket, but since my client doesn’t do airplane tickets, and United Airlines has no need for consulting services (actually, they desperately do, but that’s another story…), $1,000 is a convenient means of exchange.
- Store of Value: I may hold that $1,000 for some period of time. Sure, it is worth an airline ticket (and lots of burgers or bananas), but if I buy the burgers today, when I don’t need them, they will go bad and lose the value. I want the money to store the value for me until I am ready for my hamburgers.
All currencies, even Canadian Tire dollars, serve both as a means of exchange and as a store of value. In that respect, currency is no different than any other commodity – burgers, bananas, airline tickets, gold – except that it is much more convenient and less likely to lose value rapidly (unlike those rotting bananas).
Bitcoin replicates this behaviour exactly; it is a currency through and through, but its implementation is somewhat different:
- Means of Exchange: Instead of having to go through financial institutions or physically transfers suitcases of cash, I can easily and directly send Bitcoin currency to someone across the room, across the street or across the world. It removes both an inconvenience and an expense.
- Store of Value: People buy and hold Bitcoins for some time. To some extent they have to, as the transactions take some time to clear. Because of the clear mathematical limitations on Bitcoin, the exposure to political currency fluctuations, usually inflationary, is eliminated.
Chris Larsen and Jed McCaleb, the founders of OpenCoin/Ripple realized that these two do not have to go hand-in-hand, perhaps even should not. People may complain about the politicization of currencies, monetizing debt, inflation, etc., yet they still buy and sell goods in real-world currencies, are likely to trust those currencies for far longer than an alternate like Bitcoin (if ever), and want to deal in those currencies. As messed up as the dollar has been lately, when the rest is a mess, we still speak of a “flight to safety” into the USD. Further, national governments are guaranteed to be highly jealous of their ability to control the currency, and tolerate alternates only on a small scale. In short, alternate currencies as a Store of Value are likely to face a big uphill regulatory and market battle to gain massive scale, if ever.
Yet the commercial institutions involved in transactions, even as functioning within and across national currencies, are inconvenient, slow and expensive. The market is open for a better Means of Exchange.
Attack the hated Means of Exchange, leave the Store of Value alone… take the market. That, in my opinion, is what Ripple is about.