= a standard protocol for routing payments through arbitrary currency networks
"Ripple is a monetary system based on trust that already exists between people in real-world social networks. By cutting out the institutional middlemen, Ripple is both more community-oriented and more efficient as a means of exchange.
National monetary systems rely on trust in large financial institutions. A bank account balance, stored as electronic bits in a computer, represents a promise by the bank to pay the account holder. That promise is only meaningful if the bank is trustworthy. Banks, in turn, leverage those deposits to issue new money by making loans to trustworthy individuals as determined by an often labour-intensive screening process.
Ripple cuts the banks right out of the picture by allowing anyone to act as a bank and grant credit within the Ripple system to anyone they know. The system keeps track of the source of all IOUs, so that debts that are not repaid are automatically borne by the issuer."
"Banking was invented to solve the problem of the trusted intermediary: I'd like to buy something from you on credit, but you don't know if my credit is good, so you can't accept my IOU. If we can find someone who you trust, and I can obtain their IOU, I can use it to pay you. Goldsmiths were trusted by everyone in the region because they held gold in their vaults, and so they were natural candidates for a trusted intermediaries. The catch was, you had to obtain their IOU, which was the original paper money, either by borrowing it at interest, or by earning it from someone who already had it.
We have become so used to our banking system, we do not realize that any trusted intermediary will do. For example, a mutual friend might vouch for me by agreeing to assume the debt if I failed to repay. We might even arrange for the mutual friend to simply assume the debt so that I could just pay her. In general, a chain of more than one trusted intermediaries, each a mutual, trusted friend between the previous and the next, works the same way.
How Does Ripple Work?
Ripple is based on a simple idea that has only recently become feasible, thanks to computer technology and the internet. Each participant indicates which other participants he or she trusts, by offering to accept their IOUs up to a certain amount, like a line of credit. To make a payment to someone who trusts you, you simply adjust your IOU balance with them to indicate that that you owe them the amount of the payment.
To pay someone who doesn't trust you, the Ripple system finds a chain of credit connections between you and the payment recipient. Then you pay the first person in the chain, who pays the second person, and so on until the recipient gets paid.
This is exactly what happens when someone writes a normal cheque. Their bank deducts from his account (which is his IOU balance with the bank), and pays the central bank, who credits the recipient's bank, who further credits the recipient's account. In other words, the payer gives some of his bank's IOUs back to his bank, his bank gives some of the central bank's IOUs (national currency) back to the central bank, who passes them along to the recipient's bank, who issues its own IOUs (bank account digits) to the recipient.
Note that all three intermediaries are banks. Ripple lets everyone act like a bank." (http://ripple.sourceforge.net/)