Ripple Investment Guide Version 1.4

by Andrew White [email protected] Welcome to the Ripple Investment Guide. This ebook is designed as an overview of the ways investors can participate in the Ripple ecosystem. This book is only for educational purposes, and is not intended to provide investment advice. Before investing, I encourage my readers to discuss with their financial advisor any potential risks and rewards of an investment. My goal for this book is to be largely non-technical and, as the author, I feel a certain responsibility to make sure everyone who reads this book learns something of value. If there is a passage in this guide that does not seem to make sense or is too complicated, my apologies and a request: please do not give up learning more about Ripple and the opportunities it presents to investors. Take your time with each section and supplement your learning with Google to help with your own research on terms or ideas of interest to you. Don’t be surprised if after reading this guide you become the “go to” expert about Ripple in your social network. The Ripple payment system is one of the most exciting technologies to be developed in recent years. For the first time, payments can be sent to anyone in the world in any currency within a few seconds. I describe Ripple as “like email for money.” Activities that were once the sole purview of the banking industry, such as lending or making payments, have become democratized in the Ripple system. The myriad opportunities and challenges these new options bring to the masses open a whole new set of possibilities and questions for the discerning investor to consider. This ebook presents a brief overview of business opportunities in the RIpple ecosystem and what roles you can play in this exciting new area of finance. I want to cover all the major components of Ripple as it exists today and dive deeper into each topic as space allows. With any new technology there are tradeoffs between sophistication and ease of use, new features and complications, new capabilities and new risks, and Ripple is no different. In this ebook’s dozen pages, my intent is make you conversant in the main areas of Ripple and invite you to specialize in your own area of research. Table of Contents

Ripple Labs Wallets Ripples Gateways Consensus Currency IOUs Traders Market Makers Enterprises Due Diligence Questions In the Future FAQs Glossary About the Author

Ripple Labs Ripple is spearheaded by the company named Ripple Labs, Inc. in San Francisco. Formed in 2013 by Jed McCaleb, Chris Larsen, and a few others, Ripple Labs owns the intellectual property of the Ripple protocol. The code and programs that make up Ripple are available for free for anyone to download, use and modify. Ripple Labs is supported by a community of Ripple enthusiasts around the world who are passionate about making the technology more useful. These people provide essential feedback to product teams, engineers, techies, and C-level executives leading the overall implementation of Ripple’s development. The known investors in Ripple Labs include Google Ventures, Andresson and Horowitz, Lightspeed Ventures, Bryan Bradford, and others. As of March 2014, Ripple Labs has a staff of 40 people led by CEO Chris Larsen. Mr. Larsen is the former CEO of ELoan and later Prosper.com, both of which were pioneering companies in peer to peer lending. As an outsider, I can’t say anything definitive about Ripple Labs’ business strategies. But their plan appears committed to increasing the value of the Ripple network. They do this through a variety of strategies to show the public and world of business that Ripple provides a better system for payments, better than the alternatives. One of the ways of accomplishing this is by making useful software and giving it away for free. The source code of the software from Ripple Labs can be read and used by programmers at no charge, which is an open invitation for curious engineers and programmers to make contributions to the code and expedite the development of the core functionality. This also provides a valuable safety mechanism. Since more eyes can look at the underlying code, potential issues can be identified and fixed early, before becoming a serious issue. Ripple Labs can give away the software for free because the core value proposition of Ripple is that an open payment network that anyone can use and improve is more valuable than a closed alternative. So far the plan seems to be working well and Ripple is starting to make big waves! Wallets To use a digital currency system, people start by creating a digital version of a wallet. A Ripple wallet is identified by its Ripple address that begins with the lower case ‘r’ and looks like this: r3CxMDQFX1Atq1vQN5sqVsjm3rawGSwd32 (note: donations to the author are welcome!). The wallet is always available on a web page with the main functionality displayed: wallet transaction history, an address book, a section to send and receive payments, and a section of the wallet for you to make currency trades. It is important to note that Ripple wallets are not insured by the Federal Deposit Insurance Corporation (FDIC), which was created by the U.S. government to protect consumers from bank failures. For most consumers, the “magic” of Ripple payments happens when payments are sent across the network within a few seconds. To anyone accustomed to the slow and cumbersome process of traditional payment networks, this is an incredible advance in payments technology. No longer do people need to wait for days for a bank wire transfer to be completed, or weeks for a credit card payment to be processed; with Ripple, having to wait for payment processing is a thing of the past. Even in areas with modern banking systems (like Europe and China) with same day bank transfers, the existing payment system is still a relatively slow and costly process that creates an unnecessary drag on the economy. Just imagine what kind of lowcost new services will become available with Ripple to merchants, consumers, and investors across the entire global economy. As far as most investors are concerned, the Ripple wallet is also where “magic” happens in its role in redefining the payment experience around the world. To be honest, in my opinion, wallets are not all that interesting visually, or conceptually, nor should they be particularly interesting. They are designed to be as simple as possible hence there isn’t much to see or do in a Ripple wallet (with the exception of trading). Advanced concept warning! I like to describe Ripple wallets using the following example but it is not a precise analogy. I just mentioned that Ripple wallets are not FDIC insured because they are not issued by a U.S. chartered bank. Allow me artistic license with the following analogy: a Ripple wallet is kind of like a bank account but you as the wallet owner (account owner) are empowered to control how much money you trust to be held by your various bank like entities (gateways, more about them later). Ripple Wallets are great because when they can store or make payments in any currency. The author can’t think of any other wallet ever created that is able to accept any currency ever created, including government issued currencies and private currencies! For the first time in history, digital wallet users can hold any currency ever issued. This is a Big Idea that may take years to be widely understood, appreciated, and accepted by the market. Ripples Ripples are the native currency of the Ripple protocol. The protocol consists of the rules of how Ripple works and these rules are translated by professional programmers into software to perform all the functions that Ripple delivers. More generally, people make protocols to solve a problem in a consistent and entirely reliable manner. Well designed protocols tend to have many people using them and the best protocols have a long service life. For example, think of the protocol of shaking hands when greeting someone. This protocol has become instantly recognizable worldwide. It’s notable traits are that it is simple, easily reproducible, and cooperative in nature. The best computer protocols and monetary systems aim for similar results. To be compliant with international naming conventions, Ripples are known by a three letter acronym, comparable to how US dollars are represented as USD. The three letter code is XRP. Ripple was released with only 100 billion units of XRP to ever exist. The logic is that average consumers might only need to use a relatively few Ripples across their entire lifetime. The 100 billion number was judged to be large enough to be useful for the Ripple network for hundreds of years, and quantifiable enough to provide a business model for Ripple Labs. Ripples are distributed in a variety of ways. Ripple Labs sells bulk quantities for large orders and gives away smaller amounts for free. It is critical to the Ripple Labs business strategy that XRP be distributed to a wide number of market participants who intend to use Ripple as a system for payments, currency trading, or asset issuance. A cool feature of XRP is that as the native currency (I also like the term “meta currency” but it is not as obvious what that means), XRP can be spent to send (or receive) any other currency offered for sale inside the Ripple network. There are different investment strategies involving Ripples. Before getting into the various choices available, I would suggest would be investors ask themselves a few questions such as: “am I technically proficient enough to handle digital currencies?” “Do I always follow best practices for computer security?” “Should I rely on a reputable consultant, broker, or hedge fund to manage my investment?” “Am I well versed in the nature of online scams, wallet security issues, and legal issues before buying?” “Should I use XRP as a hedge against my other investments?” Your answers to these basic questions should help point you in the direction that’s right for you. It doesn’t help to be less than entirely honest with yourself, so be candid and assess your strengths and weaknesses before making any investment. Investors must be aware that there are inherent risks associated with digital assets. Thefts and scams are an unfortunate but inevitable aspect of online offerings and the investor must always perform due diligence before trusting others with their money. Even if an investment is not fraudulent, there is no guarantee that the value of the investment will yield profits. You are completely on your own on this one. Please do not ask Ripple Labs for support or answers to these issues. Ripple Labs cannot and will not comment on the investment fitness of Ripple, XRP, or the value and safety of claims made by non-Ripple Labs staff. Due diligence is the process of investigating a proposed investment, and the responsibility for due diligence is entirely up to you. Be appropriately skeptical and cautious in all your dealings. Ripple was released to the public around the beginning of 2013. At first they were worth nothing at market rates, but XRP has steadily increased in value through a steadily increasing number of services built for it. Gateways Gateways are service providers that let Ripple users deposit, transfer, and withdraw money by means of their gateway accounts, including transfers between a consumer’s wallet and the consumer’s gateway account. To attract and retain users of their service, gateways have every incentive to innovate and offer beneficial services. As gateways compete for market share, I fully expect that more gateways will be launched that they will increasingly offer innovative rewards programs like airline miles, coupons, and premium service discounts. There are a number of services available to people who want to create and operate a gateway. If they have a strong technical background, they can usually set one up themselves. If they don’t have the technical skills, they can use a hosted wallet (more on that in a moment). If they are serious about getting into the gateway business, they can pay a qualified consultant to make a custom service for them; for example, Ripple Labs offers a gateway customization service to enterprises. In the future, cloud-based options will be available such as OMG’s One Million Gateways hosted service. Because of Ripple’s design, anyone with a Ripple wallet can technically become a gateway. However, that is neither likely or necessary in almost all consumer or investor cases. A Ripple Wallet can become a gateway when people add “trust” to a wallet you control. “Trust” in the context of Ripple means “how much of my money do I trust this gateway to hold?” Long established gateways with a good reputation for customer service tend to be more trusted by users than new gateways that are less known and have a limited history of operation. Gateways as a business have a few different business models available to guide them. One example is a gateway primarily used for money transmission, another example is remittance. As a gateway operator, you might be interested in enabling people to send payments to another country. A consumer opens an account on your gateway and sends you money to go in that account. The gateway operator issues IOUs (more about those in the next section) to the account holder and those IOUs appear in the holder’s Ripple wallet. The account holder can than trade these IOUs for another currency. In the other country, a person can withdraw these IOUs from the gateway and receive the real currency. The gateway makes money by charging a transaction fee. If the original gateway’s website or service becomes unavailable, the IOUs do not disappear from Ripple wallets. In the event of bankruptcy or other serious disruption, the IOUs may lose some of their market value for the IOUs of currency they represent, but they could be redeemed when the gateway business returns. The unique circumstances of the gateways issue will decide what recourse is available to the IOU holders. The charts on RippleCharts.com contain the major currency markets on RIpple. These are typically written in the form of “Bitstamp USD/ XRP” to indicate that these IOU’s are issued by the Bitstamp gateway in the USD currency and is trading against XRP. Another example is the Chinese gateway RippleCN. Their IOUs for the Chinese Yuan look like this: RippleCN CNY/XRP. Back over at Bitstamp, you will see that Bitstamp USD is also able to be traded for Bitstamp BTC. Gateways can set rules on the fees of trades or policies as to what is allowed to be traded but in general all the IOU’s will be tradable for all the equivalent IOU’s on a given gateway. A quick word about adding trust to a gateway. Since anyone can create a gateway it is critical that you only trust a properly established gateway. This means it is at the very least incorporated and is run by publicly known corporate officers. If the gateway is operated in an anonymous manner, that means there is no accountability if the service disappears. This is important: in your Ripple Wallet, you should only give “trust” to gateway companies that you trust to be reliable and responsible with your tokens of value, e.g. money. Since a gateway is not usually a bank (at least at the time of this writing), there is no FDIC style insurance for deposits made to a gateway entity. A gateway that makes an effort to be legitimate has publicly known staff, a business address, customer support details, and/or a phone number with people who answer the phone during established hours of business operation. If a Ripple gateway website disappears, your IOUs do not disappear from your Ripple Wallet. The problem is that redeeming those IOUs for their cash value is impossible unless a third-party gateway accepts them for their cash equivalents. I can sum this up in a very easy to understand manner, when it comes to anonymous gateways: don’t trust them. A standards group for gateways has been formed called the International Ripple Business Association (IRBA), which operates independently of Ripple Labs. IRBA has a set of requirements to make sure that the gateways listed on IRBA’s website at http://xrpga.org are legitimate organizations, operate using best practices for businesses, etc. There are roughly 170 members of the IRBA at the present time, including people who have expressed their interest in forming a gateway for certain markets or areas in the world. Consensus Consensus is where we start to get into the technical details of how Ripple works. Understanding how everything works is not a requirement to invest in a Ripple based asset. There are a lot of complex things in life that do not required a deep understanding of how it works. A couple of tech examples include are exactly how computers work or exactly how a web browser works. We assume that the professionals that make these tools know what they are doing and they can spare us the gory details and let us move on to do what we want to do with the tool. Understanding Ripple to the low level code and protocol is likewise not a requirement to understand the ideas of Ripple. If the technical details do not interest you feel free to skip over this section. If you are familiar with Bitcoin like currencies you may have heard that Bitcoin works through a scheme called “proof of work.” Proof of work is a process in which computers co-operate on solving a hard math problem that initially none of them know the answer to. When the answer is found, the computer that solves the problem is awarded a “block,” an award of Bitcoin (25 at the time of this writing) and the block is distributed along to all the other computers with a copy of all the transactions that took place in the prior block. This is what allows transactions to take place. In technical terms, this solves an important problem of how to solve the “double spending problem.” A double spend is someone spending the same units of currency twice. If everyone thought they could just use spreadsheets to create a cryptocurrency, they would soon find that someone would cheat by manually changing how many payments were sent. This problem has existed for a long time and one way of solving it was released to the public in 2008 by Satoshi Nakomoto, the anonymous creator of Bitcoin. In 2011 Jed McCaleb was thinking of ways to solve some of the problems with the “proof of work” system. In particular, Jed wanted to solve the slow transaction time of Bitcoin. Waiting for computers to solve the proof of work problem on Bitcoin can take ten minutes or hours in time and that wait time is not good for merchants or consumers using the system. What he came up was a new approach called Consensus. If the majority of computers on a digital currency network could agree that a transaction happened there would be no reason to doubt that a transaction transpired. The proof of work system relies on several computers agreeing that a transaction occurred, which is called “confirmations.” After enough confirmations occur it can be reasonably be assumed that a transaction did in fact take place. With a consensus based approach, transactions could take place in seconds rather than minutes. There