EB92 – Stefan Thomas: Understanding Ripple

Transcript

this episode of epicenter Bitcoin is brought to you by shape-shift il with no account or sign required it's the easiest way to buy and sell gems counterparty dos coin - and other leading crypto currencies go to shape-shift that iota instantly converts all coins and to discover the future of crypto currency exchanges hi welcome to episode of Bitcoin the show which talks about the technologies projects and starts driving decentralization and the global cryptocurrency revolution my name is Sylvester Kuchar and my name is Aaron Fabian crane we heard today with Stefan Thomas he's the CTO ripple labs and of course pretty much anybody in the Bitcoin space has heard or if the

cryptocurrencies faces her I heard of ripple and so have we many times but we've never actually had the time to sort of really dive into that so our knowledge my knowledge has been very superficial so really excited that we'll have a chance to change that today Stefan also before he got involved in ripple he had sort of a long history in the Bitcoin space I'm sure some of you will know the website who created it we used coins that was I think for a long time the sort of initial launch pad to learn about Bitcoin in two minutes and he's also the original creator of Bitcoin Jas which is used as a javascript like we just used for a lot of web wallets like blockchain at least

that's what it said on the big questions website so a chef on there thanks for coming on thanks for having me I'm really excited to talk to you guys and I hadn't realized that you were behind we used coins and just excited of course first one that website whenever I could first got into Bitcoin there but even a half go so I mean almost two years ago so awesome yeah yes so I guess that brings us to sort of a first topic right so you started really early on in Bitcoin can you tell us a little bit about that yeah so I first got interested in bit going in mid-2010 and at the time there was already an established sort of community but you know things like the Bitcoin price were

just brand new things and you couldn't really like there was a little bit of debate of what the price was and if it had value at all and there's very little trading going on you know Montauk's is just starting out and so it was a it was a very I don't know it was excluded there was some potential there and what really attracted me to it was that it seems to be doing something that in computer science I learned you know what's impossible like you couldn't do you know consensus like that and so that attracted me to it and I decided to get more involved and see how can i how can I help you know how did you get the idea to do we use points so people had there was this one-stop forum on Bitcoin talk which was basically you know bounties or

like you know projects that people wanted to sponsor and one of the largest bounties with over 9,000 yeah I know very meme compatible over 9,000 bitcoins was the animated video bounty was 9,000 52 bitcoins were actually paid out the end and I grew up with a friend of mine Fabien who actually also now works here of labs with me and he had he was finishing up his bachelor's degree in motion graphics and so I called him Alfie we've grown up together and I was like you know do you want to do this video together and he was like yeah I need a vegetable project anyway and and so we started collaborating on it he ended up deciding to get paid in Euros not Bitcoin which I still regrets Tuesday I'm sure well you know I

couldn't force him you know so yeah we are where that's kind of how I got started being more active in the community I started going to conferences I was at what I think most would call the first row between conference in New York organized by Chris Wagner back then and yeah that's what I spoke there together with Gavin and Geoff barczyk and yeah just got more more involved yeah that sounds like that was a very profitable project to do that website I don't know that anything yeah so what about Pikmin Jas when did you work on the dad yeah so one of the lessons from we use coins was you know as a website

it was like I say it was popular but couldn't website did at the time aside from Bitcoin org and so a lot of people were coming in people say it say it seen the video on TV it was shown on a lot of news stations and so on so we got a lot of inbound traffic but very few people converted to to actual Bitcoin users and I started looking into like why is that and my background is I worked at first web agency so I know things like tunnels and you know marketing one of the things that I noticed was that the funnel for us was just really horrible because you had to download the client and a lot of people would drop off of the downloaded install the client at the time it took like three or four days to download the blockchain and so it it was a very high

barrier to entry for people to actually get into it especially if you weren't super technical and so one thing that I thought would help a lot would be to do web wallets but one thing I was concerned about is there was this website called my Bitcoin calm and it was basically a web wallet that would hold your keys for you like you know there's several odd today now and they ended up running away with like 50 percent of their users coins and so clearly like that was not the right approach so I wanted to create a library which would allow you to use Bitcoin and a browser but in such a way that you didn't like the website didn't have the keys the keys were somehow stored on your local and your local browser and that's kind of always been the the dream with bekandjesse and that's how I got

you to into writing Bitcoin software oh cool and where did ripple come in when did he start working on ripple so I would say like there's a couple things that that attracted me to Red Bull so actually hard to think of a way I could start one of the things that was happening sort of in 2012 was that I had worked on Bitcoin jazz for over a year I was starting to get kind of tired it was very hard for one person to keep up with you know all the changes and all the new things for people are discovering a Bitcoin old feature request and so on and I had was almost like slow race going on with my current where we would try to get our respective

implementations I can't believe in jazz me working to contain both in the Swiss community trying to get them to get to feature parity with Bitcoin and it just it got to it got to a level where it's just like not sleeping not eating not drinking and just very very tired all the time trying to maintain VidCon Jasin and keep it up to date and to be honest like the the browser library got very popular but there's also the big most of the work was in the server component which implemented like the script interpreter mining all this kind of stuff and that was a lot of work and not a lot of people use it and so I started to kind of re-evaluate like what I was doing and like what what you know what would actually help Bitcoin the most what would help this this technology the

most and one thing that I noticed was that I always had to live off of my Bitcoin investment and you that a lot of other Pitkin developers were in similar situation where they actually didn't have a ton of bitcoins you'd constantly his stories of people who had like a huge stack of points and you know totally forgot about them and then they come back and suddenly they're like millionaires and I always thought that it was kind of weird of how the big gun economy worked like all of the the bitcoins that get produced and get largely put into electricity so they go out to electricity companies ultimately and don't really benefit the community and right at that time I got approached by Jeb McCaleb who was starting this company called open coin and I was like

you know I was looking at my dwindling you know investment in Bitcoin because I had to even live off but I was looking at you know I want to get a job I did honestly want to get a job and something that isn't cryptocurrency related and so first I told him no because you know it was a pre mind coin that didn't wasn't interested in that but all the things sort of came together in the end Jesse Powell who's a CEO of crack marketing um he was a good friend of mine he had worked with him before I trusted him he invited me to come over to California and kind of meet the team of open coin like hang out with them for a bit and the other person was an investor at the time was one severe and obviously I respected him a lot he was a good friend

so I ended up coming out and I ended up spending some time with the team and that's when I noticed all public practice guys are really smart and if I've learned anything it's it's a good idea to hang out with smart people because you know rubs off so I ended up staying and I ended up moving here because so that was really early on with ripple right so it opened coin is that did it just change your name to ripple or beside a different project so yeah it's just it just changed the name originally the company was called open coin the project was already called ripple at the time and it was actually you know we intentionally tried to keep

it separate but it just caused a lot of confusion so eventually just change the name of the company to two blasts which is what it's called today and so how did this idea come to be like the idea of ripple with these people that were obviously working in Bitcoin at a time so I would say that like a lot of the the issues that we saw with mainstream adoption were things like people wanted to use their own currency there were literally companies that I talked to where I tried to get them to accept Bitcoin or try to to get them through dealing Bitcoin but they were like look we're paying our suppliers dollars we're paying our suppliers and Swiss francs or you know whatever the case may be and they said you know we have to accept was

France and so the only option that you really have at that point was you know there were companies like bid pay out there who would convert it for people right but then you have like a single a single point like a single company that's giving you the rate and that's converting your points for you whether it be you know I don't want to sing a lot bit baby could do a great job I think but like you know do you have the coin basis the bid pays and we didn't like that idea that you know do the entire currency exchange will be controlled by one company and so one of one of the ideas that that we were pursuing early on was kind of this idea of a distributive exchange so you would have like you would just have an exchange Network and if you wanted to

get from bitcoins to Mexican pesos or whatever he wouldn't have to go through you know a central exchange it gives you one rate and you're stuck with that rate but rather you could go through a competitive sort of exchange market that was on a distributed ledger and it was kind of like the original idea I think and yeah and there was one of the main things another thing was kind of mining so Jed had a big thing about if my name thing being wasteful I have recently looked at some statistics that Bitcoin when it was a thousand dollars was roughly putting out something like 8 million tons of co2 that's that's more than the country of Cyprus so there's definitely something to be

said about about mining as being a wasteful process and like I think we and we owe it to the world I guess to try and find other options if they exist so you said the original deal was to have a kind of decentralized exchange so you could trade like Pacers and different currencies of course the question then is well how do you have a peso on a ledger if he occurring on a ledger is that sort of the next the next step that then came and used like oh we need to do sort of a blockchain like assets for fiat currencies all right yeah so you

still you definitely still need a custodian the goal there was to to make the the actual exchange rates competitive so that you know if you wanted to trade out of the currency you could always do that it didn't depend on and exchange being online exchanges being TOS was a big thing at the time so again that was kind of like what got the ball rolling the other idea that came into it was Ryan fogers original ruble concept which he actually you know allowed us to do to use the name which was basically this this credit network suit out like different people could know each other money and then move that money around and so all of these things came together and what ripple then

became was essentially a graph describes everyone's financial or credit relationships to each other and from there like once you have this very general language to describe relationships we could allow people to use it however they wanted and the most popular model of usage that emerged was kind of what we now call like the gateways which is basically you have someone who's the custodian who is holding the funds then you have a bunch of people who are market makers who are trading those funds against other assets could be extra P it could be you know another gateways assets and then you have the users who are kind of using that network and that's kind of what it evolved into a circle it's interesting because in the Bitcoin space right the

one of these sort of conceptions about ripple is oh it's just horrible centralized thing but actually the original idea was that oh we wanted to assume something more centralized than what we are seeing happening in Bitcoin where if these payment processors well the way I look at it it's like you know I don't mind people criticizing us as being centralized like I you know our official company position is we're not centralized because we can't actually change the rules and that's true like if we try to do anything that people really didn't like they were just not no longer trust or validated so we start trusting other ones but to me that the real answer is you know that criticism right now is totally valid I don't I don't mind that criticism it's just one day we

will we will decentralize we will add more validators as soon as they are enough good ones out there that we can recommend and so on people will start trusting all the validators and then what will become decentralized just like you know when we originally started we were closed source and people said it'll never open source it's always maybe closed source and then we open source it's right it's just like we do the work and we don't mind being hated in the meantime you know like hey that's all you want at the end of the day it's gonna be decentralized and then the facts are gonna speak for themselves so I say that so that is fascinating right so so the ears or you your centralized today because that gives you I guess a control over the process of development right because that that is currently quite a

nightmare in Bitcoin right like how do we reach a decision on what features what choices need to be made so obviously you guys don't have that problem because well you guys just make the choices that you find best and it's a white lady Z we do have a community to worry about so like I think every choice that we make is kind of based on like what would people want us to do and this is kind of like if you're this fairly if you at this early of the stage you don't have a ton of freedom that's this I think what we mean when we say that we're already decentralized it's like you know we our hands on pretty much tight like between what the government was and what the community wants we only have a very small area to maneuver but we use that to to kind of make sure that

the core tenants of ropal are still there like it's a it's a it's an open system anyone can use it that kind of thing today's show is brought to you by our friends at shape-shift of course shape-shift is the fast and easy way to trade all coins and then I'll support over forty five of the most popular all coins including counterparty ripple gems and so many others that I've never even heard of and they now support you guess it ether since the release of the frontier launched shape ships has added ether to the list of supported currencies and so now you can buy ether and start building some sort contracts on aetherium now there's a small caveat and this is true for every exchange at the moment is that it can take up to six hours for you to get your transaction confirmed but just

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of the technical components of ripples up there multiple terminologies here that some people might find confusing in fact I do so so you have the ripple protocol and consistent consensus algorithm and then you have the ripple Network and then there's also the company ripple labs so perhaps we can go through these in order let's start with a protocol can you describe the different components of the protocol so usually we break down the protocol into a number of layers so there's a physical layer which is essentially a gossip Network where different notes exchange information about what the ledger is if where the net was at what people's opinions are etc the next layer

up is what we call the validation layer in the validation layer it's basically a Turing machine that it's like a database where people apply transactions in order to move forward in time and in order to mutate that states and that again gives you a Turing machine that you can pretty much implement whatever you want on and then we have another layer on top which is essentially what we call the application layer which is basically the actual application that's implemented on the storing machine today which is a Spanish financial network with things like trust lines and and XRP and and all that kind of stuff there are some inter dependencies between the layers like for example extra P is also used on the layer below as a way to avoid spam or

like limit spam but other than they are they're pretty independent so like you could take the the bottom two layers of architecture and build like a completely different system on top so I read the right paper and I wasn't aware of this but there are different consensus algorithms that solve the Byzantine generals problem can you describe how the ripple consensus algorithm is different than say bitcoins algorithm yes so I would say that that if you look at the traditional consensus algorithms that actually like a lot of them predate Bitcoin the way that they generally work is that they will set they will take a group of nodes and you know what that

group is and then they'll set up a world like a number of notes that will make a statement and if you have enough statements from enough notes you know that there will not be another opinion that has as much support as long as your assumption which is that only a certain number of notes of fails usually it called the default tolerance F you know that then then you're safe right and so people have proven algorithms such that they provide safety which means that the network can't fork and liveness which means that the net will eventually make progress under these assumptions like you only have so many failures and you have a network where messages get delivered after some time so these are some I think we've

talked about some of these on the show before like is it's like Paxos one of them so PACs is very empty right so taxes would be a concern consensus algorithm that's not visited on tolerant pbft is probably the most well known one that is and yeah one of the biggest differences is that if you want Byzantine fault tolerance you just need to add more notes so the number of notes you need for a non Byzantine fault-tolerant system is 2 F + 1 so you need if you wanted to learn one failure you need 2 times 1 plus 1 which is 3 whereas in a Byzantine filtering system if you want to tolerate one fellow you need 3 F plus 1 so 3 times 1 plus 1 which is 4 so those are just like your your constraints in terms of like how

many nodes you need in order to indicate a certain type of tolerance now bitcoin is kind of interesting because it breaks that model a little bit or it breaks that mould a little bit because it's it doesn't provide safety theoretically right because the Bitcoin network can't fork at different directions it's just that we always pick what to pick a winner we just pick the long spa chain to like come back to you and so from a consensus perspective between doesn't provide safety because you you never know for sure that is you know another longer chain out there but in order to buy but by making this trade-off it gets a very nice property which is the fact that you only need a simple majority depending on you know you don't need a

simple majority to decide what the official chain is okay cool so let's dive into let's I'm into some of these a lot of questions so first of all blockchain is Ripple a blockchain or not so I'm not sure if this question makes a lot of sense yeah so I would say that first of all the term blockchain like you know we're just in the process of defining it really right I mean blockchains didn't exist until recently so I think it's it's up to - to anyone - to define with it what they mean by it we usually call privileged for the

ledger but it's still a chain of cryptographic blocks that refers back to the previous one so I wouldn't blame you for calling it a blockchain I think one reason to use a different term is we kind of talked about so that the taxes and consensus history and in computer science we talked about Bitcoin as a different approach River was probably closer to the traditional consensus algorithms the main thing that it does differently is rather than having a known set of nodes up front that is fully connected it's like we're waiting to model P P of T is basically think of a graph of nodes and every node listens to every other node right and so you basically have a fully connected directed graph right and so Roble would basically be a consensus on

whether the user similar principles except it allows the graph to not be fully connected if you have to start thinking about what if this node doesn't use the same set of nodes as everyone else right and so somewhere between the fully connected graph which we know is proven safe and the completely disconnected graph which we know is gone forward there's going to be a point where you have a certain amount of fault tolerance and at fault the amount of false alarms it's gonna keep decreasing as you remove connections and so what we're kind of interested in is sort of this middle middle ground and the reason that's interesting is because the assumption that everyone's gonna set their same the same node list it's just not a very strong assumption right like if you have a validator let's say in the

US and you have a validator all it's saying to run there's a good chance that the US validator will never trust the Iranian validator right before snots to trust them and so we still want to be able to evaluate the topology of the network and say it and say there's no one's still safe there's no one still alive even with the discussions ok so we'll get to this node list thing in just a second but can you first just walk us through a transaction so as you know someone creates a transaction signs it submits it to the network then what happens so when you sign the submit a transaction to the network it would first come in on the gossip network layer and be spread around the network if it's valid and it's paying enough of a fee and the note that you originally

sent it to is confident that it will be included in the ledgers after it's spread through the network it will be part of the next proposed set from a lot of nodes so a lot of nodes have seen this transaction they think it's valid they're going to say we propose that this should be in the next ledger any transaction that's uncontroversial so is the post set is that kind of like the mempool in Bitcoin I would say it's like it's one step further because like it first goes into something very similar to mental which is kind of like all the transactions that I know it got right and then the proposal is more about like what I think is gonna go into the next ledger it's like I actually think this is going in who says these criteria who

sets the criteria for what is a valid node to be a valid transaction to be in a next proposal so any transaction that pays enough of a fee is syntactically valid there's no conflicting transactions that I already think are going in those transactions would be considered likely to go into the next so the rules are the same for everyone yeah yeah as long as you run the same software obviously I mean you can't stop a single data from running different software but that would just be like a faulty Bell data essentially okay and so and so then it gets sent into the to be a proposed transaction in the next page of ledger yeah so the next step would be every

validator receives proposals from other validators and so now you you you can see what what actually people think right and so once you know what we'll think then you can say I actually think that this is the ledger that we should construct because these transactions have an actual majority based on the proposals that I've received and so once that once that's agreed upon that that that ledger will be published the validation will be published and then the final step is every validator will be listening from other validators published ledgers and if they see enough of those published ledgers they will they will consider those letters validated and they will say okay this is now the state as the

networking and we proceed from here so that's what the point wait like for example a gateway with process of deposit or something like that okay so where does for example as you know if Bitcoin we have proof of work providing some security what protects the ripple Network from someone you know creating all the validator and doing something finally so if you think about proof of work like what proof of work essentially says is well let's like actually it started a little bit earlier all right so let's think about what is the extra problem we're trying to solve the promo trying to solve is the double spend problem we're trying to make it so that

if someone wants to spend their coins they can only do it once they can't later change their minds and say like no actually I wanted to send it to it again so in order to solve that problem you need to have some sort of authoritative decision it doesn't necessarily matter like what the decision is only that someone is making it and then after it's been made it can't be changed and so if you imagine a peer-to-peer network if everyone was always connected and always online everyone could just watch the transactions that happen and make their own decision and you wouldn't need any validation or binding or anything you would just see which transaction came in first and then everyone would see that one first we're making some assumptions here and you would just say okay this one came in first two will process this one will process the other one and you

could make a rule like if they come in very close to each other then they'll both invalid or something like that and so people wouldn't double spend because they'll just be destroying the points now there's one big problem with this and have that problem is that people you know they join the network later right they they go online to go offline and they need to somehow reach Frye's how do you research grants because when you connect to the network all you see is a bunch of nodes out there and you don't know who to listen to they're gonna say you know well this is the state of nephron someone else is gonna say this is the state of the network and you don't know if the majority is just a bunch of it's just a botnet that's like trying to convince you of an invalid state and so what

mining allows you to do is it allows you to say like well this state has this much mining power behind it and this state has this much mining far behind it's very essentially you're not watching the network all the time but you're trusting that there are other people out there that are watching a normal Network all the time and they're also mining and so you whatever they say you can kind of rely on ok.now mining or the proof-of-work portion essentially acts as a proxy for voting rights so you're giving people voting rights based on based on how much they mine so if you have you know 70% of my name power you have 70% of the voting rights so what ripple does by contrast is rather than deciding who gets to vote based on mining power we just tell each

individual user essentially or each individual node it connects to the network you decide who you want to a voting rights like if you want to listen to these notes just put them in your list and then your software will adopt whatever those notes say if you want to listen to those notes put them in your list right and so you're kind of like turning you're making it the the notes problem or denotes decision of who do you want to listen to and it gives you some pros and cons so on the pro side it allows you to it allows you to deal with malicious notes so for example if there was a malicious Bitcoin miner that would like never include any transactions for example there's nothing you could do it would just be like okay well those blocks are like empty it wouldn't hurt a

bit but network a great deal but you couldn't no you also couldn't get rid of them you couldn't shut them down or anything whereas like in Red Bull what happens is if someone doesn't include a transaction so they always vote no we would consider them a faulty validator and so people would take them off the list of validate as they listened to and so their their voting power the network would go down and so we have kind of like diesel so so is there on a client side below they are there's some rules that determine who is a faulty validator there's no it's it there's no rules it's completely manual right so like the note each note has to decide who they want to listen to okay so so if I was running a ripple node and I know they saw this purchased notes always a node and I

would like manually go in there and remove them yeah it's actually kind of I I don't know how how deep you want me to go into this topic but it's actually kind of interesting how ultimately the consensus is based on the code that you're running right like for example let's say the Bitcoin developers decided to change the mining algorithm to another mining algorithm for whatever reason would say you know sha-256 is broken or something then the blockchain that previously would have been considered formally valid the one that has the most work under sha-256 would suddenly no longer be valid to be a different block develop and so ultimately the the trust always lies with with the developers the trust is

always a manual process rightly because the developers define the rules and then all that mining is is a shortcut a decision-making framework that's faster than the manual changes right like in order to get everyone to operate their Bitcoin software take a long time so you need something that that can react on on the order of minutes and so that's why you use mining and so with red wall it's similar it's like we like there's the developers to make the software and they decide certain ground rules and then you have then you have the people run the validators and their job is to make faster decisions right and so you're kind of like trying to get to a point where you can make faster and faster decisions that are less and less secure right so Peter talked wrote an

interesting paper analyzing ripple and I think he brought up a point that I'd like to address here and that's the question you know can this be really decentralized right because if you let's say I'm running a ripple node then what I don't want to do is I don't want to listen to nodes that you know do the wrong thing right I know listening to notes that maybe give me fake data or malicious because then I'm at risk of losing money of defrauded or something right so doesn't that just mean that there is a really strong at the sort of Nash equilibrium of this is

everyone listening to the same set of notes and then you have this sort of centralization where you you don't want to switch away right and I guess that gets even more you know that gets even stronger because you guys have a default a list of default node with the clients right so I pursue most people just download it and stick with default notes so how is how is that ever going to be decentralized so it depends on what people are actually trying to optimize for like if you're if you if the centralization gives you some major benefit then you are going to choose a list of nodes that is that is decentralized you know and whether you

call that ripple oh you call that some fork of ripple right like you would choose whatever network has the properties that you're looking for so if you think that a decentralized network is better than a centralized one you would choose the list of validators that also buy into that the other thing that will influence your decision is like the people that you're trading with what have they decided what network are they on because you want to be on the same network in order to be able to interact with them the other point you mentioned was the the fact that there's a default list we don't think that the defaults will be static in you know one year or two years we think that the that will built or we are already building tools that allow you to build a list based on validator uptime again what your trading

partners whose validators they are listening to and so on so very soon we'll have the kinds of tools that allow you to build your own list and and put together your list so though it seems to me that for this to be for this to be truly or sort of achieve a high degree of central decentralization right you'd need to have first of all you need to have a fair number of different nodes right maybe doesn't have to be huge but probably a hundred or more and and then some huh I don't know if you need 100 notes to be in the centralized so you need enough notes so that collusion becomes impractical and I think that that number is probably a lot lower than I don't know it's like would you consider it kind of centralized

because right now is controlled by it by roughly four notes yeah I know I mean I think Bitcoin certainly has a problem with being too centralized and I don't think that's a good thing for Bitcoin at all right I think people should be more decentralized I don't know I think it's it's you you have to think about like what are you trying to get out of the decentralization right and and something isn't like the centralization is not a goal enough itself if the goal is security the goal is access the goal is you know the rules come first and no one can no one's above the rules that those kinds of ideals I think are what we're trying to achieve and I think that people will be attracted to whatever networks provide them with those benefits and I think that with this like

approach of like manually choosing the the validators what we're creating is a system where it will just end up with whatever people prefer because we will try to we'll try to provide the kind of network that people want and then people will opt in to the kind of network that they want so even if we screw up and we don't provide the network that people want people just go on to a different network that does have what they want it's just important to understand that what people want isn't maximum to centralization you know it's not that you want to be on a network that has like a billion nodes and the work is replicated a billion times you want to be on a network that is secure that gives you access you have confidence about the continuity those sorts of things right so you always have to come

back to what are you actually trying to get out of the decentralisation and this is why people hate you on reddit my friend this type of talk man you gotta know it but so is there an incentive to run a node then is it is it purely just to contribute to the network or other nodes get paid in some way so you already have to run a note if you want to do anything interesting with ripple like if you want to listen to transactions and so on you have to connect to some node and so you can either one one or you can connect to someone else's note of course they'll they might charge you for that or they might restrict your how many things you can submit and so on at home encouraged you can do and so there's already a strong incentive to

run a note if you're a participant and then whether or not you publish validations it's literally just a flag it's just a switch to flip and so we what we observe in practice a lot of the businesses there are honorable they also publish validations and we're starting to track you know how good their validators are in order to be able to start to decentralize and then also or in order to be able to start to add them to the to recommend it notice and so it's it's I don't think there needs to be much of an incentive and one nice thing about not having an incentive is that you avoid a lot of the attacks that are based on trying to get the incentives so like if you think of selfish mining other things that that are issues with Bitcoin those are all come back to the fact that you get

incentivized for mining and so if you don't get incentive ice for for validating there's actually there's some benefits to that and so right now this approach that we're taking but obviously you know just to change our assumptions turned out to be wrong today's magic word is waves WAV es head over to let's talk Bitcoin dot-com to sign in enter the magic word and claim you're part of the listener award so we've talked about the decentralization from sort of a node level but another I mean of course you can talk about the centralization from all sorts of perspectives one is also

the software you run right as you mentioned which is of course super important so with ripple is it correct that there's only one implementation and you think is this problem would you like to see other people develop other ripple implementations okay so the answer is going to get a little technical but one thing that that there was one of the innovations in Drupal originally is that it's validators don't just validate the history of transactions like to do in Bitcoin but they also validate the current state of the network and what that allows you to do is allows you to build wait clients that don't trust and the notes that they're talking through they can literally see what their balance is

they can see what their the state of their trust lines is etc and they can cryptographically verify that against the top hash of the current ledger what that allows you to do is you can be a lightweight note and as long as you have your own trusted node list you know exactly what those trusted nodes are saying and so you don't have to trust anyone else along the chain and the reason that that's that that's important is that there are several implementations of those client libraries right so like if you have ripple if there's a ripple of version in JavaScript this ripple a perfect version of Java there's obviously the implementation C++ so there are a couple of different implementations of that logic no we there's still some things missing with the with the validation

logic there but in principle you could add that to those implementations if you care enough about that on the validation layer it's true there's only one ripple D validation implementation that validates actually run but that's the same stress with Bitcoin so I think something like 99% of the buying power is actually the the Satoshi between original implementation and that's a problem like this a problem for for both networks I think and one of the things that we think is going to have to have long term is that they have to be multiple implementations but it's very hard to do that and like one of the reasons that people don't run alternative implementations if Bitcoin is because you risk that if there's any difference in their implementation

suddenly you're on on a side chain right so let's move on to I guess a higher level above the consensus protocol and the algorithm and some of the technical components that are at the core of ripple which are gateways so we've mentioned them early on in the show can you explain exactly what a gateway is cuz it seems to be from my understanding of it that it's very similar to a Bitcoin exchange but I understand there are some differences there they're kind of important so I kind of mentioned gateways as as like we were talking about the early days for a bull kind of where we started out one thing that that

has evolved into is like well we're the best gateway stay or banks and even better the central bank right so the bank central bank is like the ideal gateway right because they can actually issue real dollars they can actually issue real euros and so on and so as as we've evolved as a company our focus has shifted away from people who are non banks or non banking financial institutions over to two banks credit unions corporates and so on who have the kind of scope in order to be able to issue in order to to be sure to issue real dollars and FDIC insured dollars and dispense things onto the network and that's right now our current focus and

at one thing we found is that for them surprisingly do you think you know we get we get ripped off by the banks but obviously the banks get ripped off by other banks so we actually found that they have a very very compelling value proposition adopting this technology especially smaller banks do in order to be able to do real time international transactions and so our focus is pretty much shifted to financial institutions now and we just found it that it's a slam dunk story they really like this you know they they want to they like the certainty that they get from being able to see where the transactions at that like competitive effects they're like the speed of the network and so that's been been our focus more recently about

the issue with the with the community gateways was always the licensing right it's very hard it's very hard to operate the community gateway and it's very hard to do so in a profitable way okay so so that was interesting I don't know if you want to dive into into the application a little bit more right now but perhaps this would be a good idea so so you mentioned so banks use this for international international transfer so can you talk a little bit more about how exactly that works sure so any bank can just issue for example ripple euros and and then why would I accept that as another bank and

in Raisa pedis so the way that international transfers between banks work today is through the system called the correspondent and it's kind of this disjointed hodgepodge network of different banks having correspondence relationships with each other so if you go to a small midsize bank and you tell them do you want to make an international wire transfer what will ultimately happen is that they will send the money to a larger bank in their country there's only really a few banks internationally but half those international correspondence relationships that correspondent will talk to its correspondent in the other country and that correspondent will forwarded to the final recipient bank so you'll go

through at least two intermediary banks before you get to the destination there's very little transparency with that so if you make a swift transfer we've had like I don't read one guy who was an entrepreneur who would start a company in Singapore it's in the founding capital over to Singapore and just never arrived there and then he went to his bank and it's like well what's up where where did my money go they're like well we spun and if you want to know what happened we can investigate for your buddy that'll be $40 and that's you know adding insult to injury banks realize this and especially smaller banks would love to provide a better service to their customers it's just that you know they get the product that they get from the their correspondent and you know no one's really in a position to fundamentally

improve the system and so when when we were looking around the market in 2013 we kind of noticed this huge opportunity a huge problem with responding banking and notice that was like perfect solution right you could just as a bank you've become an issuer on the network you issue dollars of your US dollar bank your bank in Europe you might issue euros and then people can come in market makers can come in I wish could be you know either individual traders or it could be hedge funds it could be investment banks and so on who have very competitive effects rates and they can exchange between the dollar assets from one bank and the Euro assets from another bank right and so that way you

create this global network where banks can send money to each other directly so on the one hand you have this disjointed Network which is the international banking sector where it's very complex money from one country to another and on the other hand so what ripple is proposing is a system where essentially the ripple acts as the channel where banks can send money between each other but who so for example if I want to buy some ripple euros who created that asset can anybody just create an asset called ripple euros and is there only one are there multiple ones like can you explain that so when we say asked when we talk about assets in the ripple Network usually the way we we express them is it's not revell used but you know for

example 500 euros right so if you have a bank that is issuing an asset on onto the network it is that asset issued by that entity and that forms an asset on the on the chain and so people create markets between different assets now if you have a bunch of people issuing euros since there is the simple network that allows you to settle between these different assets there's arbitrage who just they they almost trade these things one to one because they know that they as soon as they they've traded them one way they could just send it back to it through this Assefa Network and then we balance their their their holdings so what ends up happening is that all of the different yours end up being worth the same and so on the network you can you

can send them around it basically zero cost but at the same time they're still the risk is still localized to that particular bank at that particular issue so so if I'm mister we face that so let's say I wanted to send some money to you in u.s. rap in Germany I wanna send security you then you're before it was like I said I tell my bank to send a they sent it to another bank that since it's your correspondent bank and a church as well the money it takes a lot of time was with ripple my bank creates those euros the ripple yours and then the idea is that somebody has is

arbitrage in that and then buys that yours and maybe sells some ripple USD that then since it's your bank and and that is a lot / been going through these corresponding banks and faster because is that so so I mean a part of that is set up right like the bank issuing assets that that happens ahead of time people proposing orders to trade these different assets for one another that something that happens at ahead of time when someone actually makes a transaction it goes essentially straight through from one bank to the other and within ripple there is a a path finding algorithm which basically finds like the the cheapest set of convergence II could go

through so if it's direct it will just go direct them if there's an order book between those two exact assets if they're two less liquid assets it might go through some more liquid asset like you know dollars or Bitcoin or whatever or SRP and get to the to the receiving asset so what role does XRP play in all this structure p has two two main roles one is it acts as a a fee so that we can we have some mutual way of charging people for making transactions so one of the issues if if we used any other asset you know all other assets have some issues so that issuer can create as much of that asset as they want so we can't

use it as a fee and so one reason that there's a built in cryptocurrencies so that that's a neutral feet that's a fee that we know it's worth something no one can create any and so no one including ourselves can can spam or do us the network just by creating one more extra p22 to spam the other main reason or the other main objective for extra P is to make it a liquidity asset so it's basically I'm kind of mentioned these different paths so we specifically encourage market makers to - Meghan pass-through extra P in order to create a liquid markets recipe and one of the reasons that that's attractive or one of the reasons that we want that to happen of course the site from it benefits us

it's how we fund the company it's also something that like if there was a neutral cryptocurrency out there that a lot of liquidity went through we would live in a world with with just much lower FX rates because anyone can just connect to that recurrence as opposed to having to both $4 and being at the whim of whoever issued those dollars I mean that's kind of what happened with Bitcoin and the Altman market right I mean most of these all coins don't have any liquidity between each other but only versus Bitcoin yeah exactly okay no so that makes sense so I think that brings us precisely to ripple labs as a company so is a business model that you guys own a lot of that XRP because

you know it was like three minds so you had that in the beginning so now you sort of try to make the network valuable and then hope that the extra P will appreciate in value and that's that's the kind of the path to path to insane wealth so the thing with extra P is that we're probably not going to get rich with it the the issue is that just like me you know working on Bitcoin yes back in the day I had a huge special bitcoins but if you live off of it that stash tends to get you know smaller over time and you tend to have to sell a lot before it appreciates a lot and so the same same basic thing is happening with with

ripple I mean we're we're the number two cryptocurrency now behind Bitcoin but even so like we are already we already spent a good chunk of Lorex epi and gave a good chunk away so it's it's foreseeable then after I don't know another 10 15 years or so we may run out or we may run very low on extra P and so we are already looking for other ways to to raise revenue and one of the things that that's very attractive right now it's just that you know banks want to pay us to help them integrate because they want to have a service level agreement they want to have guarantees they want to have someone they can call if anything goes wrong and so it's actually we found that banks are more

willing to integrate with ripple if you charge them charging for it right so those are new revenue students they're opening up for us and that allows us to to kind of transition off extra fee and make that more of an asset that's independent of us and where we are just one of many many holders that's supposed to act as an important holder now that makes sense and I mean I think that having that service level agreement for banks is something that will probably be desirable for for for corporations now but with regards to use cases or the use case is strictly limited to sort of banks and large institutions and large

corporations using this or can anybody use extra like other use cases for consumers basically or you know small medium sized businesses so I'd say the enterprise use cases are the most interesting for us right now as you know there are many cryptocurrency companies they're going after consumer use cases and you know I wish them the best of luck if we are very successful and we grow and we have the bandwidth we're definitely going to go after other things we're gonna you know whatever we think is the the most the most attractive thing to build next right now the most attractive thing for us to build based on our position whatever you know strengths are the way that group of words is just banks are

our most attractive customer right now but I'm not saying that that will always be the case so one potentially competitor one could imagine - you guys are doing so it people makes sense to me right if I want to have us see on on a blockchain right then what you guys are doing is sort of one obvious way to do it but I know a lot of people are also trying to find way to create these sort of synthetic assets that you know like track the value of a dollar without being backed by someone is that something you worry about and you think if that does actually work out that would be a strong alternative to the ripple approach so I would say that

probably the obviously the best kind of dollar is a central bank issued dollar so if the Federal Reserve adopts one call or another that would be the non plus ultra it'd be the best for the banking customers would be the best for end users and so that's we feel in a position to pursue that now obviously you know there will be a long term project but it's one of the things that I think is going to have to happen for Tripp to currency to really go mainstream as for these other approaches I I think fundamentally if you want to get my personal opinion this is not necessarily the company's opinion but my personal opinion I think that any asset that is not fully backed by what it says on a can is it's gonna have trouble

because people can't call that Bluff it's kind of like a bank doing fractional reserve right as soon as people lose confidence in that asset there could be a run on the bank there could be a run on that asset and then yeah the fact that there isn't enough of that asset backing it will be exposed so I personally think that the best way of doing it is is having if you want to have dollars you can have dollars that are backed by one particular institution then that risk is localized you know exactly what that risk is and if you want to make a synthetic acid on top of those you can do that and you can do that on ripple today if you want you can fit an account as a trust alliance with different gateways and it issues its own dollars that are backed by those

different gateways so that's something that oh that's that's super cool so you can you can sort of diversify the risk by by issuing you know ripple dollars that are backed by a whole variety of different issues yeah if you want to do that you can do that I mean right now if I'm if I'm totally honest like we don't have the diversity of live gateways that you could like seriously do that also I think that honestly for most people the risk that their bank will collapse and if it's FDIC insured you know FDIC will not pay out this it's pretty negligible so I think I'm not sure how much of a benefit there actually is in doing that

but yeah if you totally could and I think with a theorem coming online it's like other smart contract solutions come being on there yeah you can do a lot of cool stuff with these kind of cryptographic assets so there's another story we wanted to talk about recently there were some news that we've got fined by FinCEN I think that they're fine itself was not actually that interesting I mean if anything it was sort of worrying in terms of how aggressively they seemed to go after what seemed to me a fairly minor thing which was I guess you guys didn't do like proper cave iceo on when he sold some XRP but what was more

interesting was that it was also mentioned that you guys would have to start doing some transaction monitoring across the ripple Network what's going on with that so so there were several things that they asked for obviously and so you know as part of the negotiation one of the things that was a big goal for us was to make sure that we weren't forced to to change the protocol and in any way in any way or like purple the protocol so we achieved that goal most of the things that we are now required to do are related to our hosted wallet which is purple trade so for example we have two kyc our users we have to file suspicious activity reports and so on

and other than that we're only monitoring some of the public data it's the purpose of public ledger just like Bitcoin so there's a lot of data that's available just to the public and so we are building monitoring tools and tools that can analyze that data for a on behalf of regulators cool so how how is the attraction of ripple are you guys making a lot of headway with setting up banks like that and setting up that kind of network so obviously I can't talk about any partnership Sergent announced yet in terms of what we've announced we've announced several banking partnerships with by Dorsey BW Cross River there are

other networks that are exploring Ripple there would be Western Union a North Port and so we are working with a lot of different companies behind scenes one thing that's always an issue is its kind of the if you want the stigma of cryptocurrency kind of people still associated with risk and it's very new and so the only dipping a toe one toe at a time so a lot of these partnerships right now in a proof of concept status and as long as those proof of concepts go well we have a very robust pipeline but it's it's the kind of outcome that you guys need to really sign on a huge number of banks so that it really sort

of becomes this universally used system to move value around or is this also something that can work on a smaller scale and in some markets it's interesting so there's actually a couple things I would say that one is there are a lot of countries with efficient local systems I think the the EU area is a great example with SEPA so within those systems there's already a lot of progress being made towards real-time systems and very efficient low-cost systems and so if you have one institution in that area you can pretty much debit and credit any account in that area and so our initial goal for

the next few years is only to get very robust solid banks in all of the key payments areas right so all the key countries and payments areas around the world if we achieve that and we can pretty much already serve most payments and and move money internationally especially if we also build all the quiddity between those between those four doors the other thing I would say to that is that ripple is just one network there are many others out there and I think also the Bitcoin community just a lot of interest in building networks that where we're just kind of like via the ripple style feel assurance and that kind of thing so I think that one thing that we'll try to work towards is to tie those together with with our network as

well so that it becomes more of this like you know global crypto currency marketplace as opposed to as opposed to like different networks competing with each other now and in order to to achieve that we're participating in the double you see what payments interest group which is kind of right now it's looking more at retail payments and later this year we're gonna try to start a community group around web settlement which is essentially bad idea that I just mentioned can you talk about that the w3 w3c paint group yes so the the web payments group it started as a community group several years ago it recently it's about about a year now

turn into an interest group I won't go into the difference basically an interest group is a group of industry participants right now it's a few banks it's Walmart Apple Google a number of tech companies who are looking into better ways of doing payments of the web and within that since again there are some banks in there and just ourselves in there there are a couple of people were interested in web settlement as well which is basically like after you've made the payment does it go through the credit card networks or does it go through another network and so right now the idea is to add Bitcoin as a scheme to this but we're also interested in in in adding a new a new

scheme that can go through through different networks and that's kind of what we're working on right now and hopefully we'll have more to show by TPAC which is the next major that we see meeting in October excellent well Stefan thanks so much for coming out it was really interesting really enjoyed this and enjoyed learning more about ripple awesome yeah I loved talking up to you guys and yeah if you ever have me on again I'd be happy to yeah no no I think that I think that because there's some some stuff we didn't get to talk to talk about especially code years and and and some things in this direction but yeah maybe we'll do that another time I definitely feel more confident now when people ask me what I think what

ripple to at least be able to explain it a little bit yeah I also I also feel my level of knowledge is clearly increased in the last hour so and we're grateful for that there you go so actually let me ask you one last question just grab up so you know you had such a long history in Bitcoin and now you're in ripple and when you it seems like in the Bitcoin community there is a lot of negative views about all kinds of projects that aren't Bitcoin you know whether I'm here in the office with the theorem guys you know they they definitely feel bad you know and and I just shown errors and I'm sure this is something there and so this it's and of course ripple you guys are

perhaps the favorite target of so how do you do you feel about that do you feel people are just misunderstanding it or but I think about it I'm not in this to be popular so I don't really care and/or register it I mean haters gonna hate looking at say you know yeah okay no that's I think that's probably the best way to think about this okay well Stefan thanks so much for coming on and yeah it was really a pleasure yeah also one last thing so we've started this new bribing contest in which like once a week if you leave an iTunes review we will give a teacher to one of the people now you can leave a review saying that we are clearly banking operated robots controlled by

Goldman Sachs for having having Stephane and talking about an ebow project like ripple or you can say this is the best hour you've ever had in your life and even have learned so much either way it gives you equal chance to win two in this t-shirt so yeah check that check out and and if you actually if you do leave want then send us an email out show at Epps and Rubicon com so we know who you are because we can't figure it out otherwise form iTunes so yeah thanks so much for joining us so we put out new episodes every every Monday you can of course subscribe to it on iTunes your favorite podcast at SoundCloud or get the video on YouTube that's youtube.com slash the Epson BBC and yeah that's it then we look for it

being back the next week