Ripple as middleware

As many people may know, the current banking system is a mess when you're dealing in multiple currencies. We have disjointed networks dealing in local countries, the eurozone, and international banking on a wider scale. Using Bitcoin means having to hop onto the currency and off of it on two exchanges. There is friction at every step and companies have to focus on creating big end-to-end solutions rather than focusing on just the part they can do really well. However, I believe all of this can be simplified if we used a system like Ripple as a middleware layer.

The current situation

Currently, there are many disjointed markets out there. If you want to exchange fiat currencies, you go to a forex. If you want to buy Bitcoin, you go to one of the numerous local exchanges. For altcoins, you will most likely need to go to one of the handful websites that specializes in them. All in all, there are many problems in efficiently dealing with say, exchanging precious metals for altcoins.

Ripple as a solution

While Ripple might not be able to completely replace centralized markets that have high transaction volume and extremely low latency, it could be a good enough approximation for a lot of the projects out there.

First step in doing this would involve the creation of various gateways for the currencies we wish to use, be it USD, gold or whatever else. Since the gateways can focus only on one thing at a time, creating them is more straightforward than bringing newer and newer exchanges onto the market. If you can only handle Bitcoin but can't make a trade engine or handle fiat, you're still in business.

The second step would be copying the existing markets into Ripple through automated arbitrage bots. For example, you could take Bitstamp's USD-BTC market and post trade offers in Ripple to mimic it, although with lower granularity. When a trade is made on the network, the bot would offset it at the exchange and create profit. Given enough bots, we can represent any number of financial exchanges inside of Ripple, no matter what currency they're dealing with.

The third step would be building services that use Ripple as middleware for their payment network. Say we want to tackle Europe<->Canada money transfers. We would connect to a gateway in Europe and a gateway in Canada. When we see a Euro payment on one end, we send it to the first gateway, use the Ripple network to trade it for Canadian Dollars, and send the money out on the other end as needed. Provided we have some floating balance on both ends, we just completed an international wire transfer in 5 seconds at a fraction of the cost.

The last step would be...

Optimization through competition

Obviously, the markets will only use a product if it’s competitive and affordable. Nobody will want to pay a premium to use one product over a cheaper one with the same features. However, the beauty of this approach is that all components are interchangeable and the best ones will win.

Looking at our BitPay example, their business can be broken down into the following components:

• The frontend gets the current exchange rate and accepts payment for the goods from the user, eventually forwarding the coins to the exchange
• A server offsets the trade at an exchange
• A banking component withdraws fiat from the exchange and pays the merchant in their currency of choice

In Ripple those components could be run by different entities:

• A system like BitPay would accept customers’ coins and use Ripple to pay the merchant. They could trade the coins directly for any fiat or any other currency on Ripple, and once the funds are secured, release the payment.
• Trades would happen atomically in Ripple. No matter how many currency hops it requires, a trade could be made with one transaction. The Ripple network will find the most efficient route on its own.
• Any trades happening in the Ripple system would be offset by independent bots arbitraging between Ripple and various exchanges (forex, Bitcoin exchanges, etc.)
• Merchant payouts could be handled by dedicated gateways or payment processors working with the gateways. Say, any funds deposited to a given Ripple address could be paid to a specified bank account at the end of the day.

Since the system does not require one company to handle all of those steps, multiple entities can be competing against one another to build the most efficient pieces of the puzzle, and the system as a whole would benefit. If one arbitrage bot is replaced by another that has a tighter spread - the prices go down. If someone makes a direct market between two distant currencies - the network will route through the new path, saving money. If a new payment processor comes along, they don’t need to reinvent the wheel, they use the established network and focus on making a better product. All of the components are interchangeable, and the most efficient ones will win in the end.

Possible applications

Here is a list of applications that can easily use Ripple as a middleware money network, given enough development in the space:

• Payment processing between any currencies (BitPay, Coinbase, PayPal)
• Exchanges (using Ripple as an exchange engine)
• Remittance and other international payment networks (Western Union, PayPal)

Near future developments

If our guess is correct, we expect to see the following projects to start appearing in the Ripple space in the near future:

• More fiat gateways. They should appear in places financially close to big exchanges making payments between them easier. Alternatively, big exchanges will become gateways as well (like BitStamp)
• Given efficient gateways, arbitrage bots will appear converting every Bitcoin exchanges’ market into Ripple. We’ll see BTC-e’s LTC/USD market reflected in Ripple, BTC China’s BTC/CNY market, and many more
• Arbitrage bots will start appearing next to large forex markets, bringing in efficient fiat<->fiat exchange rates into Ripple
• Given some of those, payment processors like BitPay will start appearing in the Ripple space offering payments to any currency accepted by the merchant
• Either gateways will start offering new and convenient ways to convert people's traditional money into Ripple IOUs (say, through credit cards or other automated systems), or we might see companies like Coinbase appearing to offer this sort of services for them

Conclusions

As I wrote in a previous blog post, cryptos will succeed if the banks are failing. Due to the many inefficiencies of the current international payment systems, it is very likely that a system like Ripple would be used more and more as a common middleware to enable interoperability between many networks.

Recommended reading:

• "Executive Summary for Financial Institutions", by Ripple Labs