The Ripple service allows payments between interconnected friends and businesses.
Normally, if your friend Alice owed you $10, she would have to pay you back before you could make any use of that debt. If you were creative, however, you might be able to pass the debt on to someone else who knew and trusted Alice, in exchange for something you wanted. For example, you might be able to get a book you want from Bob, who also knows Alice, in exchange for letting Alice know that she now owes Bob $10. Instead of money, you used Alice’s IOU to pay Bob. Alice acts as an intermediary between you and Bob.
The Ripple service does the same thing, only it takes the idea one step further. What happens if you want to get a haircut from Carol, who doesn’t know Alice at all? Your $10 IOU from Alice isn’t useful because Carol being owed money by Alice doesn’t mean anything to Carol. But suppose you had a way to find out that Bob, who knows Alice, also knows Carol. You could talk to Bob and arrange for him to take Alice’s IOU in exchange for giving his own IOU for $10 to Carol. Since Alice owes him exactly what he owes Carol, Bob is even on the deal. Both Alice and Bob act as intermediaries between you and Carol.
And that’s how the Ripple service works. You create a profile inside your financial services account and indicate who you know and how much you trust them by connecting to people by email address and giving them credit limits. Then whenever you want to make a payment to another Ripple service user using only friendly obligations, the Ripple service finds a chain of intermediaries connecting you to the person you want to pay, and records the payment in each intermediary’s account all the way down the chain. You end up owing one of your “neighbours”, and the payment recipient ends up being owed by one of her neighbours.
Please note: This blog discusses the original Ripple and RipplePay, and not the current Ripple, Ripple.com, RippleLabs, RippleNet, XRP, etc.