The Ripple website describes its protocol as a neutral service for financial systems and institutions and an infrastructure technology that could be used for interbank transactions. Financial services and banks will be able to incorporate the protocol into their systems, thereby allowing customers to make use of the service. Ripple currently requires 2 parties for transactions to happen:
1. A financial institution that is regulated to issues balances and hold funds on behalf of clients.
2. Market makers, including currency trading desks and hedge funds to make available liquidity for the currency clients want to conduct trade in.
Ripple is founded on a public, shared ledger or database whose content is determined by consensus. The ledger holds balances, as well as information on offers to sell or buy assets and currencies, thereby creating a distributed exchange. The process for consensus enables remittances, exchanges and payments in a distributed manner.
Users make payments to each other in Ripple by using transactions signed cryptographically using either Ripple’s own currency (XRP), or fiat currencies or. For XRP transactions Ripple uses its own ledger, and if payments are done with other assets, the ledger only stores the amounts owed. In this case, an asset is represented as a debt obligation. As Ripple originally had no enforcement power in the real world, but only stored records in the ledger, trust was needed. Due to Ripple now being integrated with several bank services and user verification protocols, a user has to specify other users that should be trusted and with which amount. When two users trusting each other make a non-XRP payment between them, the mutual credit line’s balance is adjusted, based on limits set by the users. To trade assets between users without direct trust relationships, the system attempts to discover a route between the users in such a way that each section of the route is between users that have trust relationships. Balances along the route are adjusted at the same time and this mechanism is called ‘rippling’.