Bitcoin rival Ripple looks to make waves

A smaller, early-stage player in digital currencies secures its first round of angel funding

The online virtual currency Bitcoin has generated some serious buzz lately, with its value soaring past US$200 for the first time this week. Now a smaller player hopes to emerge as a rival by processing transactions faster and giving its users more payment options.

Called Ripple, it's a peer-to-peer payment system that allows people to send money to anyone, anywhere in the world, just like Bitcoin. The system has its own currency, called ripples, but unlike Bitcoin people can also send and receive payments in any other currency, or even create their own.

Ripple's credentials are worth noting: OpenCoin, the San Francisco-based company that built Ripple and provides its software infrastructure, was cofounded by Jed McCaleb, who built Mt. Gox, the most popular exchange for Bitcoins. Still, whether Ripple can piggy-back on momentum behind Bitcoin remains to be seen.

OpenCoin has just secured a round of angel funding from investors including Andreessen Horowitz and the Bitcoin Opportunity Fund, an investor in Bitcoins and Bitcoin-related companies. The funding was announced Thursday, though the amount was not disclosed.

Like Bitcoin and other alternatives such as LiteCoin, Ripple is designed to be a digital currency and payment system free of regulation by any outside entity. Both systems employ "crypto-currency," which allows people to make transactions online unhindered by any financial or regulatory authority. Interest in Bitcoins has surged, with the value of a bitcoin soaring from roughly $30 a month ago to more than $230 this week, though it also dipped sharply for a while on Wednesday.

Both Bitcoin and Ripple are meant to enable fast and easy payments between buyers and sellers, but Ripple also lets users set up their own payment networks among specific networks of people, in any currency they choose.

Money changes hands in two ways in Ripple's network: either as its own ripple currency between people who may not know each other, or in the form of IOU's between trusted individuals. On Ripple, in other words, people can set up a trust limit by declaring an amount in any currency that they are willing to let someone else owe them.

These "trusted pathways," as Ripple calls them, can exist among people who may not be directly connected, so a person would be able to accept a payment from someone else if they can establish a trusted pathway through a common intermediary. Therefore, the more people users designate as being trusted, the more pathways and transactions are made possible on Ripple, according to OpenCoin.

Think of it as being able to direct-message a friend of a friend on Twitter.

Ripple has about 3,500 early users and will be launched widely in May. People can sign up at its website to be notified when ripples are distributed. Ripples are currently far cheaper to obtain than bitcoins, CEO Chris Larsen said.

According to OpenCoin, Ripple's transfer model improves upon payment services like PayPal because there are no fees, its transactions are irreversible and it is available to everyone globally. Payments can be made through Ripple's own wallet service, or through third-party applications such as Bitstamp.

On Bitcoin, the currency can be purchased outright or accumulated by "mining," which involves employing the processing power of computers to crunch numbers and unlock new "blocks" of bitcoins.

While it might sound like free money, mining on Bitcoin has several problems, according to Larsen. People need to buy faster and more expensive computers to find new coins, and the electricity and hardware costs may eclipse the value of the Bitcoins that are mined.

Bitcoin transactions are also slow. Each transaction takes on an average 10 minutes to be verified before it is confirmed. By contrast, sending and receiving money on Ripple will take only a few seconds, according to Larsen.

Still, it remains to be seen if Ripple can emerge as a widely-used payment system. Many of its early users are also Bitcoin users, and it currently operates just 12 servers worldwide, Larsen said. Bitcoin, meanwhile, has well over a million users.

"I see Ripple being used more in localized, regional community environments rather than as a global international application like gold or bitcoins," said Jon Matonis, a board member of the Bitcoin Foundation, which funds Bitcoin's infrastructure.

Ripple's trusted pathways are unlikely to be formed between people who are not already connected socially, he added. "Someone in Japan is not going to care about someone's reputation in California," he said.

But Ripple has a software model that is attracting attention among developers, OpenCoin's Larsen said. The software supporting the service is open source, allowing developers to build additional transactional features on top of it.

OpenCoin held its first Ripple gathering through Meetup last week and drew more than 60 developers and hedge fund managers. "It's starting to really gel," Larson said.

Zach Miners covers social networking, search and general technology news for IDG News Service. Follow Zach on Twitter at @zachminers. Zach's e-mail address is zach_miners@idg.com

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