<p>I think it's necessary to first consider the question: Without ripple, how do banks "actually transfer money" from one bank to another?</p>

<p>Suppose that you and I are banks, and I want to send you $10 million. I'm probably not going to actually physically ship you $10 million worth of bills and coins. Instead, there are a few ways we could do this:</p>

<ol>
<li><p>You and I privately agree that I now owe you $10 million. I don't send you the money, just an IOU. Next month you might want to send me $8, and so you just cancel $8 million of that IOU. We keep track of who owes who how much, but might never actually need to resolve it, since in the long run we're both sending a lot of money back and forth. This is difficult, however, because every bank has to maintain debt with every other bank.</p></li>
<li><p>You and I make an arrangement through a mutually trusted third party. I agree to owe them $10 million, and they agree to owe you $10 million. Later, someone else might send me $10 million the same way, negating my debt to the third party. A "wire transfer" in the US is just this, where the third party is the Federal Reserve.</p></li>
<li><p>You and I announce to a trusted third party that $10 million of my money should now be considered yours. This third party isn't a middleman who holds debt, like the central bank described in #2 - it simply keeps track of IOUs and regularly announces to all parties who owes who how much. The ACH system in the US (a.k.a. "Direct Deposit") works this way.</p></li>
</ol>

<p>So, for the most part, bank's don't actually send money to each other at all -
 they just keep track of who owes who how much. Actually settling those debts, if it happens at all, has to happen outside of the systems above.</p>

<p>Ripple, as I understand it, can be thought of as a decentralized version of #3. It's basically a distributed public ledger of IOUs. (And those IOU's can themselves be traded as currency, when they're written by a trusted party.)</p>

CC BY-SA 3.0
2017-12-22T06:33:35.673Z
This seems much easier to get than the accepted answer.
goelakash
CC BY-SA 3.0
2018-02-06T11:07:29.677Z
Except it's not correct. The movement of XRP does actually settle the debts.
David Schwartz
CC BY-SA 3.0
2017-04-18T18:32:57.893Z
2017-04-18T18:32:57.893Z
Josh
<p>This is a response from XRPChat that I hope will add to what David explained:</p>

<p>Evan Schwartz (October 22, 2015)<br>
<a href="https://www.xrpchat.com/topic/333-ahbritto-ilp-will-potentially-increase-value-of-xrp-as-a-bridge-currency/#comment-1986" rel="nofollow noreferrer">https://www.xrpchat.com/topic/333-ahbritto-ilp-will-potentially-increase-value-of-xrp-as-a-bridge-currency/#comment-1986</a></p>

<p>"If two ILP connectors have XRP, each would set their rate between XRP and whatever other currencies they're trading. That rate would be publicized off-ledger, potentially through a standardized API. When it comes to executing a cross-currency payment bridged through XRP what you would see on RCL would be an XRP payment from one connector to the other. We've already built a proof of concept that did this on the test net (which has Suspended Payments support already)."</p>

<p>Therefore once the transaction is complete the receiver would have already exchanged the XRP to the desired currency at the agreed upon rate. In other words, due to the near instantaneous speed of Ripple the agreed upon rate would have been achieved at the completion of the transaction. Based upon this understanding Bank B does not have to "find a gateway" or worry that "the exchange rate at this gateway is terrible" because this has all been resolved and agreed to prior to the transaction and achieved by the completion of the transaction.</p>

CC BY-SA 3.0
2017-02-26T01:03:13.100Z
I understood the question as being about RCL. Reading over it again, it could be about ILP. The mechanism is similar -- someone accepts the sending asset and someone provides the receiving asset and the system arranges the intermediary transfers to everyone is happy.
David Schwartz
CC BY-SA 3.0
2017-03-01T23:03:13.303Z
Thank you! so bank B already receive the pounds in one of its accounts outside the Ripple network? hmm but there must be some audit here. I think this must be allowed be their central banks, right? like, they cant simply say: this 100k pounds came from the Ripple network, or they can? I'll study more to understand how international transfer can happen without interference/knowledge of the parties' central banks. thanks again!
Leandro
CC BY-SA 3.0
2018-02-06T11:08:47.587Z
There are several different flows, but the general ideal is that the ownership of funds already at the bank changes. For example, some money that previously belonged to one of the bank's customers that was stored at the bank now belongs to the bank. If the bank owed Alice $500 and now doesn't owe Alice $500 because of the transaction, the bank acts as if it was paid $500.
David Schwartz
CC BY-SA 3.0
2017-02-24T14:03:00.147Z
2017-02-24T14:03:00.147Z
AsItWasB4
<p>So I just found this discussion through Google, and I want to thank everyone here for doing a good job explaining the utility of Ripple.</p>

<p>However now that I feel like I understand.... Does anyone else think that the conversation above really just makes the current banking system (and therefore Ripple) sound completely obsolete?   </p>

<p>Ripple to me sounds like the equivalent of the slide ruler.  Sure it was great for a while during a brief period where mankind hadn't quite gotten over the old ways of doing things.  But even meager mechanical computers made it seem antiquated.  Then electric calculators were invented - and slide rulers disappeared overnight.  </p>

<p>Ripple may find use longterm with the banks that are left standing 10 years from now, but let's not pretend Ripple actually does anything that useful when DASH/Ethereum/Bitcoin/etc already remove the entire need for banks in general...  Oh, and why can't banks just make their own network now and remove the middle man?</p>

CC BY-SA 3.0
2018-01-06T12:28:32.543Z
If you think cryptocurrencies remove the need for banks, then you don't know why banks were invented in the first place. Would you store all your lifetime savings in your laptop? Of course not.
Leandro
CC BY-SA 3.0
2018-02-06T00:49:17.977Z
@Leandro - If you subscribe to philosophies of distributed systems, you certainly would.  Ironically, I think it's you that haven't grasped the point of distributed networks.  In this case, you actually WOULD store it on your laptop, and on my laptop, and on Tom Splittstoesser's.  Because all of our laptops would be playing by the same cryptographic principles, unable to convince the system to play any differently.  So, humbly, I'd have to ask you to reconsider the purpose of cryptographic transactions such as those in BTC, ETH, etc.
thataustin
CC BY-SA 3.0
2018-01-06T00:47:09.140Z
2018-01-06T00:47:09.140Z
Tom Splittstoesser
<p>The way Ripple's public ledger system works is that you propose a payment by specifying the source and destination accounts and currencies and then the system gives you a quote based on public offers. You can then specify a maximum amount you are willing to pay to complete the payment and submit it. If the payment is possible for the amount you offered or less, the payment succeeds. Otherwise it fails and you can try again.</p>

<p>Ripple uses pathfinding to figure out how the payment is possible, if it is. Essentially, it looks for a chain of market makers or currency traders willing to put together a trade where one of them gets the asset you're paying with and one of them provides the asset you're paying with.</p>

<p>In the short term, to ensure payments work, banks typically do the very same thing they're doing now. They put exchange offers into the system the same way they would if they didn't have Ripple.</p>

<p>This still gives them many advantages:</p>

<ol>
<li><p>The payment is instantaneous and the receiving bank knows the instant the payment occurs.</p></li>
<li><p>If there are cheaper paths than the regular one the bank would use, it can be taken.</p></li>
<li><p>There's flexibility to use multiple paths for a single payment.</p></li>
<li><p>The bank can net their payments with other people's payments so that the cost drops for everyone.</p></li>
</ol>

CC BY-SA 3.0
2017-02-24T03:05:09.287Z
thanks a lot. I understood how the transfer is made. But how bank A gets money in and bank B gets money out of the Ripple network?
Leandro
CC BY-SA 3.0
2017-02-24T03:35:11.840Z
Reading here http://bitcoin.stackexchange.com/questions/7617/does-sending-non-ripple-money-through-ripple-require-two-people-to-be-connected, it seems that bank A must give money to a gateway, and as you said that he can choose the destination currency, bank B will receive in pounds. but where are these pounds? still on the Ripple network? do you have a link to a paper that you show to banks how does the process work?
Leandro
CC BY-SA 3.0
2017-02-24T04:34:09.237Z
The banks could operate as gateways themselves. They could also have gateways that operate accounts at that bank. They can also do it exactly the way now and use the ledger just as a way to do distributed confirmation and reconciliation.
David Schwartz
CC BY-SA 3.0
2017-02-24T05:44:43.623Z
One way it is currently happening is the bank extends credit to a gateway. That allows any Ripple payment that can deliver an asset issued by that gateway to result in a credit to a customer at that bank (and vice versa for outgoing payments).
David Schwartz
CC BY-SA 3.0
2018-02-06T00:53:15.680Z
Just to try to get some clarity around this.  If a bank were to act as a gateway itself, does it necessarily end up holding onto XRP for long periods of time?  Or is XRP just a momentary utility whose purpose is to validate a secure transaction so the bank can near-instantly decrement it's holdings in 1 currency and increment holdings in another?   If it's the case that it holds on to XRP for any period of time, I don't know how it could responsibly gauge how long manage holding such a volatile asset.  Especially the first few banks to join RippleNet.
thataustin
CC BY-SA 3.0
2018-02-06T06:38:58.440Z
@thataustin The banks don't have to hold XRP. They can either not settle through XRP (though it's slower and more expensive) or allow others (market makes) to provide the liquidity. Holding XRP is not as bad as you might think because the gains and losses due to volatility mostly offset.We do have a lot of tools to help manage that, including offloading both the upside and downside of the holding to another party.
David Schwartz
CC BY-SA 3.0
2017-02-24T02:46:53.137Z
2017-02-24T02:46:53.137Z
David Schwartz
<p>Imagine there is bank A from USA and bank B from England, and they are both on Ripple Network.<br>
Bank A wants to transfer $100 to bank B.
<br><br>
How does bank A put money in the Ripple network? Does it need to buy XRP from some gateway?
<br><br>
Suppose bank A already has the equivalent of $100 in XRP.<br>
Bank B then receives XRP, but bank B is not interested in XRP, it wants pounds.
<br>
How will bank B convert to pounds? Does it need to find a gateway?<br>
What if the exchange rate at this gateway is terrible for him?
<br><br></p>

<ripple><ripple-gateways><money>
How Ripple actually transfer money from one bank to another?
Leandro
# How Ripple actually transfer money from one bank to another?

(Asked by: username_0 on 2017-02-24)

Imagine there is bank A from USA and bank B from England, and they are both on Ripple Network.  
Bank A wants to transfer $100 to bank B.
  
  
How does bank A put money in the Ripple network? Does it need to buy XRP from some gateway?
  
  
Suppose bank A already has the equivalent of $100 in XRP.  
Bank B then receives XRP, but bank B is not interested in XRP, it wants pounds.
  
How will bank B convert to pounds? Does it need to find a gateway?  
What if the exchange rate at this gateway is terrible for him?

**Tags:** ripple, ripple-gateways, money


---

## 4 answers

### Answer by username_3 on 2017-02-24. Score: 10 | Accepted answer

The way Ripple's public ledger system works is that you propose a payment by specifying the source and destination accounts and currencies and then the system gives you a quote based on public offers. You can then specify a maximum amount you are willing to pay to complete the payment and submit it. If the payment is possible for the amount you offered or less, the payment succeeds. Otherwise it fails and you can try again.

Ripple uses pathfinding to figure out how the payment is possible, if it is. Essentially, it looks for a chain of market makers or currency traders willing to put together a trade where one of them gets the asset you're paying with and one of them provides the asset you're paying with.

In the short term, to ensure payments work, banks typically do the very same thing they're doing now. They put exchange offers into the system the same way they would if they didn't have Ripple.

This still gives them many advantages:

1. The payment is instantaneous and the receiving bank knows the instant the payment occurs.
2. If there are cheaper paths than the regular one the bank would use, it can be taken.
3. There's flexibility to use multiple paths for a single payment.
4. The bank can net their payments with other people's payments so that the cost drops for everyone.

> **Comments:**
> **username_0**: thanks a lot. I understood how the transfer is made. But how bank A gets money in and bank B gets money out of the Ripple network?  
> **username_0**: Reading here http://bitcoin.stackexchange.com/questions/7617/does-sending-non-ripple-money-through-ripple-require-two-people-to-be-connected, it seems that bank A must give money to a gateway, and as you said that he can choose the destination currency, bank B will receive in pounds. but where are these pounds? still on the Ripple network? do you have a link to a paper that you show to banks how does the process work?  
> **username_3**: The banks could operate as gateways themselves. They could also have gateways that operate accounts at that bank. They can also do it exactly the way now and use the ledger just as a way to do distributed confirmation and reconciliation.  
> **username_3**: One way it is currently happening is the bank extends credit to a gateway. That allows any Ripple payment that can deliver an asset issued by that gateway to result in a credit to a customer at that bank (and vice versa for outgoing payments).  
> **username_6**: Just to try to get some clarity around this.  If a bank were to act as a gateway itself, does it necessarily end up holding onto XRP for long periods of time?  Or is XRP just a momentary utility whose purpose is to validate a secure transaction so the bank can near-instantly decrement it's holdings in 1 currency and increment holdings in another?   If it's the case that it holds on to XRP for any period of time, I don't know how it could responsibly gauge how long manage holding such a volatile asset.  Especially the first few banks to join RippleNet.  
> **username_3**: @username_6 The banks don't have to hold XRP. They can either not settle through XRP (though it's slower and more expensive) or allow others (market makes) to provide the liquidity. Holding XRP is not as bad as you might think because the gains and losses due to volatility mostly offset.We do have a lot of tools to help manage that, including offloading both the upside and downside of the holding to another party.  

---

### Answer by username_1 on 2017-04-18. Score: 13

I think it's necessary to first consider the question: Without ripple, how do banks "actually transfer money" from one bank to another?

Suppose that you and I are banks, and I want to send you $10 million. I'm probably not going to actually physically ship you $10 million worth of bills and coins. Instead, there are a few ways we could do this:

1. You and I privately agree that I now owe you $10 million. I don't send you the money, just an IOU. Next month you might want to send me $8, and so you just cancel $8 million of that IOU. We keep track of who owes who how much, but might never actually need to resolve it, since in the long run we're both sending a lot of money back and forth. This is difficult, however, because every bank has to maintain debt with every other bank.
2. You and I make an arrangement through a mutually trusted third party. I agree to owe them $10 million, and they agree to owe you $10 million. Later, someone else might send me $10 million the same way, negating my debt to the third party. A "wire transfer" in the US is just this, where the third party is the Federal Reserve.
3. You and I announce to a trusted third party that $10 million of my money should now be considered yours. This third party isn't a middleman who holds debt, like the central bank described in #2 - it simply keeps track of IOUs and regularly announces to all parties who owes who how much. The ACH system in the US (a.k.a. "Direct Deposit") works this way.

So, for the most part, bank's don't actually send money to each other at all -
they just keep track of who owes who how much. Actually settling those debts, if it happens at all, has to happen outside of the systems above.

Ripple, as I understand it, can be thought of as a decentralized version of #3. It's basically a distributed public ledger of IOUs. (And those IOU's can themselves be traded as currency, when they're written by a trusted party.)

> **Comments:**
> **username_2**: This seems much easier to get than the accepted answer.  
> **username_3**: Except it's not correct. The movement of XRP does actually settle the debts.  

---

### Answer by username_4 on 2017-02-24. Score: 0

This is a response from XRPChat that I hope will add to what username_3 explained:

Evan username_3 (October 22, 2015)  
<https://www.xrpchat.com/topic/333-ahbritto-ilp-will-potentially-increase-value-of-xrp-as-a-bridge-currency/#comment-1986>

"If two ILP connectors have XRP, each would set their rate between XRP and whatever other currencies they're trading. That rate would be publicized off-ledger, potentially through a standardized API. When it comes to executing a cross-currency payment bridged through XRP what you would see on RCL would be an XRP payment from one connector to the other. We've already built a proof of concept that did this on the test net (which has Suspended Payments support already)."

Therefore once the transaction is complete the receiver would have already exchanged the XRP to the desired currency at the agreed upon rate. In other words, due to the near instantaneous speed of Ripple the agreed upon rate would have been achieved at the completion of the transaction. Based upon this understanding Bank B does not have to "find a gateway" or worry that "the exchange rate at this gateway is terrible" because this has all been resolved and agreed to prior to the transaction and achieved by the completion of the transaction.

> **Comments:**
> **username_3**: I understood the question as being about RCL. Reading over it again, it could be about ILP. The mechanism is similar -- someone accepts the sending asset and someone provides the receiving asset and the system arranges the intermediary transfers to everyone is happy.  
> **username_0**: Thank you! so bank B already receive the pounds in one of its accounts outside the Ripple network? hmm but there must be some audit here. I think this must be allowed be their central banks, right? like, they cant simply say: this 100k pounds came from the Ripple network, or they can? I'll study more to understand how international transfer can happen without interference/knowledge of the parties' central banks. thanks again!  
> **username_3**: There are several different flows, but the general ideal is that the ownership of funds already at the bank changes. For example, some money that previously belonged to one of the bank's customers that was stored at the bank now belongs to the bank. If the bank owed Alice $500 and now doesn't owe Alice $500 because of the transaction, the bank acts as if it was paid $500.  

---

### Answer by username_5 on 2018-01-06. Score: 0

So I just found this discussion through Google, and I want to thank everyone here for doing a good job explaining the utility of Ripple.

However now that I feel like I understand.... Does anyone else think that the conversation above really just makes the current banking system (and therefore Ripple) sound completely obsolete?

Ripple to me sounds like the equivalent of the slide ruler. Sure it was great for a while during a brief period where mankind hadn't quite gotten over the old ways of doing things. But even meager mechanical computers made it seem antiquated. Then electric calculators were invented - and slide rulers disappeared overnight.

Ripple may find use longterm with the banks that are left standing 10 years from now, but let's not pretend Ripple actually does anything that useful when DASH/Ethereum/Bitcoin/etc already remove the entire need for banks in general... Oh, and why can't banks just make their own network now and remove the middle man?

> **Comments:**
> **username_0**: If you think cryptocurrencies remove the need for banks, then you don't know why banks were invented in the first place. Would you store all your lifetime savings in your laptop? Of course not.  
> **username_6**: @username_0 - If you subscribe to philosophies of distributed systems, you certainly would.  Ironically, I think it's you that haven't grasped the point of distributed networks.  In this case, you actually WOULD store it on your laptop, and on my laptop, and on username_5's.  Because all of our laptops would be playing by the same cryptographic principles, unable to convince the system to play any differently.  So, humbly, I'd have to ask you to reconsider the purpose of cryptographic transactions such as those in BTC, ETH, etc.  

---

