Ripple

Ripple is an open-source software project for developing and implementing a protocol for an open decentralized payment network. In its extreme form, the Ripple network could be a peer-to-peer distributed social network service with a monetary honor system based on trust that already exists between people in real-world social networks; this form is financial capital backed completely by social capital. On the other hand, it could be an extension of the existing hierarchical banking system, providing alternate payment routes that do not pass through a central bank.

Background
Modern monetary systems are built on obligations of the participants to each other. Cash and bonds are government obligations, and loan agreements are the personal obligations of borrowers. Bank account balances are bank obligations, backed by borrower and government obligations. For an obligation to have value, the holder must trust that the issuer can supply that value. Thus the banking network can be described as a trust network.

The primary method of making payment to another participant in the system is by transferring ownership of bank obligations electronically over a chain of accounts in the banking network from payer to recipient. The banking network is essentially hierarchical, with banks acting as sole intermediary between its account-holders, and central banks acting as sole intermediary between banks. This structure means that it is simple to route payments to and from any participants, but is inherently full of single points of failure, which may also be characterized as single points of control.

Principle
The core idea of Ripple is that it should be possible to route payments through an open, arbitrary trust network, similar to how the internet routes packets of data through an open, arbitrary computer network. The advantages of such a system would be that it wouldn't be reliant on a small decision-making body at the center to set monetary policy for the entire nation; instead, it would be set in a more democratic fashion by all participants, and in theory be more responsive to regional and community needs. There would be no need for a tightly-regulated institutional trust hierarchy to control the behaviour of those participants near the center: like the internet, but unlike the existing global monetary system, the Ripple network would be designed to weather the collapse of a large number of its nodes.

Note that the Ripple protocol itself wouldn't preclude a hierarchical payment structure evolving, it just allows for the possibility of other structures.

Put another way, Ripple is a system of free banking that separates the payment routing function from the credit aggregation function.

Comparison with other alternative payment systems
Other alternative payment/monetary systems already exist, including internet currencies such as PayPal, and local currencies, such as LETS. Ripple is fundamentally different from both these models in that it provides a level playing field that treats all participants equally. Both PayPal and LETS are modelled on a single central authority that issues obligations based on its policy, and handles the accounting of payments between leaf nodes. In Ripple, no node has any greater or lesser capability than any other node -- this is acknowledgement that every participant in a debt-based monetary system does in fact issue their own currency (or obligations). A node's connectedness is based on the trust of the other participants, and nothing else.

In a sense, every Ripple node is like a LETS or a PayPal unto itself. Ripple could be used to connect existing alternative and mainstream payment systems into a single network.