The topic of scalability in Bitcoin, and cryptocurrencies in general, is a somewhat controversial issue. Right now the Bitcoin network can handle roughly 7 transactions per second at the current 1MB block size limit. In contrast, the VISA network handles roughly 2,000 transactions per second on average, with a peak "burst" capacity of about 10,000 transactions per second. This suggests that Bitcoin has a long ways to go development-wise before it can compete with the legacy payment networks at scale. At first glance, the answer to this problem seems simple: just raise or remove the block size limit so more transactions can fit into each block. In reality, the answer is a bit more complicated.
Raising the block limit could mean that some day, average Bitcoin users would no longer be able to participate in the system as the computing and networking power necessary would be out of their reach. This is a legitimate concern, as centralization of the network could lead to more unwelcome changes, and so begs the question: what can we do to keep Bitcoin usable for everyone, while still achieving the scalability necessary to compete on a global level? The answer is off-chain transactions. This is a common technique that web-wallets and exchanges use to perform fast transactions within their closed-loop systems. When a customer deposits cryptocurrency into their account, the funds are either moved offline or into a central hot-wallet (often a hybrid of both) and their account is debited with a corresponding balance. This balance is then shifted around between accounts more or less instantly, and the coins only hit the blockchain when a withdrawal is processed.
Ripple offers similar functionality, but with the added benefit that your account balance is fungible on an innovative global payment network. Not only can you make payments to other Ripple users which confirm in less than 5 seconds, but you can also utilize Ripple's decentralized exchange capability to convert your Ripple balance into any other balance for which there is a market using Ripple's open order book which is accessible from the Ripple client. So if you deposit bitcoins into a Ripple gateway, those bitcoins can be converted into dollars, euros, yuan, or even silver dimes if there is a market between your gateway's BTC and the currency you want to convert into. Ripple makes it easy for cryptocurrencies to scale globally, while also increasing accessibility for anyone who wants to move funds in and out of cryptocurrency on the Ripple network. Ripple also makes it easy for cryptocurrency users to transact with users of other currencies. Let's say that you want to buy something from a merchant who has a Ripple payment processor but doesn't want cryptocurrency because it's considered too volatile. Ripple will convert your cryptocurrency into the merchant's currency of choice automatically, confirming the transaction in less than five seconds.
While increasing cryptocurrency's scalability, off-chain transactions with Ripple also add centralization into the mix: you have to trust your gateway to continue redeeming their balances for the asset it represents. This has worked out for customers of the largest and most popular Ripple gateway, Bitstamp, but can this trust scale out globally? If the history of trusting others with one's cryptocurrency is any indication, there might be some issues. While the Ripple business community is attempting to self-regulate and put in place the proper safeguards to protect customer funds while they're on deposit with gateways, the temptation to make a quick buck might be too much for some to resist. Unwitting customers unfamiliar with trust and security protocols on the internet might be tricked into depositing funds at an unreliable gateway, only to lose everything when they try to redeem their balances to no avail. Even if the server administrator is trustworthy, there's still a risk of hacking, where the hacker steals all funds stored in the server’s "hot wallet." There is a solution to this problem, one that is unique to cryptocurrencies: voting pools.
Open Transactions core developer Fellow Traveler has suggested voting pools as a way to prevent OT servers from absconding with funds, and there's no reason to think this couldn't work for Ripple deposits and redemptions as well. The process looks like this:
Competing Ripple gateways all want a way of assuring customers that they not only won't abscond with customer funds, but can't. To this end, they form a voting pool.
A customer initiates a deposit at their Ripple gateway. The gateway’s software then automatically creates a multi-signature transaction with every other gateway in its voting pool and serves the customer with the address to fund the transaction.
The customer sends their deposit to the voting address and receives an equivalent Ripple balance from the gateway, which they can then send around the Ripple network or save until a later date.
When the customer wants to redeem their balance, they send their balance back to the gateway which automatically triggers members of the gateway voting pool to sign the multi-signature transaction, redeeming the customer's deposit.
Gateways in the voting pool can be audited by each other and third parties to ensure that balances going out match deposits coming in, mitigating fraud for customers and the voting pool. Bad actors would be ostracized from the voting pool to prevent future abuse.
Using this model, the gateway cannot abscond with the funds without convincing a quorum of gateways in the pool to collude with them. Since the gateways are in competition with each other, it would be against their self-interest to collude.
Note that it does not have to be competing gateways in the voting pool; it could also be a pool of legal, accounting, and insurance firms joining their gateway customer, all of whom have an incentive to prevent loss to protect the reputation and financial stability of their businesses.
It's worth mentioning that Open Transactions isn't made entirely redundant by Ripple in this context. As a public ledger system, Ripple still has user-defined privacy, meaning that it's private until you attach your identity to a Ripple address somehow. Open Transactions, in contrast, uses private servers and blinded digital cash to enable private, unlinkable transactions just like with real physical money. So a Ripple gateway might offer their customers access to a private OT server in order to increase privacy for certain transactions, and then balances can be withdrawn either back into the Ripple network for decentralized exchange and payments, or redeemed for the original asset.
Other technological advances hope to solve the scalability issue with cryptocurrency, such as the innovative GHOST protocol which is already being implemented into next-generation cryptocurrency systems. Even with scalability at a transactions-per-second level potentially solved, 51% attacks, power consumption, and decentralized exchange issues still remain, and Ripple's consensus and pathfinding capabilities offer a unique solution to these problems while maintaining the security cryptocurrency demands. This isn't a new idea, but one worth revisiting and taking into consideration as Bitcoin and the rest of the cryptocurrency ecosystem inches closer to mainstream adoption.