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.

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.)

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?