When you open an account with a traditional bank, the bank will hold funds on your behalf, accepting deposits and honoring withdrawal requests. However, there isn’t a box in which your particular funds are stored. Instead, your bank account is like an IOU — when you make a deposit, your funds go into the general pool, and the bank keeps track of how much it owes you. Later on, you can make a withdrawal and the funds come out of that general pool, again updating your account balance.
In the same way, a Ripple issuer is able to hold funds on your behalf, and you are able to make use of those funds whenever you need them. An issuer is needed whenever you want to receive payments in a currency other than XRP.
Just like you have to trust the bank to keep your money safe, you need to trust a Ripple issuer to hold your funds. By extending trust to an issuer, you are telling the Ripple system that you trust that issuer to hold a certain amount of funds in a given currency for later redemption. This is done by setting up a trust line within the Ripple system.
Note that when you set up a trust line, you really are trusting that issuer to hold your funds in that currency. If the issuer reneges, for example because it goes out of business or decides not to honor a withdrawal request, then you can lose up the value of your trust line.
When setting up a trust line, make sure that you enter the appropriate Ripple address for the issuer. Some issuers will have multiple Ripple addresses (for example, in the form of a hot wallet); make sure you use the address the issuer told you to trust, and that you trust the address for a currency that the issuer supports.
You can adjust or remove a trust line at any stage. Note that if the issuer is holding funds on your behalf and you reduce a trust line, the funds will not be affected, but you will be unable to receive further payments unless there is sufficient trust available. If you reduce your trust line to zero and have no funds in that currency and issuer, the trust line will be removed.
Multiple Trust Lines for the Same Currency
If you trust multiple issuers for the same currency, and have funds in that currency held by one of those issuers, the Ripple system considers that you trust both of these issuers equally, and may automatically swap your currency in one of those issuers for the equivalent amount held by another issuer. This won’t affect the total amount of the currency that you have, but that currency may swap from one issuer to another.
Ripple does this to fulfill payment requests — you are effectively providing liquidity between those two issuers for that currency. For example, if you have $US 100 issued by XYZ, and trust both XYZ and ABC for $US, the Ripple system may take your $US100 and give it to someone else, swapping your $US from XYZ to ABC to fulfill a request for $US/XYZ. You will still have $US 100, but it is now held by issuer ABC rather than issuer XYZ.
The Ripple client will warn you if you attempt to set up multiple trust lines for the same currency. Obviously, you should trust all the issuers for who you create a trust line.