What Is Ripple (XRP)

Ripple is one of the most controversially debated projects within the cryptocurrency world. Some consider it to be a highly centralized endeavor that should never be likened to an open and permissionless blockchain like Bitcoin and Ethereum. Others are of the opinion that Ripple is the only project that will ever be able to get meaningful adoption within the traditional world of finance. Still others, the XRP army, are relentlessly shilling the digital asset.

But what is Ripple? Ripple is a project that brings together a network of independent banks and payment providers with a standardized protocol. This protocol allows for shared communication and sending low-cost, immediate payments all around the globe. There is also XRP, a cryptocurrency that is inherently related to Ripple. 

How long has Ripple been around?

Ripple’s founding story goes way back in time. One could argue that its initial idea precedes the advent of Bitcoin. As a matter of fact, Canadian developer Ryan Fugger first conceptualized Ripple back in 2004. Its first iteration was called RipplePay, a project that was supposed to provide secure payment solutions for a global financial network. Once Bitcoin was launched in 2009, Ripple projects evolved as well. New technologists like Arthur Britto, Jed McCaleb, David Schwartz, and Chris Larsen (first CEO of Ripple) took the project to a new level in 2012. They transformed RipplePay into a U.S.-based technology company called OpenCoin. With it, the blockchain-based payment system called XRP was born. Following this transformation, Ripple was focused on payment solutions for banks and other financial institutions. One year later, OpenCoin was rebranded to Ripple Labs. Again, two years later, the project got its actual name, Ripple, which it still has to this day.

What is Ripple aiming to solve?

Today, Ripple’s major goal is to facilitate and optimize traditional payments — especially cross-border payments. The bulk of financial transactions today is still operated through siloed databases controlled by separate financial entities. This causes endless friction, which Ripple is set to eliminate by providing a more open payment infrastructure.

According to various sources, various banks and financial institutions around the world have partnered with Ripple so far. Among these are institutions like Santander Bank, American Express, and MoneyGram. Also, Egypt’s biggest bank, the National Bank of Egypt (NBE), is said to have joined Ripple’s network.

Although there remains some doubt about how frequently these partners have been using Ripple’s services, the company is confident that its solutions present an enticing alternative for cross-currency and international payments. After all, there is some speculation that XRP Ledger would be a well-suited candidate to serve as a distributed alternative to today’s SWIFT system (a financial messaging platform used by banks for money transfers). While some see Ripple as a better version of SWIFT, people who have worked for Ripple offer an alternative view that the project is not a competitor but a complementary system to SWIFT.

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How does the Ripple system work?

At the heart of Ripple’s infrastructure is the XRP Ledger (XRPL), Ripple’s blockchain. XRPL is an open-source distributed ledger that allows for real-time financial transactions. So, while XRPL functions like Bitcoin’s ledger, it is not a simple copy of the Bitcoin (BTC) blockchain but only draws on several aspects found in Bitcoin. Just as with Bitcoin, the XRP Ledger can be used to send and receive cryptocurrency. Also, if tokens are sent between addresses on the XRPL, digital signatures are required. One aspect that was left out with XRP Ledger is Bitcoin’s proof-of-work mechanism. The XRP Ledger is relying on a federated-consensus algorithm instead. For this reason, Ripple touts itself to be more eco-friendly than Bitcoin.

The XRP Ledger is not owned, operated, and controlled by Ripple. The development of XRPL is in the hands of the community and is led by entities like RippleX, XRPL.org, or the XRPL Foundation. Different fiat currencies can be transacted on XRPL. Also, things like decentralized exchanges can be built on XRPL. In addition, NFTs can be issued. As of now, non-fungible tokens exist on something called NFT-Devnet, a testnet. In the future, tokenization projects and capabilities for metaverses, gaming, art, and beyond should be deployable on XRPL.

Ripple, the company, has been developing RippleNet, a proprietary business solution that offers connections to hundreds of financial institutions. Supposedly, the service supports more than 55 countries and 120 currency pairs. RippleNet functions as a payment and settlement network that is provided by Ripple and was born out of xCurrent and xVia. As such, RippleNet is an exchange and settlement system for different bank ledgers. Through this protocol Ripple customers using RippleNet can transact in dollars, euros, or any other fiat currencies as well as cryptocurrencies like bitcoin or ether. The XRP token can also be traded but is in no way the system’s only way to transact in.

The same is true with “On-Demand Liquidity” (ODL), which was formerly called xRapid and is now also part of RippleNet. This pillar functions as a liquidity solution within RippleNet. It helps users to swap in-between assets to move through RippleNet. Again, all different kinds of cryptocurrencies are supported, although XRP is marketed as the go-to token. Ripple, the company, does provide “on-demand” liquidity in XRP, meaning that it acts as a liquidity provider for users that want to quickly swap assets in and out of XRP.

Watch the video: XRP — Understanding the Asset and Clearing Misconceptions

The relationship between Ripple and its token, XRP

Because of Ripple’s multi-faceted system consisting of multiple pillars, their connection between XRP and Ripple is not entirely clear. First and foremost, XRP is the XRP Ledger’s native cryptocurrency. As such, XRP is inextricably linked to this ledger. When it comes to Ripple and its proprietary business solution, RippleNet, there’s not necessarily a connection. Examples from the past indicate that Ripple has been successfully collaborating with banks, without XRP really being used. Also, if XRP is used, it is only ever used as a transactional medium, not as a means to store value.

XRP and its tokenomics

Contrary to popular belief, Ripple’s distributed ledger (XRP Ledger) is open and permissionless. It is also open-source and outsiders are encouraged to propose developing solutions. The reason why many people might suspect that Ripple is a permissioned blockchain is the “UNL” that is proposed by Ripple by default. The UNL is a list of validators that are recommended by Ripple. The list is being published, so XRP Ledger validators know which other validators they can be in touch with.

From a technical perspective, Ripple’s blockchain is different from that of other public blockchain networks like Bitcoin or Ethereum. There is no proof-of-work algorithm, which means that there is also no mining going on with XRP Ledger. When XRP Ledger was launched originally in 2012, the entire 100 billion XRP tokens were initially pre-mined. After all the tokens were created, the founders retained some (about 20 billion), while 80 billion were given to Ripple the company, which was tasked with distributing the tokens along the way.

In May 2022, a little more than 48 billion tokens were in circulation. The rest is mainly held in escrow, with Ripple having power-of-attorney over it. Tranches of escrowed tokens are released month after month and Ripple uses them to do market-making for XRP. This way, the remaining XRP in escrow will be distributed to the public over time.

Interestingly, XRP has a kind of token-burning mechanism built in. With every XRP that is being transacted, a small amount is put up by the sender and is destroyed in the process, reducing this amount from the total supply. While a token burn acts as a sort of scarcity-enhancing mechanism, in the case of XRP it would still take at least 70,000 years to burn all the XRP.

Is XRP a security?

Back in 2020, the Security and Exchange Commission (SEC) in the U.S. charged Ripple the company with conducting a $1.3 billion unregistered-securities offering. Because XRP was not issued through proof-of-work mining but was pre-mined by Ripple instead, SEC officials argued that XRP represents an unregistered security, which is against U.S. law. Proponents of Ripple objected that XRP is merely a utility token for payments.

Back in 2018, former director of the SEC’s Division of Corporation Finance William Hinman indicated that neither bitcoin nor ether should be deemed securities. Proponents of Ripple are keen on using this material — once released — to their favor.

A resolution might only be reached in 2023. Whatever the outcome of the SEC versus Ripple case will be, there is quite a lot at stake for the crypto world as a whole.

Watch the video: Explained: SEC vs. Ripple