Ripple which was formally released on the 15th of May 2018 is the real time gross settlement system current exchange and remittance network. This goes to say Ripple is a money transfer network designed to serve the needs of the financial services industry. XRP is a cryptocurrency tailored to work on the Ripple network, and is consistently listed among the top five cryptocurrencies by market capitalization.
What Is Ripple?
Forbes defines it as a payments settlement system and currency exchange network that can process transactions around the world. The idea is that Ripple serves as a trusted agent in between two parties in a transaction as the network can quickly confirm that the exchange went through properly.
People not only use this network for transactions involving the Ripple digital token, called XRP, but they can also use it to exchange a variety of fiat currencies, Bitcoin and even commodities like gold. Whenever users make a transaction using the network, the network deducts a small amount of XRP as a fee.
“XRP was designed from the very beginning to essentially be a replacement for SWIFT [a leading money transfer network] or to otherwise replace the settlement layer between major financial institutions,” says Pat White, CEO of Bitwave.
El Lee, board member of Onchain Custodian says “The standard fee to conduct transactions on Ripple is set at 0.00001 XRP, which is minimal compared to the large fees charged by banks for conducting cross-border payments,” As of late April 2021, the XRP price was $1.38 per token, meaning the transaction fee works out to be just $0.0000138.
What Really Is XRP?
XRP is cryptocurrency issued by Ripple Labs as part of its network. You can buy XRP as an investment, as a coin to exchange for other cryptocurrencies or as a way to finance transactions on the Ripple network.
Notably, XRP’s blockchain operates a little differently than most other cryptos’. Other cryptocurrencies leave their transaction ledgers and verification processes open to anyone who can solve complex equations quickly, but transactions are secure as majority of ledger holders must agree with the verification for them to be added.
On the other hand, the XRP’s Ripple network somewhat centralizes things; While anyone can download its validation software, it maintains what it calls unique node lists that users can select to verify their transactions based on which participants they think are least likely to defraud them. According to Forbes, it’s default list currently contains 35 trusted validators. Ripple decides which validators to approve for this list and also makes up six of these validation nodes. However, users can opt out of this default list and hypothetically remove Ripple-backed validators from their transactions entirely, instead constructing their own lists of trusted validators. This would allow the network to continue to approve transactions even without Ripple the company remaining involved or even continuing to exist.
As new transactions come in, the validators update their ledgers every three to five seconds and make sure they match the other ledgers. If there’s a mismatch, they stop to figure out what went wrong. This allows Ripple to securely and efficiently validate transactions, which gives it an edge over other cryptocurrencies, like Bitcoin.
“Bitcoin transaction confirmations may take many minutes or hours and are typically associated with high transaction costs,” says Lee. “XRP transactions are confirmed around four to five seconds at much lower cost.”
“Mining” is the distributed verification system used by most blockchain-based cryptocurrencies. It facilitates transactions and provides the mechanism by which new currency is introduced into a cryptocurrency system—typically as a reward to verifiers for their work supporting the network. For example,
Bitcoin has a total supply limit of 21 million tokens that are steadily released as more and more transactions are verified,
Ripple, in contrast, was “pre-mined,” meaning Ripple the company created 100 billion tokens that are then periodically released publicly. Ripple owns about 6% of that as an incentive for it to help the cryptocurrency grow and be successful over time. Another approximately 48% are held in a reserve for regular release into the market through sales.
Understandably, this has led to concerns that a lot of XRP could be released at once, diluting the value of other XRP already in circulation because part of what gives any currency its value is its comparative scarcity.
Tim Enneking, principal of Digital Capital Management revealed that “The company has tried to reduce the uncertainty by implementing several mechanisms (trust, predictable release, etc.),”
. That mining vs. pre-mining distinction may also be a reason for its conflict with the SEC as the SEC may think of XRP as less a currency and more security, like a stock, that is governed by different, stricter regulations.
Transaction confirmations are incredibly fast. They generally take four to five seconds, compared to the days it may take banks to complete a wire transfer or the minutes or potentially hours it takes for Bitcoin transactions to be verified.
The cost to complete a transaction on the Ripple network is just 0.00001 XRP, a small fraction of a penny at current rates.
Exchange network versatility:
The Ripple network not only processes transactions using XRP, but it can also be used for other fiat currencies, cryptocurrencies and commodities.
Used by large financial institutions: Large enterprises can also use Ripple as a transaction platform. Santandar, Yes Bank are a few using this network, demonstrating it already has larger institutional market adoption than most cryptocurrencies.
One of the reasons that cryptocurrencies became popular is that they were decentralised, taking control away from large banks and governments. The Ripple system is centralized and goes against this philosophy.
Ripple Labs controls the XRP supply: Ripple Labs decides when to release coins, giving it control versus other cryptos where coins are slowly and steadily released by mining. This means Ripple Labs has more power to influence the value of XRP by deciding when and how many tokens to release.
Recent SEC legal action against XRP:
In 2020, the SEC filed a lawsuit against Ripple, saying that since it can decide when to release XRP, the company should have registered it as a security. Until this gets resolved, it could slow down institutional use of this system. Several exchanges have also stopped listing XRP as a result, such as Coinbase.
How To Use Ripple and XRP.
You can use XRP like any other digital currency, either for transactions or for potential investments. You could also use the Ripple network to process other types of transactions, like exchanging currencies.
For example, if you are looking to swap USD for euros, you could first exchange your USD for XRP on the Ripple network, and then use those to buy euros, rather than handling the currency exchange directly through a bank or money changing exchange. This can be a much faster and cheaper approach versus paying the high fees banks and money remittance organizations may charge.
Should You Buy XRP?
While some might find the vision and benefits for XRP compelling, White is worried the SEC lawsuit could create trouble for those looking to buy into it. “They are positioning themselves as a settlement layer for regulated companies, but they’re also deep in a dispute with the SEC. None of the customers they would love to be onboarding can really start to use XRP until Ripple has gotten their legal woes figured out,” he says.
With all this uncertainty, Enneking warns that XRP can be a gamble not for the faint hearted. Though it has since more than recovered, “the SEC announcement caused the price of XRP to plunge,” he notes, making this crypto a particularly volatile investment until things are sorted out with the SEC.
But like any other payment system or investment, just make sure it’s with money you can afford to lose. So, if you believe that Ripple will emerge victorious against the SEC and continue taking over as a payment system, then it could be worth buying XRP.