Ripple (XRP)
8 minutes
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- XRP is an open-source Layer 1 cryptocurrency developed by Ripple to compete with the SWIFT network by providing instant international money transfers with low fees.
- XRP is one of the few cryptocurrencies approved by ISO-20022 (the international standard for electronic messaging between financial institutions), which is currently being used by some of the world's leading banks, including Santander Bank, Standard Chartered Bank, and SEB.
- The company became the subject of a high-profile legal case brought by the SEC in 2020, which is still ongoing.
What are XRP and Ripple?
XRP is a cryptocurrency developed by Ripple (previously known as Ripple Labs) to facilitate cheap and efficient money transfers on an international level. It has been in existence since 2012, making it one of the oldest altcoins.
XRP is a token that can be bought and traded on Ripple networks. Similar to how Bitcoin is a network and BTC is its coin, but XRP was not developed as a means of payment like Bitcoin. Instead, as mentioned earlier, it is used to facilitate transfers between different currencies through RippleNet.
Unlike BTC, where new coins can be mined into circulation, 100 billion XRP tokens were created back in 2012 and no new tokens will be created. Ripple releases 1 billion XRP from escrow into circulation every month to control the supply.
What does Ripple (XRP) do?
Sending money internationally is an expensive and cumbersome process - it involves numerous expenses such as intermediary bank fees and currency conversion fees, and the settlement can take anywhere from three to five days. Ripple aims to solve this massive problem through fast and inexpensive processing of cross-border payments and money transfers.
Let's say we want to transfer money from the US to the UK. We would need to perform a SWIFT transfer, which takes 24 hours, use the direct exchange rate between the currencies, and then pay a transaction fee, including the exchange rate from US dollars to pounds sterling. The bank would have to take the currency, in this case US dollars, and convert it into currency B, which is pounds sterling, or vice versa. The client would pay a transaction fee for the SWIFT bank transfer (typically up to $50 USD) and 1-3% of the total amount to cover the currency conversion rate.
Compare that to XRP, which can process transactions in 3-5 seconds at an average cost of $0.0002 per transaction. This transaction fee is charged as a measure to combat spam and is not paid to any party but is irretrievably destroyed through a process called burning. Additionally, the XRP network operates 24/7, making it an excellent alternative to banks that are only open from Monday to Friday.
According to its website, the XRP Ledger (RippleNet) consistently processes 1500 transactions per second (TPS), whereas Bitcoin has a TPS of 3-7, Ethereum has a TPS of 15-25, and Visa has 1700.
The idea behind RippleNet is that instead of transferring fiat currency or converting US dollars to British pounds, Bank A can deposit the amount in US dollars into XRP in Bank B's Ripple wallet. The value of XRP in British pounds remains constant for Bank B. By retaining its value in each currency (for example, XRP for $2 will be worth €1.8 at the current exchange rate), the recipient bank can hold XRP without converting it until they spend it again. Using this method, the currency conversion fee is eliminated by 100%. RippleNet can facilitate the transfer of XRP to US dollars, euros, British pounds, or any other currency.
Bitcoin and XRP
Now let's compare XRP to Bitcoin. Bitcoin uses blockchain technology to store transaction data for BTC, while Ripple uses the XRP Ledger. Both the Bitcoin blockchain and the XRP Ledger are types of distributed ledgers, but the ways transactions are verified in them are different. BTC uses a Proof of Work system, in which miners compete to be the first to solve mathematical problems to hash a block and mine new BTC tokens. XRP uses a more environmentally-friendly trust-based consensus algorithm to confirm transactions and add them to the XRP Ledger, creating a new version of the ledger. This means that the transaction processing time for XRP is about 4 seconds compared to 1 hour for BTC.
Another difference between them lies in the data stored in each distributed ledger. In the Bitcoin blockchain, each block only contains the history of transactions that occurred during a specific period of time and a reference (hash of the block header) to the previous blocks. However, the XRP ledger stores much more information. Account information such as balances, transactions, and objects stored in the accounting book are available for viewing. Each version of the ledger essentially represents an instantaneous snapshot of all balances stored across all addresses. Every time new transactions are validated in the ledger, a new version of the ledger contains all the previous information plus the new transactions, increasing the "height" of the blocks.
The technology underlying XRP
XRP is a Layer 1 coin, which means it operates on its own network. However, XRP does not use the Proof-of-Work consensus mechanism that Bitcoin uses. It operates on the Ripple Transaction Protocol (RTXP), which standardizes communication rules, allowing payment intermediaries and global banks on the RippleNet network to seamlessly send and receive payments.
XRP was designed with maximum scalability in mind, which means inexpensive, highly efficient transfers and currency conversions. This gives banks an alternative to SWIFT transfers via blockchain.
XRP is one of the few cryptocurrencies approved by ISO 20022 (the international standard for electronic messaging exchange between financial organizations), which gives it a chance to be integrated by banks worldwide after the implementation of the new standard. XRP also supports smart contracts and is developing a DeFi ecosystem on top of its network.
Who is behind XRP?
XRP was founded by Jed McCaleb, an American blockchain pioneer who built the world's first cryptocurrency exchange, Mt.Gox. Mt.Gox was the largest Bitcoin exchange for many years, trading up to 150,000 bitcoins (worth $6 billion at current prices) per day, until it was hacked in 2013, resulting in the loss of 850,000 bitcoins. McCaleb sold Mt.Gox to French developer Mark Karpeles in 2011, who was then living in Japan, before he focused on Ripple.
He continued to develop the Ripple protocol, actively pitching it to investors, before stepping down from his active role in Ripple in July 2013 (reportedly due to a falling out with other co-founders) to start his next crypto venture, Stellar Lumens (XLM), in 2014. Stellar uses a similar ledger technology, but is geared towards underdeveloped markets lacking traditional banking services, while XRP is designed for major players in the global banking and financial services sector.
David Schwartz, one of the newest blockchain programmers in the crypto space, is also part of the Ripple team, making significant contributions to its early development. The current CEO of Ripple is Brad Garlinghouse.
XRP Lawsuit: Why Did the SEC Sue Ripple?
In 2018, a civil lawsuit was filed against Ripple, alleging that its founders were creating "billions of dollars' worth of coins out of thin air and selling them to retail investors" on the open market.
In response, the United States Securities and Exchange Commission (SEC) initiated the most high-profile legal action against Ripple's executives in late 2020, alleging that XRP is an unregistered security. The SEC's position is that since Ripple uses centralized technology and controls over 50% of existing XRP, the coin is considered a security rather than a commodity like Bitcoin or Ethereum (ETH).
After the news broke, all major centralized exchanges delisted XRP and then relisted it shortly after early court hearings indicated that the decision could be in favor of XRP when one of the judges noted that XRP "also has utility, and that utility distinguishes it (XRP) from Bitcoin and Ether."
Economic data of the project at the time of writing:
Volume in circulation: 50,215,300,844
Maximum volume: 100,000,000,000
Market capitalization: $24,971,326,984
Price: $0.49
CoinGecko.com data
