Ripple is a money transfer network designed to meet the needs of the financial services industry. XRP, a cryptocurrency designed to run on the Ripple network, is consistently listed among the top ten cryptocurrencies by market capitalization and more recently (June 2024) entered the top five most profitable assets.
What exactly is Ripple?
Ripple is a payment settlement system and exchange network that can process transactions worldwide. Ripple regularly serves as a trusted agent between two parties in a transaction, as the network can quickly confirm that the exchange has taken place. Ripple can facilitate trade for a variety of fiat currencies, cryptocurrencies like Bitcoin, and even commodities like gold.
“Ripple was designed from the ground up to replace SWIFT (a leading money transfer network) or otherwise replace the settlement layer between major financial institutions,” says Pat White, CEO of Bitwave.
Every time users make a transaction using the network, the network charges a small amount of XRP as a fee.
“The standard fee for transacting on Ripple is set at 0.00001 XRP, which is minimal compared to the hefty fees charged by banks for making cross-border payments,” says Onchain Custodian board member El Lee. At the end of mid-2022, the price of XRP was around $0.35 per token, which means that transaction fees amount to only $0.0000035.
What is XRP?
XRP is a cryptocurrency that runs on the XRP Ledger, a blockchain designed by Jed McCaleb, Arthur Britto, and David Schwartz. McCaleb and Britto will found Ripple and use XRP to facilitate transactions on the network. You can buy XRP as an investment, as a coin to trade against other cryptocurrencies, or as a way to fund transactions on the Ripple network.
Notably, XRP’s blockchain works a bit differently than most other cryptos. Other cryptocurrencies open their transaction ledgers and verification processes to anyone who can solve complex equations quickly, but transactions are secure because the majority of ledger holders must accept verification for them to be added.
Instead, XRP’s Ripple network centralizes the process somewhat: while anyone can download its validator software, it maintains what it calls lists of unique nodes that users can select to verify their transactions. based on which participants they believe are least likely to defraud them. Its default list currently contains 35 trusted validators. Ripple decides which validators to approve for this list and also composes six of these validator nodes. However, users can opt out of this default list and hypothetically remove Ripple-based validators from their transactions, building their own lists of trusted validators instead. This would allow the network to continue approving transactions even without Ripple, with the company remaining involved or even continuing to exist.
As new transactions arrive, validators update their registers every three to five seconds and make sure they match other registers. If there is a lag, they stop to figure out what was wrong. This allows Ripple to validate transactions securely and efficiently, giving it an edge over other cryptocurrencies, such as Bitcoin.
“Bitcoin transaction confirmations can take several minutes or hours and are usually associated with high transaction costs,” Lee explains. “XRP transactions are confirmed around four to five seconds, at a much lower cost.”
How to mine XRP
“Mining” is the distributed verification system used by most blockchain-based cryptocurrencies. It both facilitates transactions and provides the mechanism by which new currency is introduced into a cryptocurrency system, usually as a reward to verifiers for their work supporting the network. For example, Bitcoin has a total supply limit of 21 million tokens which are steadily released as more transactions are verified.
XRP, on the other hand, was “pre-mined”, meaning that the XRP Ledger created 100 billion tokens which are then periodically released publicly. Ripple owns about 6% of it as an incentive to help the cryptocurrency grow and succeed over time. An additional 48% is held in reserve for regular release to the market through sales.
Naturally, this raised fears 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 relative scarcity.
“The company has tried to reduce uncertainty by putting in place several mechanisms (trust, predictable release, etc.)”, explains Tim Enneking, director of Digital Capital Management.
Benefits of corrugation
- Quick settlement. Transaction confirmations are incredibly fast. They typically take four to five seconds, compared to the days it takes banks to complete a wire transfer or the minutes or potentially hours it takes for Bitcoin transactions to be verified.
- Very low fees. The cost to complete a transaction on the Ripple network is only 0.0001 XRP, a small fraction of a penny at current rates.
- Versatile exchange network. The Ripple network not only processes transactions using XRP, but it can also be used for other fiat currencies, cryptocurrencies, and commodities.
- Used by major financial institutions. Large companies can also use Ripple as a transaction platform.
Disadvantages of corrugation
- Very centralized. One of the reasons cryptocurrencies have become popular is that they have been decentralized, taking over big banks and governments. The Ripple system is centralized and goes against this philosophy.
- Ripple Labs controls the supply of XRP. Ripple Labs decides when to release coins, giving it control compared to other cryptos where coins are slowly and steadily released through mining. This means that Ripple Labs has more power to influence the value of XRP by deciding when and how many tokens to release.
- Recent regulatory action against XRP. In the United States in 2021, the Securities and Exchange Commission (SEC) filed a lawsuit against Ripple, claiming that since it can decide when to release XRP, the company should have registered it as a security. Until this is resolved, it may slow institutional use of this system. Several exchanges, such as Coinbase, also stopped listing XRP as a result.
How to use Ripple and XRP
You can use XRP like any other digital currency, either for transactions or as a potential investment. You can also use the Ripple network to process other types of transactions, such as currency exchange.
For example, if you are looking to exchange Australian dollars for euros, you can first exchange your AUD for XRP on the Ripple network and then use them to buy euros, rather than managing the exchange directly through a bank or a exchange office. . This can be a much faster and cheaper approach than paying the high fees that banks and money transfer organizations can charge.
Should you buy XRP?
While some might find the vision and benefits of XRP compelling, White fears the SEC lawsuit could create problems for those seeking to join.
“They position themselves as a settlement layer for regulated companies, but they are also deeply at odds with the SEC. None of the customers they would like to onboard can really start using XRP until Ripple resolves their legal issues,” he said.
With all this uncertainty, Enneking warns that XRP is not a bet for the faint-hearted. Crypto markets went into a tailspin in May with billions of dollars wiped out in value and major coin Bitcoin falling below the psychological barrier of US$20,000. XRPlike other coins, has not been spared from routing and is now trading at around US$0.35, down from an all-time high of $3.84 in 2018. That’s a decline of over 90%.
That said, if you think Ripple will emerge victorious against the SEC and continue to take over as a payment system, then by all means, roll the dice. Just make sure it’s money you can afford to lose.
This article is not an endorsement of any particular cryptocurrency, broker, or exchange, nor does it constitute a recommendation of cryptocurrency as an investment class.
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