What is Ripple?
Ripple is an open-source protocol, designed to allow fast, seamless, and low-cost transactions, it also has its cryptocurrency called XRP which payment providers can use for further additional benefits.
Ripple provides real-time payment settlements and currency exchange facilities to banks, financial institutions, and payment processors. Over 100 companies worldwide have adopted Ripple technology to ensure fast and frictionless global transfers.
Because of the immense success, its cryptocurrency XRP is currently the third most valuable currency, after Bitcoin and Ethereum. It had a valuation of over $90 billion in January 2018. However, XRP is not intended for customer use as such. It is mainly used as a source of liquidity by banks to generate international transfers. We’ll study more about this later in the article.
What is RippleNet:
Ripple is known for its digital payment protocol, RippleNet than its cryptocurrency XRP. It allows peer-to-peer, decentralized transactions, in any currency (USD, Yen, Ethereum, Bitcoin, XRP etc.).
We’ll understand this money transfer system through an example:
Laila owes $100 to Denver. Now, as he is a stranger, or let’s assume he lives in a different city, she does not or cannot approach him with the money directly and settle her debt. So for that, she makes use of her agent, Kevin to send that $100 to Denver, and also tells Kevin the password that Denver needs to mention, to claim the money. Now Kevin approaches Romilia, Denver’s agent and briefs her with all the transaction details and settles the IOU (I owe you) between them. For example, if Romilia was also Angela’s agent, and Angela had transferred $100 to Michael, whose agent is Kevin, this balances out $100 paid by Kevin to Emilia.
Ripple is similar to the example mentioned above, rather complex. This example requires a degree of trust between Laila and Denver, Kevin and Romilia, Laila and Kevin, Denver and Emilia. In the case of Ripple, we can replace these agents with gateways. The gateway acts as a financial intermediary that receives and sends currencies to people over the Ripple Network. Any business or bank can register itself as a gateway, which makes it responsible for exchanging currencies, maintaining liquidity and transferring payments on this network.
Currently, RippleNet has three major product offerings:
- XRapid: Now, after the above example, assume that Laila lives in the USA, and she owes $100 to Denver who resides in India (in INR). Now, in this case, on the Ripple network, who will act as her agent? The gateway- i.e. the banks will act as the gateways in this transfer. Currently, if banks and financial institutions have to send money from one place to another globally, the cost of liquidity is too high. By cost of liquidity, I mean that for international payments, banks need to maintain pre-funded accounts, to execute currency exchange.
- Banks (A) need to maintain a Nostro Account, with another bank (B). Nostro Accounts must be held in foreign currency. Thus they are subject to inflation risks. XRapid allows banks and financial companies to convert their domestic fiat currency into XRP, and then use the ripple network to transfer this amount to another bank seamlessly. Once the transfer is done, XRapid converts XRP into the foreign (destination fiat currency) currency. Thus, it uses XRP as a bridge currency between multiple fiat currencies. This eliminates the need for banks to maintain extra capital with them and also facilitates faster transactions. For payments between the US and Mexico, financial institutions using XRapid, saw a savings of 40-70%, compared to what they normally pay to foreign exchange brokers. Thus, XRapid provides banks and payment providers a highly efficient, scalable, and reliable method to service cross border payments.
- XCurrent: Ripple’s ultimate goal is to make money move at the same rate as information flows digitally throughout the world. Ripple seeks to upgrade the infrastructure that runs our banking system, making transactions faster and cheaper.
XCurrent is an interbank communication and transaction settlement software built on the InterLedger Protocol (ILP). Let’s break this down. Inter means ‘between’, while ledger is the record of your transactions. So inter ledger means payment/transaction to be executed between two distributed or undistributed ledgers. Protocol governs the rule for such transfer. These days, payment networks are disconnected, and it takes a long time to send money to a person outside of your payment network, and even longer if the other party to the transaction doesn’t reside in your own country.
Interledger uses ‘connectors’ to route or transfer payments across different ledgers. However, the only problem is that both the parties to the transaction (banks) need to trust the connector to transfer the funds to the intended recipient. So for this, the ledger provided escrow guarantees with the sender that the funds will only be transferred to the connector, once the ledger receives the proof that the recipient has been paid, from the connector’s escrow account. Now how is this confirmation sent to the sender? Once the connector releases funds to the receiver from his escrow account, the receiver has to send a signed fulfilment to the connector, which further sends it to the sender. As soon as the sender receives it, the sender releases funds from his escrow to the connector. It enables banks to settle cross border payments with end-to-end tracking instantly. Now how does this happen? Using XCurrent, banks can message each other (peer-to-peer messaging) real-time to confirm payment details before initiating the transactions and to confirm delivery. Thus, it is majorly composed of two primary layers:
- It is a communications protocol to confirm delivery and receipt of funds. The settlement layer ensures that funds are committed on both sides and simultaneously releases the committed funds to each side.
- XVia: It is the last offering of the Ripple’s ecosystem. It provides a standardized payment interface on RippleNet designed for corporations, payment providers and banks. Its Application Program Interface (API) does not require any software installation and allows users to seamlessly send payments globally, transparently. It also allows rich data transfer, i.e. supporting the payments with invoices and documentation.
By combining all these three products, Ripple can offer its customers a unique and user-friendly crypto banking experience, efficiently tackling the criticisms of traditional banking: high transaction cost and time-consuming.
One thing that we need to pay attention to is that Ripple supports fiat currencies like
Dollar, Yen, Euros and Pounds, as well as other cryptocurrencies like Bitcoin and Ether. As said earlier, Ripple is majorly a payment processor, and currency exchange and the XRP currency is secondary to Ripple’s mission. In this sense, Ripple does not strive to compete with Bitcoin or Ethereum. Instead, its main competitors are the existing payment validation and remittance systems like Swift and ACH.
History of Ripple
Ripple’s idea originated in 2004; however, it started in 2012. In 2005, Ryan Fugger launched RipplePay.com as a precursor to blockchain currencies. It provided online secure payment options for communities but didn’t gain widespread adoption. In 2011, Fugger was soon approached by Jared McCalab and Chris Larsen to replace RipplePay with a digital currency system. Work on the Ripple transaction protocol began in 2012. The protocol was designed to facilitate quick, direct money transfers between two parties. To provide greater liquidity, the protocol also provided for the creation of a new value token known as XRP.
By 2014, what began as Peer to peer money transfer began to gain traction with banks, as an option of settling remittances more quickly and cost-effectively than the traditional technology. People have added more institutions ever since, with around a hundred in 2017.
How Ripple Works:
Interestingly, the Ripple network does not run on a proof of work system, like Bitcoin or proof of stake system, like Tezos. Instead, transactions rely on a consensus protocol, to validate the transactions and to check whether accounts of the transacting parties have sufficient balances. Ripple does not have a blockchain, which sounds strange. Ripple Protocol Consensus Algorithm (RPCA) ensures there is consensus amongst the nodes, that the transaction is valid. Thus confirming transitions does not require wasteful or competitive use of resources, unlike most other blockchain systems.
All 100 billion XRP are pre-mined. Since RippleNet doesn’t rely on mining, its transactions can be very quick. Usually, a payment between gateways takes 4 seconds for initiation and completion. Ripple’s network is capable of processing 1500 transactions per second, as compared to Bitcoin’s four transactions per second speed or Ethereum’s 15 transactions per second speed.
Advantages of Ripple:
- Instant settlement, reconciliation, and clearing of transactions.
- Infinite scaling: Ripple’s InterLedger Protocol allows different blockchains to work together. It permits transactions to be carried out across different ledgers.
- Lower Fees and network protection and security
- Over 100 banks have partnered on Ripple. If banks want zero latency and instantaneous payments, they know Ripple is the best platform for it.
However, Ripple is not a perfect technology yet. It comes with downsides that need to be overcome.
- There are chances of a person transacting on an untrustworthy gateway on Ripple. In this case, there’s a huge chance one loses his coins. However, Ripple is working on this platform to ensure trustworthy gateways are certified, and multiple gateways can be used for establishing a multilevel method of trust.
- Most cryptocurrencies of a great level of anonymity. Ripple, however, offers less degree of anonymity. Though it seems impossible, efforts are being made to make Ripple an anonymous platform.
- Another problem is that Ripple itself holds 63% of the coins, which means that they can control the prices. One of the most appealing things about cryptocurrency is that the direction in which the price of the coin goes is dictated by the users and not the single entities.
Bitcoin vs Ripple:
Bitcoin operates on a public blockchain ledger, that facilitates payments with Bitcoin for various services. Miners verify transactions on an ongoing basis and add them to the block, which serves as a ledger for various transactions taking place through Bitcoin. In exchange for their computing power and time necessary to validate the ledger, miners awarded Bitcoin upon successfully validating a transaction.
Ripple, on the other hand, is known for Payment settlement currency exchange and remittance system, to be utilized by banks and financial intermediaries who act as gateways. Instead of using the blockchain mining concept, Ripple uses a unique consensus algorithm through a network of servers to validate transactions. By conducting a poll, the nodes on the network, decide about the validity and authenticity of transactions by consensus. Bitcoin is usually criticized for being energy-hungry, which is the problem solved by Ripple.
While Bitcoin transactions take minutes to be confirmed and also charge high transaction fees, Xrp transactions are confirmed within seconds at a low cost. Bitcoin has a total supply of 21 million crypto coins, Xrp has a total of 100 billion pre-mined coins, and the majority is owned by the Ripple Foundation and the Ripple corporation.
For example, Bitcoin as an alternative to a real-world currency. Peter can purchase anything in Walmart using Bitcoin, or he can purchase Bitcoin for trading and investment and sell them off a later date for a profit.
Meanwhile, if Peter in America wants to send $100 to Paul in Africa, he can do so through banking transfer. If his bank is registered on RippleNet, it shall convert these $100 to XRP and transfer them to Paul’s bank in Africa over the Ripple Network. Now, XRP can be further transferred to African currency, on user’s discretion, within seconds.
A few finance giants like JP Morgan, are now working on introducing their digital assets to offer a service which is very similar to that of Ripple. If this happens, the adoption date of XRP will fall significantly. The only way to avoid this scenario, Is that people should start promoting its currency not only as a method of payment but also as a method of investment.
While Ripple does grow at a rapid pace and attracts attention from financial institutions, many still argue whether or not the project will be able to thrive in the growing competition.