R ipple, is it just one more new cryptocurrency riding on this large, heavy Bitcoin supposition rollercoaster? For those who look through the crypto news outlets, this may seem to be the case. But the fact is, Ripple is basically different from Bitcoin, Ethereum, Litecoin, and a lot of other members of the large coin family. You could even say that Ripple is not actually a coin at all.
What is Ripple?
Is Ripple a coin or not?
If Ripple is not a coin, then what is the XRP cryptocurrency that is presently so hot on the exchanges? XRP, or Ripples, is certainly a coin, but it is the native coin of the XRP ledger, not the Ripple itself, which is truly: A network.
The Ripple network (or RippleNet) is an open-source protocol developed and available in 2012 by Chris Larsen, Ryan Fugger, and Jeb McCaleb.
Their intention in creating RippleNet was not to introduce another crypto coin to the market but to construct a payment network for use between financial institutions such as banks.
For global finance and everyday life, it is of the extreme importance that the transfer of funds cannot only be processed within a bank, e.g., remittances between customers of the same bank, or between banks such as interbank loans or currency exchanges. For these purposes, the huge majority of institutions still use the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system that was introduced in 1973, a system with grave inefficiencies and a large overhead.
Is this why Ripple is expected to cripple Bitcoin in 2018?
Ripple, the payment system and protocol
In spite of its name, SWIFT is really a leisurely system for a cross-border accounting between banks because of the number of intermediaries that are concerned. A transaction generally takes in the range of one to numerous working days! The cost of SWIFT transactions depends on the banks involved and their respective locations, but the cost is generally in the range of 5 to 50 EUR (or its equivalent in other currencies) per transaction, and fees are frequently incurred both by the sender and the receiver of the money. The Ripple network promises to change this system with a universally compatible, real-time enabled system.
XRP, the coin
XRP were shaped before the company was established and the only relation between Ripple, the company and XRP is that a specific percentage of the coins have been gifted to the company after incorporation. This is component of the final delivery of 100 billion – no additional XRP will always be mined, in comparison to other currencies for example Bitcoin, which is still being mined presently until the limit of 21 million is reached. To be accurate, there is no mining at all in Ripple because Ripple does not use a proof-of-work algorithm for agreement, as we have discussed before.
The current market value of all XRP is about 130 billion USD. Consequently, Ripple Labs’ current market value is at about 80 billion USD. Of course, monetizing all of these XRP funds at once would lead to an extreme reduction in value for XRP, but it seems that Ripple Labs has excluded any big sells for the future anyway. They said that they had deposit 55 bln XRP in an escrow fund which was secured cryptographically out of which simply 1 bln XRP per month can be released. Still, at the current XRP rate, pretty good pocket alter.
Contrary to what people unfamiliar with Ripple may suppose, XRP is, again, not used in the Ripple network to resolve balances between participating institutions or individuals. Rather, this role is filled by IOUs that symbolize the balance among two participants of the network. These IOUs can be in any currency that the two transaction partners have agreed upon; they are not inadequate to XRP. Ripple briefly overtakes Ethereum as the No. 2 cryptocurrency.
XRP within the Ripple network is simply used to inflict a small transaction fee that is supposed to discourage spammers. This is the same reason why time and again some people argue to impose a small fee for each email that is sent on the internet. If you are a sensible email customer (or of Ripple), you mail possibly 50 emails (or 5,000 Ripple transactions) for each day, and the small transaction fee will not cost you lots of money in whole. If, however, you send a million emails per day, or you seek to DDoS the Ripple network with millions of absurd transactions, this will get costly for you very quickly.
With every transaction on the Ripple network, a small fraction of XRP is destroyed forever. Thus, XRP is not inflationary – on the contrary, it is even a deflationary currency because its amount is intended to reduce in the future.
The current transaction cost is about 0.00001 XRP. When the network load is very heavy, occasionally this may go up a bit higher. However, with all transactions that have been performed up until now, not a single whole XRP has been burned yet. The Ripple documentation states that after a while, transaction fees will be adapted to the XRP supply.
That means that when there is less XRP, the value of 1 XRP will be higher, and transaction costs would therefore lower to less than 0.00001 XRP:
- If 1 XRP today has a value of 1 USD, the transaction cost is 0.00001 XRP (that would be 0.00001 USD).
- Fast forward 100 years: A bit more XRP has been burned, which means that there is less supply of XRP, which in turn means that 1 XRP becomes more valuable
- Thus, Ripple will alter the transaction cost from 0.00001 XRP to half of it, 0.000005. XRP in a selection process as described above (back to 0.00001 USD as 100 years ago).
This way, Ripple expects that they will never run out of XRP to cover up transaction costs.
What problem is Ripple trying to solve?
The objective of Ripple is to create bank transactions more well-organized and transparent – especially cross-border, inter-currency payments.
This would have the following advantages:
- On the blockchain (Ripple Ledger), intermediaries are only concerned electronically, no genuine work is performed. Thus, intermediaries such as correspondent banks don’t need to take away fees from the funds that they are processing. This makes payments much cheaper.
- The administrative overhead is greatly compact through automation and precision; no one has to look up correspondent banks to perfectly fill out the form or phone the transaction addressee to find out if the funds had arrived.
- Cheaper liquidity is presented for banks (see xRapid), who can then lower their fees for their customers.
Who controls Ripple?
As the Ripple protocol is open source, everyone can develop customers or wallets that provide services and access to the Ripple network. An instance of this is the Rippex client, which is also open source.
Ripple although is an open source protocol – is pretty much in the hands of Ripple Labs. As we have outlined for the moment, Ripple works with gateways as a relation between Ripple users and the Ripple network. In theory, all business can turn into a Ripple gateway and Ripple outlines the possible sources of income that you are able to have by being a gateway on its website. However, gateways have to fulfill with a vast number of rules, from KYC to AML to doubtful action Reporting, and several others. Hence, the hurdles to becoming a gateway are high.
How does Ripple Labs make money?
Presently, Ripple is working hard at onboarding banks for its corporate solutions. Recently, it has proceeding partnerships with various Japanese and South Korean banks for its xCurrency system, and it is going to pilot its xRapid system with the financial facility supplier MoneyGram (like to Western Union).
Until these partnerships begin paying off, it seems similar to Ripple Labs can courteously fund themselves by cashing in on XRP’s currency gains on the markets; they are still holding onto the bulk of the XRP funds that exist, and they further contribute to XRP’s increase with strong marketing measures. The important thing for Ripple Labs is that this approach holds until the products start bringing in profits.
How can you make money with Ripple?
The present adoption and pilot projects of Ripple look quite capable, as it has many big names on board already; MoneyGram, American Express, Santander Bank, Bank of Tokyo-Mitsubishi UFJ, SEB, and others. Certainly, it remains to be seen if Ripple will be adopted long-term after such pilot projects, but it is at least off to a strong start.
First, the demand for developers well-known with Ripple will rise in the banking sector and adjacent industries. Various banking professionals are still functioning on understanding the blockchain itself, so they will desire technical professionals to explain Ripple for them. These experts will also be required to execute Ripple’s solutions and interfaces with legacy systems.
Second, further currency gains in XRP are feasible but speculative. The higher the industry adoption of XRP, the higher its price will maybe rise. However, the simple fact that Ripple is holding so much of the funds is a source of ambiguity.
Third, can you build a business on Ripple? This too seems risky as Ripple is already highly synchronized, more so than other cryptocurrencies. Additionally, it is under the control of a single entity, at least a bulk of it. Though it is fixed that the Ripple protocol is open source, so in principle, everyone is free to arise with inventive business models that stay away from the cumbersome regulatory aspects.