The concepts behind Ripple reportedly predate Bitcoin by four to five years. In 2004-2005, Ryan Fugger, a Canadian computer programmer, developed RipplePay as a way to provide secure payment options to members of an online community via a global network.
But it would take another six years before the blockchain-based payment system known as XRP and its founding fintech company, now known as Ripple, were started.
XRP is now at the center of a legal battle between the company and the U.S. Securities and Exchange Commission (SEC), which alleges that the asset is an unregistered security that Ripple sold in violation of federal law.
Backing up: The XRP Ledger is an open-source, public blockchain that was first created in 2011 by developers Arthur Britto, Jed McCaleb and David Schwartz to solve the inefficiencies of cross-border remittance and payments in traditional banking. (The three, along with the addition of Chris Larsen as CEO, would later found the company now known as Ripple.) The XRP Ledger serves as the rails on which the decentralized XRP cryptocurrency runs.
Although Ripple and XRP are inherently related, they are still separate entities – at least, on paper. Ripple is a centralized fintech company that builds global payment products and that developed the XRP payment system, which the firm describes as decentralized. XRP is an independent digital asset used for things like online payments and currency swaps, and as of March 2022, it had a market cap of about $83 billion.
Still, Ripple uses XRP and XRP’s public blockchain to power its products.
What is Ripple, exactly?
Unlike the public nature of Bitcoin and Ethereum that seek to disrupt legacy finance, Ripple focuses on improving the existing and fragmented traditional banking system.
It does that by unifying a network of independent banks and payment providers with a standardized protocol to communicate and send low-cost, immediate payments worldwide.
Co-founded by McCaleb, who later became the chief technology officer of Stellar, a rival project with similar aims, and Chris Larsen, the company initially introduced three main products for money transfers between banks.
Those products included xRapid, a liquidity product; xVia, a payment application programming interface; and xCurrent, a real-time settlement system. In 2019, xCurrent and xVia were combined and rebranded to RippleNet. xRapid was also renamed “On-Demand Liquidity” (ODL), which is a product used to speed up the transfer and exchange of fiat currencies between countries.
How does Ripple work?
There are two main components that comprise Ripple:
Ripple: In its entirety, Ripple provides a real-time gross settlement system (RTGS), currency exchange and remittance network. The platform, which is supported by its blockchain payment protocol, uses RippleNet to facilitate instantaneous transactions between financial entities.
RippleNet: RippleNet is the distinct network of payment facilitators and global banks that helps streamline communication and allows participants to send and receive payments seamlessly through Ripple’s distributed platform.
Like the standardized HTTPS, which is used as a common protocol for information transfer across the internet, RippleNet provides a framework and a set of rules called the Ripple Transaction Protocol (RTXP) for all network participants to follow, thereby reducing bottlenecks in transactions.
While anyone can connect to the ledger, only a few trusted validators approve transactions, and those are mostly well-known banks and financial institutions. As of this writing in March 2022, the network could process up to 1,500 transactions per second with a fee of $0.0007. That is faster than ether, the native cryptocurrency of Ethereum that completes around 10 transactions per second, and bitcoin, the native cryptocurrency of the Bitcoin network that can handle four to five transactions per second.
Gateways provide an entry point for external people or entities who want to join the Ripple network. Usually, in the form of banks, the gateway acts as a trusted intermediary to help two parties complete a transaction. They provide a channel to transfer funds in fiat and cryptocurrencies using the Ripple network.
How does XRP work?
XRP is the native cryptocurrency of the XRP Ledger, a public blockchain that uses the federated consensus algorithm and that differs from the proof-of-work and proof-of-stake mechanisms, as participants in the Ripple network are known and trusted by each other, based mainly on reputation. As of March 2022, there were more than 150 validators on the network and about 36 on the default unique node list (UNL).
A unique node list is a list of nodes that a network participant trusts. There are three entities – Ripple, the XRP Ledger Foundation and Coil (a Ripple-funded entity) – that publish lists of recommended validators based on aspects like past performance, verified identity and secure IT policies. These lists are the default unique node lists (dUNL). As more validators join the network, participants have more flexibility to choose who they add to their UNL, although that provides a level of risk because not all validators carry the same level of trust and performance.
In contrast to conventional methods of overseas payments (a process that can take one to four business days), XRP can be used to provide on-demand liquidity or act as a bridging currency to settle cross-border transactions in less than five seconds and at a fraction of the cost of traditional transfers.
To cover the cost of transaction fees, a small amount of XRP – about 10 drops, which are units of XRP worth 0.00001 XRP each – is destroyed. While the cost of sending XRP varies depending on network activity, all related transactions are executed and settled on the XRP Ledger.
Read more: What Does It Mean to Burn Crypto?
Unlike other cryptocurrencies, XRP can’t be mined, and no new tokens will ever be created. That is because the founders issued the entire supply of 100 billion XRP tokens upon the ledger’s launch in 2012. To help the business scale, the founders allocated 80 billion tokens to Ripple and pocketed the remaining amount.
Additional XRP can still be circulated on secondary markets whenever Ripple decides to sell coins from its pre-mined supply. For example, in 2017, the company transferred 55 billion of its 80 billion XRP tokens into an escrow account from which it could sell a maximum of 1 billion tokens per month. That was organized to help improve the transparency and predictability of XRP sales.
XRP tokens held in escrow are deemed “undistributed,” with the rest accounting for the circulating supply. Any unsold tokens are returned to the escrow and re-distributed at a later date.
As of March 2022, the escrow account held 46.1 billion XRP tokens. Data regarding the total XRP held and distributed by Ripple can be found on its website.
Pros and cons
Although it uses the open nature of blockchain to decentralize its bookkeeping and keep transactions transparent, XRP is more centralized than Bitcoin or Ethereum in that no public entity or person outside of Ripple can determine the issuance of new coins. That is largely because XRP is ostensibly more a tool for transferring value across borders via Ripple products than it is a speculative investment vehicle – although to the SEC’s mind, it has unquestionably functioned as an investment.
Controversy arose in 2020 when the regulator charged Ripple with illegally raising $1.38 billion from investors in what the SEC regarded as an “unregistered securities offering.”
As of March 2022, the case was still ongoing XRP climbed 22% in February 2022 after reports suggested a positive turn for the company in the legal proceedings.
Here are some advantages of Ripple and XRP:
Fast, efficient, and transparent payments with an added liquidity tool to help streamline the settlement process.
XRP settlement speed is faster than Bitcoin’s or Ethereum’s.
Ever-improving scalability – the XRP network can handle up to 1,500 transactions per second.
The cross-border currency payment system has attracted more than 100 financial institutions including banks to its network.
Here are some of the drawbacks:
RippleNet is not wholly decentralized compared with other public blockchains.
Because its products are tailored for big financial institutions, there is little practical relevance for retail users, although that hasn’t stopped its rabid fans, known as the XRP Army, from pumping the coin on Twitter.
Because a large majority of XRP is held by Ripple, the token’s price could be easily manipulated or negatively influenced by saturating the market with large sales.
UPDATE (March 29, 2022, 21:15 UTC): Makes edits throughout to better reflect nuances of the intertwined histories of Ripple and XRP.