What is Ripple?
Ripple is a decentralized crypto platform that allows digital and fiat currencies to be transferred across international borders on the same network without an intermediary, in real-time. Ripple is known for its digital payment protocol and XRP, its native cryptocurrency. The platform, which was developed and promoted by Ripple Labs, has two main components: RippleNet and XRP Ledger (XRPL).
RippleNet is a network of financial institutions that use Ripple’s technology to enable cross-border transactions. XRP Ledger is a decentralized, open-source blockchain that processes and verifies transactions on the network.
XRP, the ledger’s native currency, acts as a bridge currency to increase the speed and reduce the cost of cross-border transactions. Using XRP as a mediator currency reduces the need for pre-funded accounts and enables more efficient transactions than was previously possible through traditional financial institutions.
Ripple’s Role in DeFi
While Ripple itself is not a decentralized finance (DeFi) platform, it has played an important role in promoting DeFi by providing the necessary tools and infrastructure for the development of new DeFi projects. The Ripple Transaction Protocol (RTXP) and XRP, for example, have been used as building blocks for DeFi applications that bridge the gap between traditional financial institutions and decentralized financial services.
Ripple’s supporters maintain the platform has contributed to the growth of the DeFi ecosystem and helped make financial services more accessible and inclusive for people in unserved and underserved parts of the world.
It’s important to note, however, that Ripple also has critics, many of whom question whether the platform is truly decentralized.
XRP Ledger and Consensus
One important question has to do with the way the platform’s consensus mechanism works. Unlike cryptocurrencies that employ decentralized consensus mechanisms, such as proof-of-work (PoW) or proof-of-stake (PoS), Ripple employs a unique protocol that requires a limited number of nodes called validators to arrive at a consensus.
The decentralization of a cryptocurrency is an essential aspect of its security because it prevents any single entity from having too much control over the network. With Ripple’s consensus protocol, however, a small group of validators has the power to approve transactions. Critics point out this also gives them the power to collude and manipulate the network.
Critics have also questioned XRP’s usefulness as a bridge currency when other cryptocurrencies and fiat currencies could be used for the same purpose. There has also been quite a bit of debate over whether it’s really necessary for a majority of the total supply of XRP to be held in escrow by Ripple Labs and its founders.
Ripple was created in 2012 by Chris Larsen and Jed McCaleb, two well-known entrepreneurs, and pioneers in the cryptocurrency and blockchain industry. In 2013, OpenCoin rebranded Ripple Labs. Since that time, Ripple Labs has worked to improve the XRP Ledger, promote the use of XRP as a digital currency, and nurture partnerships with banks, liquidity providers, and other financial institutions.
|2011||David Schwartz, Arthur Britto, and Jed McCaleb begin developing the XRP Ledger.|
|2012||XRP Ledger launches; Chris Larsen and Jed McCaleb found OpenCoin.|
|2013||OpenCoin is rebranded Ripple Labs|
|2014||Fidor Bank becomes the first bank to use the Ripple Transaction Protocol (RTXP).|
|2014||Ripple Labs introduces Codius in an attempt to bring smart contract functionality to the Ripple ecosystem.|
|2015||Cross River Bank and CBW Bank adopt the Ripple protocol. Ripple Labs puts Codius on hold.|
|2016||Standard Chartered Bank and Axis Bank announce Ripple integration.|
|2017||Ripple partners with American Express and Santander; XRP token price experiences significant growth.|
|2018||National Bank of Kuwait announces Ripple technology adoption.|
|2019||Ripple acquires MoneyGram and raises $200 million in Series C funding.|
|2020||U.S. SEC files lawsuit against Ripple Labs. XRP’s price drops significantly.|
|2021||Ripple Labs expands FinTech partnerships and XRP’s price begins to recover.|
|2022||Ripple acknowledges it owns a majority of the 100 billion XRP tokens in circulation and periodically releases tokens from an escrow account to keep prices stable.|
|2023||Ripple claims it has spent roughly $100 million to defend its case and shield the crypto industry from SEC overregulation. The case continues to be delayed.|
How Ripple Works
Here’s a high-level overview of how Ripple works:
- The sender initiates a financial transaction using their own currency.
- A currency exchange on the Ripple network converts the sender’s currency into XRP.
- Ripple’s payment protocol sends the XRP to the recipient. A pathfinding algorithm selects the fastest and most cost-efficient route for the transaction across borders, taking factors such as exchange rates and transaction fees into consideration.
- Trusted nodes on the Ripple network validate the transaction and add it to the distributed ledger.
- The XRP transfer is exchanged for the recipient’s fiat currency and credited to the recipient’s account.
On the back-end, the Ripple platform consists of a currency exchange, a real-time gross settlement (RTGS) system, and a remittance network.
- A currency exchange is a marketplace that allows individuals and institutions to exchange, buy or sell different currencies.
- A Real-Time Gross Settlement (RTGS) system is a financial system that enables the real-time transfer of funds between two or more banks or financial institutions.
- A remittance network is a platform that allows individuals or businesses to send and receive money across borders.
Uses Cases in Finance
The Ripple cross-border payment platform is designed to be used by individuals as well as businesses and financial institutions such as banks and payment providers.
Today, some of the largest financial institutions in the world, including Santander, Standard Chartered, and American Express, are using Ripple’s technology to eliminate many of the inefficiencies and delays associated with sending money from one country to another. The platform is used to:
- Send and receive direct payments and money transfers in different currencies across borders quickly and securely.
- Settle cross-border financial transactions in real-time instead of waiting days or weeks for a transaction to clear.
- Reduce the costs associated with cross-border payments, including fees charged by banks and other intermediaries.
- Reduce the potential for fraud or errors by enabling all parties involved in a transaction to view and track the status of a payment in real-time.
- Provide a remittance service that enables individuals to send money to friends and family around the world, with low transaction fees and real-time settlement.
- Allow crypto traders to buy and sell XRP for profit. Currently, XRP is the world’s sixth-largest cryptocurrency by market capitalization.
Ripple Labs also offers a range of products and services beyond cross-border payments. They include:
On-Demand Liquidity: A service that leverages the digital asset XRP to provide instant liquidity for cross-border transactions. Financial institutions can use Liquidity Hub to source liquidity on-demand, eliminating the need for pre-funded nostro accounts and reducing the cost and time associated with cross-border payments.
RippleNet Cloud: This is a cloud-based service that allows financial institutions to easily connect and integrate with RippleNet, Ripple’s global payment network. RippleNet Cloud is known for enabling faster deployment, lower operational costs, and easier maintenance compared to traditional on-premises solutions.
Line of Credit: Ripple Labs offers a line of credit service to eligible customers, allowing them to access funds for cross-border payments using XRP through ODL. This service aims to help businesses grow by providing upfront capital for investments or expansion.
University Blockchain Research Initiative (UBRI): Ripple Labs launched UBRI to support and accelerate academic research, technical development and innovation in the blockchain, cryptocurrency, and digital payments sectors. The initiative partners with universities worldwide.
Ripple uses the Ripple Transaction Protocol, the Ripple Protocol Consensus Algorithm, and the Interledger Protocol to transfer digital and fiat currency across borders on the same network.
Each protocol plays a specific role in facilitating fast and cost-effective cross-border payments. RTXP (Ripple Transaction Protocol) outlines the overall structure and components required for transactions. RPCA (Ripple Protocol Consensus Algorithm) ensures the integrity and security of the Ripple ledger and ILP (Interledger Protocol) facilitates cross-ledger transactions between different blockchain networks and traditional banking systems.
RTXP is an open-source protocol that uses a distributed ledger technology that’s similar to blockchain to facilitate cross-border payments. The protocol is known for its unique consensus mechanism, pathfinding algorithm, gateways, and IOUs. Gateways are trusted currency exchange entities that act as entry and exit points for transactions within the Ripple network. Transactions are facilitated through IOUs, which represent debt obligations between users and gateways.
RPCA is a consensus process based on the Practical Byzantine Fault Tolerance (PBFT) algorithm. The nodes on the Ripple network that participate in the consensus process are known as validators. Validators are required to hold a minimum amount of XRP as a security deposit to ensure they have a stake in the network’s operation. Here is how the protocol works:
- When a transaction is initiated on the Ripple network, the sender’s own node validates the transaction and signs it with a private key.
- The transaction is broadcast to a group of trusted nodes on the network.
- The nodes add the new transaction to a list of other transactions that are waiting to be processed. This list is called the transaction pool.
- Each node reviews the new transaction in the transaction pool and creates a list of transactions to include in the next ledger. This list is called a candidate set of transactions.
- Each node shares its candidate set with the other trusted nodes and reviews the candidate sets submitted by the other nodes.
- Each node decides whether to keep their candidate list of transactions as is, or optimize it using part (or all) of another node’s candidate list.
- This process of sharing, reviewing, and iteratively improving candidate sets is repeated until a supermajority of nodes agree on a set of candidate transactions to include in the next ledger.
- Once a supermajority of validators agree on a set of candidate transactions, they create a new ledger that includes those transactions and broadcasts it to the network. The ledger is then added to the blockchain, which is a tamper-evident record of all transactions on the network.
ILP is a decentralized, open-source protocol that enables transactions across different payment networks and ledgers. ILP relies on connectors, a routing protocol, conditional payments, and a cryptographic unlocking mechanism to ensure secure, efficient, and interoperable transactions between diverse payment systems. Here is how the protocol works:
- The sender and receiver set up or log into accounts with one or more connectors. Connectors serve as intermediaries between different payment networks or ledgers.
- The sender provides details of their transaction, including the currency, the payment amount, and the destination.
- The sender and connectors exchange routing information to determine the optimal route between the sender and the receiver, which may involve multiple hops through different connectors.
- Once the route is determined, the sender requests a quote from the first connector in the path. This quote includes information about the exchange rate, fees, and other conditions for the transaction.
- Upon receiving and accepting the quote, the sender initiates a conditional payment to the first connector with a hashlock. This means the payment is locked and can only be unlocked when the receiver provides a preimage (a secret value) that hashes to the value specified in the hashlock.
- The first connector forwards the conditional payment to the next connector in the path, and this process continues until the payment reaches the receiver’s connector. Each connector locks the payment using the same hashlock condition.
- When the receiver’s connector receives the conditional payment, the receiver shares the preimage with their connector to unlock the funds. The connector then forwards the preimage to the previous connector in the path, and the process continues in reverse until the sender’s connector receives the preimage.
- Once the sender’s connector receives the preimage, the payment is considered fulfilled and the receiver can access the funds.
Ripple continues to be a subject for debate as concerns about centralization and the way Ripple Labs sold XRP raised questions about how the bridge currency should be treated under current laws and regulations.
In 2020, the United States Securities and Exchange Commission (SEC) filed a lawsuit against Ripple Labs, its CEO, Brad Garlinghouse, and its co-founder, Chris Larsen, alleging that even though Ripple Labs and its executives were aware that XRP could be considered a security under federal securities laws, they continued to sell XRP as an unregistered security to fund their operations.
The outcome of this lawsuit is expected to have significant implications for the cryptocurrency industry because it could set a precedent for how current U.S. laws and legislation could be used to oversee the crypto industry. If the SEC prevails in the case, and XRP is deemed a security, it’s possible that other digital assets might face similar regulatory scrutiny and be required to comply with U.S. securities laws.
Impact of the SEC Lawsuit
Following the lawsuit, several cryptocurrency exchanges suspended or delisted XRP trading because of the negative sentiment surrounding Ripple Labs. The lawsuit also inspired media coverage that highlighted the regulatory risks associated with investing in cryptocurrencies, especially those with unclear legal status. This, in turn, increased the volatility of XRP tokens as well as Ripple liquidity
Some investors, on the other hand, viewed the lawsuit as an opportunity. The negative sentiment and uncertainty surrounding the lawsuit initially lead to a drop in XRP’s price, which provided investors who believed in the long-term potential of the project with an attractive entry point.
How To Buy and Store XRP
In spite of the controversy, XRP is still one of the top cryptocurrencies by market capitalization and has a high trading volume, because it is often used as a base currency for trading pairs on the cryptocurrency exchanges.
Here are the steps required to purchase and store XRP as an investment:
- First, select a reputable cryptocurrency exchange that supports XRP trading. The availability of XRP on exchanges may vary depending on the investor’s location and local regulations. Popular exchanges that list XRP include Binance, Bitstamp, Kraken, and Coinbase.
- Next, sign up for an account on the chosen exchange and complete the required identity verification process. Typically, this requires the trader to provide personal information and upload identification documents, because most exchanges follow Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
- Once the account has been verified, it’s time to deposit funds into the exchange account using a preferred payment method.
- Next, navigate to the XRP trading pair on the exchange and either place a buy order at the current market price or set a limit order at a specific price.
Once the order is executed, the XRP will be credited to the exchange account. Although XRP can be stored on the exchange, it’s considered a best practice to transfer it to a digital wallet for better control. There are different types of XRP wallets available, including software wallets (desktop or mobile), hardware wallets and paper wallets.
- Software wallets: These are applications that can be installed on a computer or mobile device. Popular XRP-compatible software wallets include Atomic Wallet and Trust Wallet.
- Hardware wallets: These are dedicated physical devices designed to securely store cryptocurrencies offline. Ledger and Trezor are two examples of hardware wallets that support XRP.
- Paper wallets: A paper wallet involves printing XRP public and private keys on paper and keeping the paper safe.
- To transfer XRP from an exchange to a wallet, find the “withdraw” or “send” option on the exchange, enter the wallet’s XRP address, and specify the amount to transfer. Always double-check the destination address before confirming the transaction.