What is Ripple?
Ripple Labs Inc, is an American company that develops the internet of value called RippleNet, a global decentralized network that brings together a diverse ecosystem of payment players.
In simple words, it aims to create a global network of banks and financial institutions that uses its software RippleNet which enables people or businesses to transfer money (i.e. Value) anywhere around the world instantly, reliably, and with low fees. Ripple calls this network as “The Internet of Value”
The Problem – Current banking systems are outdated
Most major banks are still using systems that were built 40 years ago for this task. Swift, MoneyGram, and Western Union are just some examples of slow, expensive, and relatively limited systems that financial services use to transfer money.
On top of that, not all of the banks are connected via the same network. So, in many cases, you don’t even have a direct line between two banks when they need to transfer money from one account to the other.
For bank A to send money to bank B that doesn’t have any direct relationship, more often than not, it will have to go through several intermediary banks, searching for common network connections between each other to clear a path for the money.
That’s why international wire transfers are so slow and costly. Each bank along the way takes time to process the transaction and a fee for servicing the process.
In some cases, bank transfers must involve currency conversions, which make things even more problematic and expensive.
The financial institutions make trillions of dollars collectively in transaction fees. This has created even lower incentive for them to innovate.
The solution - Ripple
The idea for Ripple was first conceived way back in 2004 by Ryan Fugger and was called RipplePay, but in 2012 was passed to Jed McCaleb and Chris Larsen who founded OpenCoin later, to be called Ripple Labs.
Roughly, $155 Trillion moves around the globe every year. A simple 3% transaction fee equates to around $4.65 Trillion.
Through the use of RippleNet, there is no reason to pay a fortune and wait days when transferring money globally. Unlike most cryptocurrencies that focus on the individuals, Ripple Labs aims to serve banks and payment providers, allowing them to lower transaction costs and expedite settlements.
How does Ripple work?
RippleNet is a network based on a set of rules known as the Ripple Transaction Protocol or RTXP for short. Just like the Internet has its own rules, or protocol, to transfer information known as HTTP. The RippleNet uses a protocol known as RTXP for moving value around the world.
The network consists of computers, known as validators, that are spread around the world and maintain a blockchain – a shared ledger of who owns what. Validators make sure that every transaction on the network follows RTXP protocols to ensure seamless and error-free transfer by consensus of a super-majority of validators (i.e. 80%). This is also known as a proof-of-stake method of validation.
Companies who want access to the Ripple network can use gateways. Gateways, which are usually run by banks, act as entry points to Ripple for people outside the network.
Ripple is a revenue-generating company with over 300 financial institutions and banks use RippleNet including J.P. Morgan and Bank of America. Interestingly, Banks in India including Yes Bank, Kotak Mahindra Bank, Axis Bank, and IndusInd Bank have also adopted RippleNet.
It is important to note that RippleNet also functions as a currency exchange for all types of fiat currency. However, to do this, it has to be able to provide on-demand liquidity i.e. it should be easily convertible to and from currencies around the world.
That’s where XRP comes in. XRP is a cryptocurrency (a digital asset) that is built for providing a source of liquidity to payment providers, market makers, and banks. By harnessing this technology, it will be possible to eliminate the need of creating unnecessary Nostro accounts.
For example, if a bank wants to move large amounts of money, instead of needing to use multiple intermediary banks and different currency to transfer the money, it can just convert the money to XRP and send that XRP to the recipient bank.
There are a total of 100 billion XRP tokens pre-mined. Out of that, around 6.33 billion tokens are held by Ripple itself while around 44.26 billion tokens are distributed in partnership and business development agreements, and the remaining 49.4 billion tokens are placed in escrow. Every time a transaction is validated, a small amount is destroyed as transaction fees.
Speed and scale of XRP
The XRP Ledger (the Ripple blockchain) can settle transactions exponentially faster than traditional means of transfer.
Even when compared to other blockchains like Bitcoin and Ethereum, Ripple outperforms significantly.
Transactions on the XRP ledger only takes 3-5 seconds to settle as compared to several minutes in case of other blockchains.
It is an extremely scalable technology. The ledger can consistently handle 1500 transactions per second while Bitcoin can only handle 7 transactions per second.
XRP vs Bitcoin
XRP and Bitcoin both are cryptocurrencies that are designed to work as a medium of exchange on their respective blockchain and both can be bought, stored, and sold through various crypto exchanges around the world. But, this is where the similarity between these digital assets end.
Bitcoin is designed to be used as a peer to peer payment option while Ripple aims XRP to be used in banks and financial institutions as a medium of transfer for large volumes of money.
Bitcoins are mined by solving the complex mathematical equation and uses proof-of-work to process transactions that require enormous computing power. Ripple on the other hand already has 100 billion pre-mined tokens and uses a proof-of-stake method to validate transactions on its blockchain which is a highly energy-efficient method.
XRP is the 4th largest digital asset having market capitalization of around $8.3 Billion while Bitcoin leads the digital asset space with around $169 Billion in market capitalization.
Bitcoin hasn’t seen much adoption in real-world applications as it remains extremely volatile and difficult to regulate. XRP is equally volatile but the technology behind it is more promising and already has real users.
Conclusion
Unlike other technology companies in recent times, Ripple surprisingly is a cash flow positive company providing promising solutions to make large money transfer quick, easy, and significantly less costly.
As of now, Ripple has raised a total of $200 Million from venture capital funds and other companies including Google ventures, Standard Chartered, Accenture, and IDG Capital Partners.
Looking at the success of Ripple, there is no doubt that new competition will soon emerge. Only time will tell if this market will be dominated by Ripple or become fragmented and return to the same problem which it is meant to solve.
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