Ripple is a money transfer network designed to meet the needs of the financial services industry. XRP, a cryptocurrency tailored to work on the Ripple network, is consistently ranked among the top ten cryptocurrencies by market cap and most recently (June 2024) broke into the top 5 most profitable assets.
What is Ripple exactly?
Ripple is a payment processing system and currency exchange network that can process transactions anywhere in the world. Ripple routinely serves as a trusted agent between two parties in a transaction because the network can quickly confirm that the exchange has happened. Ripple can facilitate exchanges for a variety of fiat currencies, cryptocurrencies like bitcoin, and even commodities like gold.
“Ripple was designed from the start as a replacement for SWIFT (a leading money transfer network) or as a replacement for the settlement layer between major financial institutions,” said Pat White, CEO of Bitwave.
Whenever users conduct a transaction over the network, the network deducts a small amount of XRP as a fee.
“The standard fee for conducting transactions on Ripple is set at 0.00001 XRP, which is minimal compared to the high fees banks charge for conducting cross-border payments,” says El Lee, board member of Onchain Custodian. At the end of mid-2022, the XRP price was around $0.35 per token, which means the transaction fee is only $0.0000035.
What is XRP?
XRP is a cryptocurrency running on the XRP Ledger, a blockchain developed by Jed McCaleb, Arthur Britto, and David Schwartz. McCaleb and Britto would later found Ripple and use XRP to facilitate transactions on the network. You can buy XRP as an investment, as a coin to exchange for other cryptocurrencies, or as a way to fund transactions on the Ripple network.
Notably, XRP’s blockchain works a little differently than most other cryptos. Other cryptocurrencies open up their transaction ledgers and verification processes to anyone who can quickly solve complex equations, but transactions are secure as the majority of ledger holders must agree to verification before they can be added.
Instead, XRP’s Ripple network somewhat centralizes the process: while anyone can download its validation software, it maintains what it calls unique node lists, which users can select to verify their transactions based on which participants they think are least likely to cheat . Its default list currently contains 35 trusted validators. Ripple decides which validators to allow for this list and also compiles six of these validation nodes. However, users can opt out of this default list and hypothetically remove Ripple-backed validators from their transactions entirely, rather than creating their own lists of trusted validators. This would allow the network to continue approving transactions even without the Ripple company remaining involved or even continuing to exist.
As new transactions come in, the validators update their ledgers every three to five seconds, making sure they match the other ledgers. If there is a discrepancy, they stop to figure out what went wrong. This allows Ripple to validate transactions securely and efficiently, giving it an edge over other cryptocurrencies like Bitcoin.
“Bitcoin transaction confirmations can take many minutes or hours and typically involve high transaction costs,” says Lee. “XRP transactions are confirmed in about four to five seconds at a much lower cost.”
How to mine XRP
“Mining” is the distributed verification system used by most blockchain-based cryptocurrencies. It facilitates both transactions and the mechanism by which new currencies are introduced into a cryptocurrency system – typically as a reward to verifiers for their work supporting the network. For example, Bitcoin has a total supply limit of 21 million tokens, which will be steadily released as more and more transactions are verified.
In contrast, XRP has been “pre-mined”, meaning that the XRP ledger has created 100 billion tokens, which are then released publicly on a regular basis. Ripple owns about 6% of this as an incentive to help the cryptocurrency grow and thrive over time. Another approximately 48% is held in reserve to be brought to market regularly through sales.
Understandably, this has raised concerns that a lot of XRP could be released at once, diluting the value of other XRP already in circulation, since part of what gives any currency its value is its comparative scarcity.
“The company has attempted to reduce uncertainty by implementing multiple mechanisms (trust, predictable release, etc.),” says Tim Enneking, head of Digital Capital Management.
- Fast processing. Transaction confirmations are incredibly fast. They typically last four to five seconds compared to the days it takes banks to complete a transfer or the minutes or possibly hours it takes to verify bitcoin transactions.
- Very low fees. The cost of completing a transaction on the Ripple network is only 0.0001 XRP, a small fraction of a cent at current rates.
- Versatile exchange network. The Ripple network not only processes transactions with XRP, but can also be used for other fiat currencies, cryptocurrencies and commodities.
- Used by large financial institutions. Large companies can also use Ripple as a transaction platform.
- Strongly centralized. One of the reasons cryptocurrencies became popular is that they were decentralized, removing control from big banks and governments. The Ripple system is centralized and contradicts this philosophy.
- Ripple Labs controls the XRP supply. Ripple Labs decides when coins are released and gives it control over other cryptos where coins are slowly and steadily released through mining. This means Ripple Labs has more power to influence the value of XRP by deciding when and how many tokens are released.
- Recent regulatory action against XRP. In the US, the Securities and Exchange Commission (SEC) filed a lawsuit against Ripple in 2021, saying that since it can decide when XRP will be released, the company should have registered it as a security. Until this is resolved, it could slow institutional use of this system. Several exchanges, such as Coinbase, subsequently stopped listing XRP.
How to use Ripple and XRP
You can use XRP like any other digital currency, either for transactions or as a potential investment. You can also use the Ripple network to process other types of transactions, such as B. the exchange of currencies.
For example, if you want to exchange Australian dollars for euros, you could first exchange your AUD for XRP on the Ripple network and then use that to buy euros, rather than going through a bank or currency exchange directly to exchange currencies. This can be a much quicker and cheaper approach than paying the high fees that banks and money transfer organizations can charge.
Should You Buy XRP?
While some might find XRP’s vision and benefits compelling, White is concerned that the SEC lawsuit could land trouble for those who want to get involved.
“They position themselves as the resolution layer for regulated companies, but are also deep in a dispute with the SEC. None of the clients he would like to take on can really start using XRP until Ripple gets their legal issues sorted out,” he said.
With all this uncertainty, Enneking warns that XRP is not a gamble for the faint of heart. Crypto markets went into freefall in May, with billions of dollars shedding in value and leading coin bitcoin falling below the $20,000 psychological barrier. XRP, like other coins, has not been spared from routing and is now trading around $35, down from an all-time high of $3.84 in 2018. That’s down more than 90%.
However, if you think Ripple will emerge victorious from the SEC and continue to dominate as a payments system, then by all means, get the dice rolling. Just make sure it’s money you can afford to lose.
This article is not an endorsement of any particular cryptocurrency, broker, or exchange, nor is it a recommendation of cryptocurrency as an asset class.