What is Ripple? A beginner's guide for understanding Ripple
When people think of Ripple, they may immediately think of the XRP cryptocurrency. However, Ripple’s business, technology and ecosystem are not completely synonymous with XRP, although Ripple does harness the XRP coin for certain uses within its ecosystem.
So what is Ripple trying to solve? The progression of technology has significantly changed the speed and ease at which information moves globally. The movement of money, however, has remained comparatively more cumbersome than, say, the transition from letters to email.
Cryptocurrency has provided significant improvements in the area of value transfer, but crypto, in a general and broad sense, lacks levels of compatibility with traditional money systems. By harnessing blockchain technology, Ripple aims to help quicken and smoothen the arena of money transfer.
It is important to note that although the Ripple company harnesses the XRP Ledger and XRP coin in various capacities, the XRP Ledger and XRP coin are independent of the Ripple company, according to ample statements and material issued by the company itself over the years of operating.
History of Ripple
Originally a money transfer platform known as RipplePay, initiated by software developer Ryan Fugger in 2004, Ripple as it functions today is the result of a journey of transitions and developments over the years. A number of people have played influential roles on that journey, including Jed McCaleb, Arthur Britto and David Schwartz. The triad of engineers opted to look outside of Bitcoin (BTC) to build their own solution following Bitcoin’s launch in 2009. The result — the XRP Ledger, which went live in 2012.
McCaleb, the founder of the now-defunct Mt. Gox exchange, left Ripple in 2014, going on to co-found Stellar (XML). Previously Ripple’s CEO, Chris Larsen now holds the position of executive chairman for Ripple’s director board. Brad Garlinghouse took over as Ripple’s CEO in 2017, after Larsen announced his decision to depart the position in 2016.
The XRP coin hit significant price highs around $3 per coin in early 2018, up considerably from trading below the $0.05 level in early 2017.
In 2019, a Series C funding added $200 million to the Ripple company for its endeavors.
In December 2020, regulatory uncertainties surfaced regarding Ripple. According to a complaint made by the United States Securities and Exchange Commission (SEC), Ripple sold XRP to investors in the U.S. and the global public as part of an unregistered securities sale that garnered over $1.3 billion.
Since the cryptocurrency industry is new compared with traditional finance, the regulatory status of crypto assets has surfaced as a topic of discussion over the years. The Commodity Futures Trading Commission (CFTC) has expressed a view of Bitcoin and Ethereum (ETH) as commodities, although classification has been foggier for other digital assets.
As per the SEC’s movement against Ripple, the commission alleged XRP to be a security, which would then fall under the SEC’s jurisdiction. A petition came forward from a group of people that bought XRP, citing arguments for XRP’s classification as something other than a security, although holes exist in the petition’s rationale.
Ripple has argued that the SEC’s action came too long after the creation of XRP and that other U.S. government agencies have given XRP a classification other than that of a security.
Ripple — its core areas of business
Banks use the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system to process international transactions. While this is effective, there are increased costs and operational overhead compared with what may be possible with newer technologies. Through a number of solutions, at its core, Ripple essentially aims to provide an efficient system for the direct transfer of money that settles in real-time, while being cheaper, more secure and more transparent than other transfer systems employed by traditional financial institutions.
Ripple pushes a narrative that it calls the Internet of Value, or IoV. According to this narrative, Ripple believes that people should be able to transfer money and information at the same speed. Think of being able to send money at speeds similar to sending a text, for example.
Ripple is a company focused on advancing the world of payments, which has historically proven to be clunky and fragmented. Multiple branches and solutions exist under the Ripple brand umbrella — RippleNet, the XRP Ledger, the XRP coin and RippleX.
RippleNet is a global network that financial institutions can use to transfer money more quickly, with greater transparency and at less cost through a unified system, as opposed to the fragmented traditional ecosystem banks have historically worked with. RippleNet requires the use of just one application programming interface (API). Ripple formerly also had products called xRapid, xCurrent and xVia, although the company combined those solutions to form RippleNet in 2019.
The XRP Ledger is an open-source blockchain on which the XRP coin runs. XRP is the native asset of the XRP Ledger. The XRP Ledger and the XRP coin run independently of the company Ripple, although Ripple uses both for various solutions. Also abbreviated to XRPL, the XRP Ledger serves as a blockchain on which parties can construct solutions, similar to the Ethereum blockchain. Fluctuating in United States dollar value, the XRP coin is also an asset traded on crypto exchanges. XRP is used in various capacities in Ripple’s ecosystem of solutions.
RippleX serves as a platform touting blockchain-based solutions that interested parties can use for their various value-transfer-based use cases. The platform looks to serve as an easier method for harnessing blockchain-based solutions, as opposed to interested parties building their own solutions from scratch. RippleX utilizes the XRP Ledger and aims for simplicity in terms of mainstream compatibility. Two other protocols exist under RippleX. Interledger helps with payments compatibility when multiple different systems are involved. PayString works to simplify payment addresses.
How does the XRP Ledger work?
The XRP Ledger (XRPL) does not employ a proof-of-work (PoW) algorithm, as seen with Bitcoin’s blockchain, or a proof-of-stake (PoS) algorithm, as with the Ethereum 2.0 blockchain. Instead, the XRP Ledger relies on a setup called the XRP Ledger Consensus Protocol to validate account balances and perform transactions. Compared to other types of blockchain consensus, the XRP Ledger Consensus Protocol statedly boasts more efficiency.
For a better understanding of blockchain technology, read: How does blockchain work? Everything there is to know
The XRP Ledger is maintained by independent participants. For each transaction to be successful, there should be an agreement (consensus) among independent validators. Operating as a validator is an option for any entity. While PoW blockchains produce blocks — compartmentalized segments of the overall chain that each include certain information — the XRPL produces “ledgers.”
Every ledger holds information such as data tying it to the former ledger in the chain, account totals and more. Transactions and network alterations must achieve agreement from a certain number of validators.
It takes between three to five seconds for the XRP Ledger to confirm each block (ledger) — completing transactions. This is comparatively much faster than Bitcoin’s 10-minute block time.
How does RippleNet work
Speed is important in today’s world. In the traditional, institutional money transfer world, participants globally must interact with each other, essentially figuring out how to work with different systems that may or may not be easily compatible. With RippleNet, Ripple essentially created a global network that broadly abides by a given framework and group of parameters, making interactions among participants simpler, smoother and more transparent, while decreasing costs and transaction times.
Traditional centralized financial institutions can take days to complete transactions, due to the different systems involved in the process. This can make the current landscape slow, error-prone, costly and can negatively impact the efficiency of a business transaction.
RippleNet also boasts a feature known as On-Demand Liquidity (ODL), which removes the need for pre-funding when it comes to cross-border transactions. So, how does ODL work? When one entity wants to send money to another across country lines, they may each have a different currency on hand. One party may not desire to receive Canadian dollars if they reside in Sweden, for example. Using XRP as a go-to between two different fiat types, RippleNet’s ODL can facilitate transactions with each side sending and receiving their native currency.
The traditional world of money transfer is out of date when it comes to the speed, efficiency and cost of communication and data movement — the results of technological advancement. Ripple’s solutions aim to eventually bring the global money transfer world up to speed.
In the traditional world, as far as centralized financial institutions are concerned, sending money internationally can entail a lot of procedures. Transaction times and fees can vary, but generally remain relatively expensive and take a day or two for completion, with the sender bearing the costs of the transaction. RippleNet, on the other hand, decreases transaction times and costs.
Advantages and disadvantages of Ripple
There are positives and negatives to consider before deciding to choose to use Ripple as an individual or a business organization.
Advantages of Ripple
Ripple aims to solve problems and create opportunities. Normally, people have to wait days for cross-border payments, depending on the payment type and involved regions.
Ripple’s solutions look to help reduce costs, as well as increase speed and efficiency. RippleNet also boasts numerous involved players, so the solution is not uncommon. According to the growing network phenomenon, the more companies from the traditional sector that join Ripple’s solution, the greater the impact Ripple will make in the future.
Downsides of Ripple
Ripple is in a crowded financial technology space and is aspiring to establish itself as an alternative to SWIFT, the leader of the market. Changing the status quo in the traditional world can also be difficult, time consuming and will ultimately require transitions and related education.
Aside from SWIFT, Ripple has competitors within the crypto space, like Stellar. Even though Ripple has the first-mover advantage, it needs to stay ahead with its products and network growth.
Since the crypto sector is a new industry compared to the traditional finance world, regulation has been unclear. Should the crypto space simply fall under existing traditional laws and guidelines, or should regulatory authorities craft different laws that better fit this new wave of innovation? The SEC’s action against Ripple is one example of such regulatory issues. For Ripple to replace legacy systems using XRP in any capacity would likely first require a clearer ruling from regulatory authorities on what type of asset classification XRP falls under.