Ripple (XRP) is a real-time gross settlement (RTGS) system, which is a specialist money transfer network, currency exchange and remittance network. It was created by the U.S.-based technology company Ripple Labs Inc. in 2012 and was validated by independent servers. The native token used for the protocol is XRP and despite its regulatory concerns, it can be exchanged for other currencies avoiding users the wait times associated with banks.
This article will discuss Ripple’s XRP cryptocurrency, how it works, how it started, and what it is used for.
Defining Ripple (XRP)?
Ripple (XRP) is a cryptocurrency token designed to migrate transactions from central databases controlled by financial institutions to a more open infrastructure while significantly cutting costs. XRP transactions are trustless, instant and cheap, putting them at an advantage for cross-border movements.
It had one of the most ambitious goals in the cryptocurrency space when it launched way back 2012. The software enabling the use of XRP — the XRP Ledger — proposed a new way of operating blockchains that proponents claim is more suitable for transactions.
In the Bitcoin blockchain, anyone can contribute computing power, validate transactions and secure the protocol. Meanwhile, the XRP Ledger only allows select network participants to help validate transactions and secure the network. There are over 150 of these participants in the network, collectively known as the Unique Node List.
At launch, 100 billion XRP tokens were pre-mined and subsequently distributed to specific individuals, companies and the general public through gifts and giveaways. At the time, the move led to concerns surrounding its decentralization as a few entities controlled a large supply of the coins.
Adding fuel to the fire, XRP’s involvement in the market relies on a for-profit company called Ripple that, to this day, acts as the main player in the XRP ecosystem. Ripple helps maintain the XRP Ledger and plays a pivotal role in its development while being a significant XRP token holder.
Ripple XRP’s Brief History
The idea for Ripple was originally conceived by Jed McCaleb in 2011. Despite being a drop out of UC Berkeley, he was still able to successfully start his own company in 2012 and initially called it OpenCoin. He was one of the proponents of Mt. Gox, which he first envisioned as an exchange for Magic: The Gathering cards only to evolve as one of the biggest and most scandalous exchanges in the history of crypto.
McCaleb tapped Arthur Britto and David Schwartz as co-developers to ultimately engineer his vision for Ripple. And Britto and Schwartz eventually had Ryan Fugger bring their vision to fruition, as Fugger transformed his original OpenCoin system into Ripple.
By 2018, more than 100 banks had signed up to use Ripple, albeit with most using the infrastructure’s messaging capabilities rather than the XRP cryptocurrency itself.
Also in 2018, Ripple raised a class action lawsuit related to its unregistered sales of XRP tokens, amounting to millions of dollars in gains for Ripple. In 2020, as part of its legal proceedings against Ripple, the Securities and Exchange Commission (SEC) classified XRP as a security, not a commodity, and alleged Ripple’s leadership were allowing the sale of unregistered securities.
The jump in XRP’s value in April 2021 came despite the U.S. suing Ripple for raising over a billion dollars by selling XRP on allegedly unregistered securities offerings.
XRP, as well as other major cryptocurrencies, experienced a peak in 2018, when its value reached $3.38. However, in 2020, XRP lost over 90% of its value from that previous 2018 high, making it one of the worst performers across digital currencies. As of Aug. 23, 2022, the price was about $0.34 per XRP token — well off its April 1, 2021, value of $1.56.
How does Ripple work?
As mentioned above, Ripple operates on an open-source and peer-to-peer decentralized platform that allows for a seamless transfer of money in any form, whether it’s dollars, yen, euros, or cryptocurrencies, like litecoin or bitcoin.
Ripple is a global payments network and counts major banks and financial services institutions among its customers. These are the elements of how Ripple works.
XRPL
Like any cryptocurrency, the basis for Ripple lies in its blockchain that provides a permanent and unchangeable record of transactions. In Ripple’s case, the blockchain, or electronic ledger, that keeps track of transaction information such as accounts, balances, and transfers, is called XRPL (which stands for XRP Ledger).
Quorum-based
Ripple doesn’t use Proof-of-Work or Proof-of-Stake network consensus protocols. Instead, it has a quorum-based consensus method, which Ripple calls RPCA (Ripple Protocol Consensus Algorithm) to allow a majority of validators — servers specifically configured to participate actively in consensus — to agree a set of transactions should occur in a ledger entry.
That agreed-upon version of the ledger entry is validated and written to the blockchain, and its contents can never change.
Unique Node List
While Ripple provides a default recommended list of ~35 validators based on past performance, each participating node in the network is free to choose its own list of validators. This list is called a Unique Node List, or UNL, that is specific to each node.
Each node should carefully choose validators from among the 150+ present validators based on who they believe will behave honestly most of the time and not collude with other validators to break the rules.
Consensus
Each validator proposes what they deem to be the correct block containing new transactions. They compare blocks, or ledger entries, every 3 to 6 seconds, and if an 80% majority of validator nodes agree on the transactions and order, a consensus is achieved, and the block is added to the XRPL and forms the starting point of the next block.
However, if 80% of validators don’t agree on what transactions should be written to the ledger, each validator modifies their proposals to more closely match the other validators they trust on their UNLs. This may repeat for several rounds until a consensus is reached.
As long as fewer than 20% of trusted validators are faulty, consensus can continue unimpeded; and confirming an invalid transaction would require over 80% of trusted validators to collude. If more than 20% but less than 80% of trusted validators are faulty, the network stops making progress.
Using of Ripple XRP
The purpose of Ripple is to utilize the internet, blockchain technology and the XRP currency to allow value transfers across borders in a quick, cost-efficient and reliable way. In that sense, Ripple is primarily geared towards offering solutions to businesses, governments and institutions. Cross border payments to enable global money transfers, crypto liquidity to source digital assets, and CBDC services are Ripple’s primary use cases. Some invest in XRP like they would stocks, buying the currency on a crypto exchange and then holding it or selling it on.
- Ripple is used as a payment solution by banks, governments and institutions.
- Ripple’s primary use cases are cross border payments, crypto liquidity and CBDC.
- XRP can be bought as an investment on a cryptocurrency stock exchange and held in a digital wallet.
Is it a good investment?
Like any other cryptocurrency, XRP is subject to high volatility. As always, invest at your own risk as you are the only one responsible for your losses. If you firmly believe in Ripple’s bright future, start investing in small amounts. The fact that it has bank ties is encouraging, giving somehow a sense of security for your hard earned money.
Ripple’s vision can come to fruition if it continues to perform well in the crypto space. It has the potential to replace inefficient and outmoded international money transfer systems.
