Ripple is a money transfer network designed to meet the needs of the financial services industry. XRP, a cryptocurrency tailored to run on the Ripple network, is consistently listed in the top ten cryptocurrencies by market capitalization, and most recently (June 2024) entered the top five most profitable assets.
What exactly is Ripple?
Ripple is a payment settlement system and currency exchange network capable of processing transactions around the world. Ripple regularly acts as a trusted agent between two parties in a transaction as the network can quickly confirm that the exchange was successful. Ripple can facilitate exchanges for a variety of fiat currencies, cryptocurrencies like Bitcoin, and even commodities like gold.
“Ripple was designed from the outset as a replacement for SWIFT (a leading money transfer network) or to otherwise replace the settlement layer between major financial institutions,” says Pat White, Bitwave CEO.
Whenever users make a transaction using the network, the network deducts a small amount of XRP as a commission.
“The standard fee for transacting on Ripple is set at 0.00001 XRP, which is minimal compared to the high fees charged by banks for making cross-border payments,” says El Lee, board member of Onchain Custodian. At the end of 2022, the XRP price was around $ 0.35 per token, which means the transaction fee turns out to be just $ 0.0000035.
What is XRP?
XRP is a cryptocurrency that runs on XRP Ledger, a blockchain designed 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 currency to trade with other cryptocurrencies, or as a means of financing transactions on the Ripple network.
In particular, the XRP blockchain works a little differently than most other cryptocurrencies. Other cryptocurrencies open their transaction logs and verification processes to anyone who can quickly solve complex equations, but transactions are safe as most register holders have to agree with verification to be added.
Instead, XRP’s Ripple network centralizes the process somewhat: while anyone can download its validation software, it maintains what it calls unique node lists that users can select to verify their transactions based on the participants they deem least likely. to defraud them. Its default list currently contains 35 trusted validators. Ripple decides which validators to approve for this list and also makes up six of these validation nodes. However, users can turn off this default list and hypothetically remove Ripple-supported validators from their transactions, building their own lists of trusted validators instead. This would allow the network to continue approving transactions even without Ripple the company getting involved or even continuing to exist.
When new transactions arrive, validators update their ledgers every three to five seconds and make sure they match the other ledgers. If there is a mismatch, they stop to figure out what went wrong. This allows Ripple to validate transactions securely and efficiently, which gives it an edge over other cryptocurrencies, such as Bitcoin.
“Bitcoin transaction confirmations can take many minutes or hours and are typically associated with high transaction costs,” says Lee. “XRP transactions are confirmed in four to five seconds, at a much lower cost.”
How to extract XRP
“Mining” is the distributed verification system used by most blockchain-based cryptocurrencies. It facilitates transactions and provides the mechanism by which the new currency is introduced into a cryptocurrency system, typically as a reward for verifiers for their work in supporting the network. For example, Bitcoin has a total supply limit of 21 million tokens which are constantly released as more and more transactions are verified.
XRP, on the other hand, has been “pre-mined,” which means that XRP Ledger has created 100 billion tokens which are then periodically released publicly. Ripple owns around 6% as an incentive to help cryptocurrency grow and succeed over time. Another 48% is held in reserve for regular release to the market through sales.
Understandably, this has led to concerns that many XRPs could be released at the same time, diluting the value of other XRPs already in circulation because part of what gives value to any currency is its relative scarcity.
“The company has tried to reduce uncertainty by implementing various mechanisms (trust, predictable release, etc.),” says Tim Enneking, principal of Digital Capital Management.
Advantages of ripple
- Fast settlement. Transaction confirmations are blazingly fast. They typically take four to five seconds, compared to the days it might take banks to complete a bank transfer or the minutes or potentially hours it takes to verify Bitcoin transactions.
- Very low fees. The cost to complete a transaction on the Ripple network is just 0.0001 XRP, a small fraction of a cent at current rates.
- Versatile exchange network. The Ripple network not only processes transactions using XRP, but can also be used for other fiat currencies, cryptocurrencies, and commodities.
- Used by large financial institutions. Large businesses can also use Ripple as a transaction platform.
Disadvantages of ripple
- Highly centralized. One of the reasons cryptocurrencies have become popular is that they have been decentralized, taking control away from big banks and governments. The Ripple system is centralized and goes against this philosophy.
- Ripple Labs controls the XRP supply. Ripple Labs decides when to release coins, giving it control over other cryptocurrencies where coins are released slowly and steadily from mining. This means that Ripple Labs has more power to influence the value of XRP by deciding when and how many tokens to issue.
- Recent regulatory action against XRP. In the United States in 2021, the Securities and Exchange Commission (SEC) filed a lawsuit against Ripple, saying that because it can decide when to release XRP, the company should have registered it as a title. Until this is resolved, it could slow down the institutional use of this system. As a result, several exchanges, such as Coinbase, have also stopped listing XRP.
How can you use Ripple and XRP
You can use XRP like any other digital currency, both for transactions and as a potential investment. You can also use the Ripple network to process other types of transactions, such as exchanging currencies.
For example, if you are looking to exchange Australian dollars for euros, you can first exchange your AUD for XRP on the Ripple network, then use them to buy euros, instead of handling the currency exchange directly through a bank or currency exchange. This can be a much quicker and cheaper approach than paying the high fees banks and remittance organizations might charge.
Should you buy XRP?
While some may find XRP’s vision and benefits compelling, White is concerned that the SEC lawsuit will create problems for those looking to buy it.
“They are positioning themselves as a conciliation layer for regulated companies, but they are also in a dispute with the SEC. None of the customers they would like to join can really start using XRP until Ripple has resolved its legal issues, “he said.
With all this uncertainty, Enneking warns that XRP is not a bet for the faint of heart. The cryptocurrency markets went into free fall in May with billions of dollars written off in value and the major Bitcoin coin falling below the psychological barrier of $ 20,000. XRP, like other coins, was not spared from routing and is now trading at around $ 35, down from its all-time high of $ 3.84 in 2018. That’s a drop of more than 90%.
That said, if you believe Ripple will come out victorious against the SEC and continue to take over as a payment system, then, by all means, roll the dice. 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 does it constitute a recommendation of cryptocurrency as an investment class.
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