Ripple is a blockchain-based digital payment network and protocol that uses its own cryptocurrency, XRP. Ripple’s main focus is as a payment settlement asset exchange and remittance system, similar to the SWIFT system for international money and security transfers used by banks and financial intermediaries dealing across currencies.
The token used for the cryptocurrency is premined and uses the ticker symbol XRP. Ripple is the name of the company and the network, and XRP is the cryptocurrency token. The purpose of XRP is to serve as an intermediate mechanism of exchange between two currencies or networks—as a sort of temporary settlement layer denomination. Ripple was first released in 2012 and was co-founded by Chris Larsen and Jed McCaleb.
Key Takeaways
- Ripple is a blockchain-based digital payment network and protocol with its own cryptocurrency, XRP.
- Rather than using blockchain mining, Ripple employs a consensus mechanism via a group of bank-owned servers to confirm transactions.
- Ripple transactions use less energy than Bitcoin, are confirmed in seconds, and cost very little, unlike Bitcoin transactions that use more energy, take longer to confirm, and involve higher transaction costs.
- Ripple’s XRP ranks among the most valuable blockchain-based tokens by market capitalization.
- Though intended primarily for banks, individual investors can speculate on the price of XRP.
Understanding Ripple
Ripple operates on an open-source and peer-to-peer decentralized platform that allows for seamless money transfers in any form, whether dollars, yen, euros, or cryptocurrencies. It is a global payments network that includes major banks and financial services institutions among its customers. XRP is used to facilitate quick conversion between different currencies.
Ripple as a Digital Hawala Network
To comprehend the system, imagine a structure where two parties on either end of a transaction use their intermediaries to receive money. Ripple functions as a digital hawala service, an informal method of transferring money across borders without physical transfer of funds.
Consider Lawrence needs to send $100 to River in another city. Lawrence sends the funds to a local agent, Kate, and shares a secret password that River must correctly provide to receive the funds in his city. Kate alerts River’s agent, Asuka, of the transaction details—recipient, funds, and password. If River gives Asuka the correct password, Asuka gives him $100. The money comes from Asuka’s account, meaning Kate owes Asuka $100, which they will settle later. This process requires trust, which Ripple eliminates using its blockchain network.
Anyone or any business can register and open a gateway to act as the intermediary for exchanging currencies, maintaining liquidity, and transferring payments on the network.
Ripple’s Digital Currency XRP
Ripple’s digital currency, XRP, acts as a bridge currency between other currencies. It facilitates exchanges without discriminating between fiat or cryptocurrency, making currency exchange seamless. Each currency has its own gateway—CADBluzelle, BTCbitstamp, USDsnapswap. For example, if River wanted bitcoins in exchange for services rendered to Lawrence, Lawrence can send the payment in Canadian dollars (CAD) to his gateway, and River receives bitcoins from his gateway. Multiple gateways may form a chain of trust.
Holding balances with a gateway exposes users to counterparty risk, similar to the traditional banking system. If a gateway does not honor its liability, the user could lose the money held with that gateway. Users can transact with a trusted gateway that deals with the “untrusted” gateway to mitigate this risk.
How Ripple Works
The Ripple network does not run on a proof-of-work (PoW) system like Bitcoin or a proof-of-stake (PoS) system like Ethereum. Instead, it relies on a consensus protocol to validate account balances and transactions. This consensus improves the system’s integrity by preventing double-spending. A Ripple user that tries to transact the same $100 multiple times with different gateways will have all but the first transaction nullified. Consensus is reached by distributed nodes that decide the order of transactions. The validations take roughly five seconds, ensuring quick confirmations.
The XRP Ledger tracks all IOUs in any given currency for users or gateways. These transaction records are publicly available on the ledger but not linked to individual identities. Although every transaction history is public, the lack of direct linkage to individual accounts provides a layer of privacy, albeit susceptible to de-anonymization.
Special Considerations
One of Ripple’s advantages is improving traditional banking shortcomings. Transactions on Ripple are settled within seconds, even when processing millions of transactions. In contrast, banks may take days or weeks for a wire transfer. Additionally, Ripple’s transaction fees are minimal, with an average transaction costing $0.0002 XRP compared to hefty banking fees for cross-border payments.
Is Ripple Better Than Bitcoin?
Ripple transactions consume less energy, are confirmed quickly, and have minimal costs, unlike Bitcoin transactions, which consume more energy, take longer and include higher fees.
How Does Ripple’s Network Function?
Ripple network transactions rely on a consensus protocol to validate account balances and transactions, unlike Bitcoin’s PoW or Ethereum’s PoS system. The consensus aims to prevent double-spending, making the network efficient and secure.
How Is Ripple Different from XRP?
Ripple is a global payment network catering primarily to major banks and financial services providers. In contrast, XRP is an open-source cryptocurrency developed to facilitate quick currency conversion within Ripple products.
The Bottom Line
Ripple is a decentralized blockchain platform designed to offer faster payment services than existing financial solutions globally, leveraging its native cryptocurrency, XRP.
Related Terms: Bitcoin, Ethereum, Blockchain.
References
- Decrypt. “7 Things Nobody Tells You About Ripple”.
- Ripple. “XRP”.
- Ripple. “About Ripple”.
- Hariharan, Arya. “Hawala’s Charm: What Banks Can Learn From Informal Funds Transfer Systems”. William & Mary Business Law Review, vol. 3, no. 1, February 2012, Page 273.
- Ripple. “Frequently Asked Questions”, Select I’ve sent XRP via an Exchange/Gateway, but it did not arrive. What do I do?
- Ripple. “Frequently Asked Questions”, Select What is the Consensus Protocol?
- Bank of America. “Bank of America Online Banking Service Agreement: 6. ACH and Wire Transfers: B. Types of ACH and Wire Transfers”.
- Bitcoin. “Frequently Asked Questions”, Select Transactions: Why do I have to wait for confirmation?
