What is Ripple?
Ripple is a blockchain-based digital payment network and protocol that utilizes its own cryptocurrency, XRP. Ripple’s primary function is as a payment settlement asset exchange and remittance system, similar to the SWIFT system used by banks and financial intermediaries for international money and security transfers across different currencies.
The token used in this network is premined and carries the ticker symbol XRP. Ripple is both the name of the company and the network while XRP is the cryptocurrency token used. XRP serves as an intermediate mechanism for exchange between two currencies or networks, acting as a temporary settlement layer. 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 relies on a consensus mechanism using a group of bank-owned servers to confirm transactions.
- Ripple transactions use less energy than Bitcoin, are confirmed within seconds, and incur very low costs, unlike Bitcoin transactions that are energy-intensive, slower to confirm, and have higher costs.
- XRP ranks among the most valuable blockchain-based tokens by market capitalization.
- The Ripple payment system is primarily designed for banks, but individual investors can also speculate on the price of XRP.
Understanding Ripple
Ripple operates on an open-source, peer-to-peer decentralized platform that allows seamless transfers of money in any form, whether dollars, yen, euros, or cryptocurrencies. As a global payments network, it counts many major banks and financial institutions among its customers. XRP facilitates quick conversions between different currencies.
Ripple as a Digital Hawala Network
To understand the system, consider a money transfer structure where two parties use intermediaries to receive money. Ripple functions like a digital hawala service, an informal method of transferring money across borders without moving physical cash.
For example, imagine Lawrence needs to send $100 to River, who lives in a different city. Lawrence sends the funds to a local agent, Kate, and provides a secret password that River must use to receive the funds in their city. Kate alerts River’s agent, Asuka, of the transaction details. If River gives Asuka the correct password, Asuka gives River $100 from her account. Meanwhile, Kate owes Asuka $100, which can be settled later.
Ripple bypasses this complex web of trust using its blockchain network, allowing any person or business to become an intermediary for currency exchange, maintaining liquidity, and transferring payments.
Ripple’s Digital Currency XRP
Ripple’s digital currency, XRP, acts as a bridge currency for other currencies. It doesn’t discriminate between any fiat or cryptocurrency, simplifying exchanges. In the ecosystem, each currency has its own gateway. If River wants bitcoins and Lawrence only has Canadian dollars, Lawrence can send CAD to his gateway, and River can receive bitcoins from his gateway.
Holding balances with a gateway does expose users to counterparty risk. If a gateway doesn’t honor its liability, users could lose their money. Users who don’t trust a gateway can transact through a trusted gateway linked to the ‘untrusted’ gateway, managing IOUs via a creditworthy network.
How Ripple Works
The Ripple network does not use 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 transactions and account balances, enhancing system integrity and preventing double-spending.
If a user attempts multiple transactions with different gateways simultaneously, all but the first transaction will be deleted by consensus. This process of instant confirmations takes roughly five seconds, and because no central authority governs nodes, Ripple is decentralized.
The XRP Ledger tracks all IOUs in any currency for any user or gateway, and balances are publicly available. While the Blockchain records transaction history publicly, it doesn’t link it to individuals or businesses. Nevertheless, this openness makes the information susceptible to de-anonymization.
Special Considerations for Ripple
Ripple improves upon traditional banking drawbacks. Transactions on the Ripple network are settled within seconds, even with a high transaction volume. Unlike banks where wire transfers can take days, Ripple charges minimal fees for its transactions, set at a modest $0.0002 XRP, much lower than the hefty cross-border fees banks typically impose.
Is Ripple Better Than Bitcoin?
Ripple transactions use less energy, are confirmed in seconds, and have low costs. In contrast, Bitcoin transactions are more energy-intensive, slower, and have higher transaction fees, making Ripple a more efficient option for certain kinds of transactions.
How Does Ripple’s Network Function?
Ripple relies on a consensus protocol to confirm account balances and transactions, rather than PoW or PoS systems. This protocol prevents double-spending and improves system integrity by ensuring nodes reach a consensus on transaction validity quickly.
How Is Ripple Different from XRP?
Ripple is a global payments network that partners with major banks and financial services providers. XRP is the open-source cryptocurrency developed by Ripple, used to facilitate quick currency conversions within its products.
The Bottom Line
Ripple is a decentralized blockchain designed to provide faster payment services than existing financial solutions globally, using its native cryptocurrency, XRP.
Related Terms: Bitcoin, Ethereum, SWIFT, blockchain, consensus protocol, decentralization.
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?
