What is Ripple?
Ripple is a blockchain-based digital payment network and protocol that uses its own cryptocurrency, XRP. Ripple’s main focus is to serve as a payment settlement, asset exchange, and remittance system akin to the SWIFT system used by banks and financial intermediaries for international currency and securities transfers.
The cryptocurrency token is pre-mined and uses the ticker symbol XRP. Ripple is the name of the company and the network, while XRP is the cryptocurrency token. The purpose of XRP is to act as an intermediary mechanism of exchange between two currencies or networks—as a temporary settlement denomination layer. Ripple was first released in 2012, co-founded by Chris Larsen and Jed McCaleb.
Key Points
- Ripple is a blockchain-based digital payment network and protocol with its own cryptocurrency, XRP.
- Ripple does not utilize blockchain mining but instead uses a consensus mechanism that confirms transactions through a network of bank-owned servers.
- Ripple transactions use less energy than Bitcoin, are confirmed in seconds, and cost very little, whereas Bitcoin transactions use more energy, take longer to confirm, and have higher transaction costs.
- By market capitalization, Ripple (XRP) ranks among the most valuable blockchain tokens.
- The Ripple payment system is primarily for banks, but individual investors can speculate on the price of XRP.
Understanding Ripple
Ripple operates on an open-source and peer-to-peer decentralized platform, allowing for a seamless transfer of money in any form, be it USD, Yen, Euro, or cryptocurrencies. It is a global payments network, with major banks and financial services as its clients. XRP is used to facilitate quick conversions between different currencies.
Ripple as a Digital Hawala Network
To understand how the system works, consider a remittance structure where both ends of the transaction use their preferred intermediaries to receive funds. Essentially, Ripple functions like a digital Hawala service. Hawala is an informal method of transferring money, often across borders, without any actual physical movement of funds.
For example, suppose Lawrence needs to send $100 to River in another city. Lawrence sends the money to a local agent, Kate, providing a secret code that River must answer correctly to receive the funds in their city. Kate informs River’s agent, Asuka, of the transaction details—the recipient, the funds to be repaid, and the code. If River gives Asuka the correct code, Asuka gives them $100.
However, this money comes from Asuka’s account, meaning Kate owes Asuka $100 (to be settled later). Asuka could keep a log of all debts owed by Kate, who would pay on an agreed date, or reverse transactions could be made to balance the debt. This multi-step transaction requires a trust network, which Ripple circumvents using a blockchain network.
Any individual or business can register and open a gateway, authorizing the registrant to act as an 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 for other currencies. It doesn’t discriminate against any fiat/crypto currency, making it easy for any currency to be exchanged for another. Each currency in the ecosystem has its own gateway, e.g., CADBluzelle, BTCbitstamp, and USDsnapswap. If River wants Bitcoin as payment for services provided to Lawrence, Lawrence does not necessarily need to own any Bitcoin. He can send payment in Canadian Dollars (CAD) to his gateway, and River can receive Bitcoin from their gateway. Initiating a complete transaction doesn’t require a single gateway; multiple gateways can be used, forming a chain of trust among users.
Holding balances through gateways exposes users to counterparty risk, also present in the traditional banking system. If a gateway fails to honor its obligations, users might lose the value of funds held at that gateway. Therefore, users not trusting a gateway can transact with a trusted gateway that deals with the “untrustworthy” gateway. Thus, IOUs would be traded through trusted or reputable certified gateways.
How Ripple Works
The Ripple network does not operate with a proof of work (PoW) system like Bitcoin or a proof of stake (PoS) system like Ethereum. Instead, transactions rely on a consensus protocol to validate account balances and transactions on the system. This consensus aims to improve the integrity of the system by preventing double spending.
If a Ripple user initiates a transaction through multiple gateways but attempts to send the same $100 to the gateway system, all transactions except the first would be eliminated. Individual distributed nodes decide by consensus which transaction to proceed with first. Confirmation is instant, taking about five seconds. Since there’s no central authority deciding who can set up nodes and confirm transactions, the Ripple platform is described as decentralized.
The XRP Ledger tracks all IOUs for any user or gateway’s given currency. Transactions of IOU credits and wallets between are publicly available on the XRP ledger. However, even though financial transaction histories are recorded publicly and provided on
the blockchain, this data is not associated with any personal or business ID or account. Nevertheless, the public record of all transactions (i.e., the blockchain) makes the information susceptible to de-anonymization measures.
Special Considerations
Ripple improves on some of the drawbacks of traditional banking. Transactions on the Ripple network can be settled in seconds (even though the platform often handles millions of transactions) contrasting with banks that may take days or weeks to complete a wire transfer. The fees for transacting on Ripple are also very low, with the minimum transaction cost for a standard transaction being 0.0002 USD in XRP, compared to the high fees charged by banks for international payments.
Is Ripple better than Bitcoin?
Ripple transactions use less energy than Bitcoin, are confirmed in seconds, and cost very little, whereas Bitcoin transactions use more energy, take longer to confirm, and have higher transaction costs.
How Does Ripple’s Network Work?
Ripple network transactions rely on a consensus protocol to verify account balances and transactions on the system. It does not operate with PoW systems like Bitcoin or PoS systems like Ethereum. Ripple’s consensus aims to improve the integrity of the system by preventing double spending.
What’s the Difference Between Ripple and XRP?
Ripple is a global payment network, with major banks and financial service providers as its clients. XRP is an open-source cryptocurrency developed by Ripple for use in Ripple products to facilitate quick conversions between different currencies.
Bottom Line
Ripple is a decentralized blockchain designed to provide faster payment services for global institutions using its native cryptocurrency, XRP, than current solutions offer.
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