What is Ripple (XRP) ?
While the cryptocurrency market experienced highly volatile moves, Ripple, via its XRP token, is not doing anything since the beginning of 2019, but stays int he third place of the market capitalisation. Ripple is controversial: its supporters see it as the new Bitcoin and its detractors see it as a centralised system with a useless token. Coinhouse studied the value proposition of the”Ripple system” to figure out right from wrong.
Bitcoin and Ripple, two very different projects
Some of our clients come to our Coinhouse Store, curious about Ripple and wanting to buy XRP tokens. The first step is to realise that Bitcoin and Ripple are two very different, even opposite propositions.
Bitcoin is a peer-to-peer protocol and value exchange system that was the first to use Blockchain technology. Its blockchain is public and censorship- resistant: its operation is fast, decentralised and has proven its worth in terms of security. These characteristics make it possible to exchange value with a minimum degree of trust between users.
Ripple is a company that, through blockchain technology, has developed an asset exchange system in the form of IOU (I Owe You) and value (the XRP token). This system allows faster transactions – nearly 1500 per second according to the Ripple website – but requires much greater trust between the various actors in the system, which calls into question the decentralisation characteristic. We will see why.
You can buy and sell XRP, Bitcoin and other cryptoassets if you have an account on our online platform.
Ripple, faster but less resistant?
The consensus mechanism of the Ripple blockchain is very different from Bitcoin. Bitcoin uses proof of work, which provides an economic incentive for anyone wishing to participate in the operation of the network via monetary inflation: this is the mining principle where miners use computing power to validate transactions and receive bitcoins in exchange. It is a model where the actors do not need to trust each other because everyone has an interest in securing the network in an honest way to continue to earn money: it is the decentralised model.
On the contrary, Ripple chooses a model that requires a certain degree of trust, since no remuneration is provided for operating the network and it is not possible to mine XRP: tokens are issued by Ripple.
The Ripple blockchain weighs around 8TB, compared to 200GB for Bitcoin, which greatly reduces the number of potential “validators”. Indeed, a person wishing to become a node of the Blockchain Bitcoin simply has to download it to his computer. If a storage space of 200GB remains reasonable, few people have 8TB, necessary to become a node of the XRP Blockchain.
Is Ripple controlling its network validations?
It is possible to be a validator of the XRP blockchain without asking Ripple’s permission. But in order to ensure that transactions are validated by trusted actors, there is a list of validators called UNL (Unique Node Lists) that recommends by default the nodes to which validators should connect. On this list, about half of the nodes belongs to Ripple. To integrate this list, you must have proven that you are able to maintain the node 24/7, integrate updates very quickly, and be identifiable. Such a work is not accessible by everyone.
This architecture allows Ripple to implement a much faster transaction block speed than on Bitcoin, with transactions that can be validated in less than four seconds, almost as fast as on the Lightning Network. However, the notion of trust becomes necessary again to a certain extent since a large number of validators are linked to Ripple.
As for the code, Ripple’s source code is open-source, contrary to what many people think.
An economic policy more permissive, controlled by Ripple
XRP has 40.3 billion units currently in circulation out of a total of 100 billion. Today, 59.7 billion units are controlled by the private company Ripple because it is the company that issues the tokens on the market. In addition, 81% of the total number of units is controlled by the 100 richest addresses.
Ripple is allowed to market up to XRP 1 billion per month. For example, during Q3 2018, 163 million XRPs were launched on the market. Some of it is reserved for OTC sales to large and institutional customers, while others are sold on the market.
Ripple therefore has significant control over the monetary issuance policy of the token, while having a constant source of revenue through the sale of new units on the market and in OTC every quarter.
In What do you invest when buying XRP?
XRP is the native token of the Ripple system. He performs different functions:
- A unit of value that can be quickly transferred from one account to another
- Transaction costs that serve as anti-spam and are burned – decrease in supply
- Permission to open an account: each account requires an amount of 20 XRP which will be stored forever.
What needs does Ripple claim to meet?
Ripple’s solution is a service that allows you to transfer any type of asset around the world (currency, gold, oil…), in the form of IOUs. IOUs are tokens that represent the asset in question for the duration of the transaction, and can be quickly sent just like XRPs on the platform.
In this system, the IOU receiver must have confidence in the sender and its ability to exchange the IOU for the asset it represents. The issuing entity therefore needs to be known and trusted so that exchanges can take place without fear. This is why financial institutions are interested in Ripple’s solution as an alternative to SWIFT for their international bank transfers.
This is an interesting system in case the two entities know each other. In the case of two individuals, the uncertainties are already much greater. But Ripple never claimed that its solutions were intended for the general public for peer-to-peer transfer. By the way, what is the purpose of the XRP token in all this ecosystem?
Xcurrent et Xrapid : two solutions you need to understand
Ripple has developed two main solutions that use different protocols called Xcurrent and Xrapid:
- Xcurrent allows IOU exchange via RippleNet. This is the most interesting solution for institutions, as it allows IOUs to be sent at a lower cost (a few fractions of XRP).
- Xrapid puts the XRP token in the center of the table, with the asset serving as a bridge. For example, if a Spanish bank A wishes to send €10M to a Peruvian bank B, the latter will first convert the €10M to XRP from “liquidity providers”, send the XRPs in a few seconds, and the receiving bank will exchange these XRPs with other “liquidity providers” for €10M in Peruvian soils. This system will have to reach a certain inflection point before it can be really effective. It is true that the problem of XRP volatility can be an obstacle to the use of this process. However, since the transfer to XRP takes only a few seconds, volatility issues remain unlikely, especially if the market is sufficiently capitalised.
”Those who invest in the XRP token are speculating on the use of the Xrapid system on a large scale.”
Why XRP is worth less than a dollar?
Can it achieve the same valuation per unit as Bitcoin? One of the motivations for buying XRP that we sometimes hear is the fact that it is “cheap”, and that its potential return on investment would be extremely high if it had the same success as Bitcoin. Unfortunately, this scenario is too simplistic.
If Ripple reached Bitcoin’s market capitalisation, an XRP would be worth €1.94. This is due to the fact that there is a much larger quantity of XRPs in circulation: 40.3 billion units, compared to 17.3 million for Bitcoin. Thus, if an XRP were to achieve a valuation equal to that of a BTC, Ripple’s market capitalisation would be 182 trillion euros, a highly unlikely figure.
XRP is ultimately very different from most of the other cryptocurrencies. Even if everyone can theoretically be a validator on the XRP blockchain, the conditions required are strong barriers. The solutions Ripple proposes to provide are not uninteresting, but it is important to understand the value proposition of the assets in which you are investing. Coinhouse invites you to go deeper into the subject, particularly into Ripple’s involvement in the XRP token, before investing in this asset.