The World of Cryptocurrencies – Part 3 – What Is Ripple

What is Ripple

Welcome back to our tour of the cryptocurrency landscape.  In the last post, we discovered Monero (XMR), a cryptocurrency primarily focused on privacy.  Rather than utilizing a standard blockchain with detailed information concerning senders, receivers, and transaction amounts, Monero obfuscates all of this information by employing ring signatures, ring confidential transactions, and stealth addresses.  Another unique quality of Monero is the fungibility of XMR – any unit of XMR is equivalent to any other unit with no way to trace which XMR has been used in any previous transactions.

What is Ripple

            While Bitcoin, Monero, and even Ether to some extent are focused on individuals in need of transferring money, Ripple takes a different tack – why not provide a commercial solution for use in transferring money for the enterprise?  Using this kind of an ecosystem would allow financial institutions to send money across the world in a matter of seconds rather than days (as is common in current monetary transfers, especially to foreign countries). 

            Before we dive in, let’s get our terms straight.

  • Ripple – According to their FAQ, “Ripple is a technology company that provides the most efficient solutions to send money globally using the power of blockchain technology.”
  • RippleNet – Financial institutions operate within the ecosystem provided by Ripple.  For fractions of a penny, a financial institution in the US, for instance, can transfer money to Germany (or almost any other foreign country) in a matter of seconds with the reliability and verifiability of a ledger system (discussed more below).
  • XRP – This is a digital asset independent of Ripple, which operates on the XRP Ledger (or XRPL).  The ledger is open-source and independent of Ripple.
  • Drop – This is the atomic unit of XRP equivalent to 0.000001 XRP. 

Ripple the Company

Let’s put it all together – Ripple (the company) operates RippleNet (a financial ecosystem) utilizing XRP (a digital cryptocurrency) to fund transactions on the XPRL between financial institutions.

             So why not just use something like SWIFT or Western Union to transfer money?  That’s a great question, but before we answer, let’s dive into the reason why Ripple started in the first place and how it attempts to bridge the gaps present in the current financial system.

            Although the original idea for OpenCoin (which eventually became Ripple) came about around 2005, the company didn’t really find its roots until its official founding in 2012.  As more companies caught onto the idea behind Ripple, more investments allowed the company (and the cryptocurrency) to gain a wider platform.  The development of the Ripple Transaction Protocol (RTXP) earned the company a position in the 2014 50 Smartest Companies (by MIT Technology Review).  In late 2017, XRP became the 2nd largest cryptocurrency in use for a short time (currently sitting at 3rd as of the time of this writing).  

            Back to the question about SWIFT – Ripple has decided to challenge the 40+ year old system by providing quick payments (we’re talking seconds, not days) at a very small cost (fractions of a penny).  SWIFT still works and has worked quite well for decades now, but it is very slow in view of modern expectations of information exchange and can be slightly costly to transfer money.  While SWIFT has developed their global payments innovations (gpi) service to bolster their reputation and throughput, it still remains to be seen if Ripple will ultimately gain ground on SWIFT and provide serious competition in this global market.

On Demand Liquidity

            Before moving on to other core components of Ripple, it’s interesting to take a look at one of their poignant value propositions – On-Demand Liquidity (ODL) (this was originally known as “xRapid” if you’ve been following Ripple for a while).  Typically, when a bank desires to send money to another country (say, using SWIFT), they need to have a pre-funded account in the destination currency.  In other words, if we want to send USD to Gambia, for instance, I would need to have a pre-funded account that can convert the USD to GMD.  Now, do this hundreds of times to send currency around the globe, and you might begin to see the problem.  This can be difficult, expensive, and, for smaller countries, even impossible.  Ripple’s ODL solution seeks to change this.  If financial institutions use XRP as a digital asset to source liquidity, these transactions can be completed in three seconds – bridging any supported currency divide and allowing for reliable, low-cost transfers. 

            Another interesting facet of RippleNet is the ability to send currency other than XRP.  There are several specialty payment types that can still use the XRPL to send payments across the world, but utilize an exchange of standard currency or “checks” for deferred payments or even partial payments that can be finalized over a period of time.  While XRP is definitely a primary focus of the XRPL, it’s definitely not the only currency transfer mechanism available.

Ripple Methodology

            While other cryptocurrencies are based on miners providing validation of transaction blocks for the network, Ripple uses a vastly different methodology.  There are no more tokens (XRP) to mine in Ripple – there never have been.  At the very inception of the ecosystem, 100 billion XRP were placed into existence.  The founders of Ripple kept 20 billion and gifted the other 80 billion to be used in the network.  Ripple is a deflationary currency as well – there will never be any more XRP added to the network and currency will be lost over the course of time.  Each time a transaction occurs (i.e., transaction fees are charged) or when XRP is sent to a wallet with no keyholder, more XRP is removed from the network.  As such, XRP will only increase in value over time.  Won’t we run out of XRP soon?!  No, at the current rate it will take approximately 70,000 years to destroy all XRP in existence.

            Like we previously mentioned, no one can mine “new” XRP or contribute to a proof-of-work algorithm like most other cryptocurrencies.  If so, then how do we know that transactions are being completed properly?  Does the decentralization of confirmation still exist in RippleNet?  Put your thinking caps on and remove your previous understanding of how cryptocurrencies work – this is going to be quite an interesting tour.

Ripple Validation Method

            Ripple uses a system of “trusted validators” to agree upon which transactions occur and in which order they occur.  There is no monetary incentive for being a trusted validator; your incentive is that you (or your company) is a part of the network and you want it to remain stable and trustworthy.  This was specifically designed so that the network wouldn’t become warped for gaining as much currency as possible.  Because there is no mining, the energy costs for running RippleNet are exceedingly small (especially compared to Bitcoin) – a single trusted validator uses about as much power as an email server.  In addition, transactions are completed within seconds (as opposed to a new block being produced every 10 minutes in Bitcoin or waiting for several days of SWIFT transaction time). 

So… it can be quick, but does it scale?  Currently Bitcoin can produce around 6 transactions per second (tps) while Ethereum more than doubles the rate at 15 tps.  At nearly 1,500 tps, 24x7x365, RippleNet is able to process nearly 130,000,000 transactions per day and claims to be able to scale to nearly 65,000 tps!

Is Ripple a Blockchain?

            How about the blockchain – does Ripple use a blockchain like everyone else?  Yes and no.  As you saw above in the company’s self-description, the “power of blockchain technology” is used to manage interactions and transactions on the network, but in a more accurate sense, XRP is not administered through the use of a blockchain like most other cryptocurrencies.  Instead, a consensus protocol is used to validate and process transactions. 

Essentially, a transfer of XRP is given a single value through the use of a hash tree.  The hash tree implements a data structure that holds hashes of the keys and sends the actual keys (and any other data that needs to be included) to tracking servers and validators (nodes on the network).  The nodes serve to compute hashes of the keys and compare them to the hash tree – if everyone agrees (or at least 80% of the nodes involved in the consensus), the transaction is authorized and processed. 

Learn More About Ripple

            So that’s Ripple – and it’s quite different from other cryptocurrencies we’ve looked at!  Still not sure what’s going on?  Curious to learn more?  Check out a few of the links below:

  • The self-described “most accessible global payments network”, RippleNet has the potential to revolutionize the way financial institutions transfer money around the world.
  • With more reading than you can shake a proverbial stick at, the XRPL home site contains a vast amount of information about XRP and the ledger upon which XRP operates.  Check out the “Docs” section for more.
  • Learn more about the differences between Bitcoin and Ripple.
  • In this corner – Ripple.  In that corner – SWIFT.  Just who will come out on top?
  • Is Ripple even a cryptocurrency?

            Thanks again for reading!  In the next post, we’re going to take a closer look at Cardano – see you then!