Ripple, currently one of the top five cryptocurrencies in terms of market capitalisation, has seen its fair share of controversy.
On the one hand, supporters point out that the aim of the company to improve cross-border transfers through distributed ledger technology will have a significant effect on commerce and finance and thus a positive impact on the world economy.
On the other hand, detractors claim that the company’s product offering is complex, its token unnecessary and its concept far from decentralized.
Let’s unpack each point, and then see how the different parts can work together to achieve Ripple’s aim.
Improve cross-border transfers
Few dispute that the current system of transferring money across currencies and borders is inefficient and wasteful. In order to be able to make cross-border payments on behalf of their clients, commercial banks need to have accounts with banks in the destination country. They generally hold balances of that country’s currency in these accounts. Often the balance just sits there, waiting for a payment instruction.
The company believes that funds for payment can be transferred into other currencies more efficiently, using its proprietary technology.
Ripple’s tech is divided into several parts: xCurrent, xVia, xRapid and the cryptotoken XRP.
We’ll introduce them one by one:
xCurrent is a platform used by banks and other financial institutions to settle cross-border payments. It uses a messaging protocol that extracts the information necessary to arrange the payment, which it communicates to the banks involved (usually the initiating bank, its correspondent bank in the beneficiary’s country, and the beneficiary’s bank). Once the pre-transaction validation of the accounts and balances has been completed, all parties put a lock on the funds.
At this point, cryptographic signatures are generated that verify the funds are available and that the parties are ready to make the transaction. The funds are then simultaneously released across all the participants.
xCurrent uses a distributed ledger called Interledger, developed by Ripple but currently managed by the World Wide Web Consortium, a not-for-profit group that maintains the international standards for the world wide web.
This solution is currently the most used of Ripple’s platforms, with over 100 financial institutions signed up. Many have moved beyond the testing phase and are using xCurrent for live transactions.
xCurrent only works well, however, for cross-border payments where the trading pair is liquid (such as moving money from euros to dollars or vice versa, or dollar-yen payments).
Payments in less liquid combinations are more likely to use xRapid, which relies on Ripple’s token XRP to facilitate liquidity (more on this token below). It does this by moving the originating funds into XRP, and from there into the beneficiary funds. This allows the originating bank to avoid the need to have funds “parked” at an account in a correspondent bank in the beneficiary’s country, or to rely on another institution (a “liquidity provider”) to supply the beneficiary bank with the correct amount in local currency (adding costs).
For example, if company A in Thailand purchases raw materials from company B in Nigeria, the transaction would look like this:
xRapid would use company A’s baht to buy XRP, and then convert that into naira, which it would deliver to the beneficiary bank. The algorithm would automatically choose the baht/XRP market maker with the best price, and the XRP/naira market maker with the best price. This way company A’s bank in Thailand wouldn’t need to hold naira at an account with a correspondent bank in Nigeria. Nor would it need to find a liquidity provider willing to do the currency exchange.
At time of writing, a handful of payment providers (including Western Union and Moneygram) are experimenting with the platform, and Mexican money transfer firm Cuallix is actually using it in production.
One potential barrier to xRapid’s growth is XRP’s liquidity. For the platform to scale, XRP will need to be listed on exchanges around the world, with a reasonable level of trading volume.
And its reliability depends on that of third-party XRP market makers, of which there are currently relatively few. For the number of market makers to organically grow, demand for the xRapid service will need to grow – but that depends on the number of market makers.
xVia is a user interface designed to make xCurrent and xRapid easier to use. Via API integration, it offers a connection to financial institutions using Ripple’s products, as well as payment tracking and invoice generation.
Ripple started onboarding payment providers to test xVia early in 2018 – a handful are currently doing so.
XRP is Ripple’s token. At time of writing it is the third largest cryptoasset in terms of market capitalisation.
The token does not have miners – all 100 billion tokens were issued to Ripple in 2015. The creators kept 20 billion and gave the rest to the company, which has been using it to develop liquidity, methodically distributing them to clients and incentivizing market making activity.
The blockchain that XRP runs on is called the XRP Ledger. Rather than rely on proof-of-work, proof-of-stake or similar, transactions are validated by a list of “trusted” nodes, authorized by Ripple.
Another term you might come across is RippleNet, which does not refer to a specific product, but rather to the network of financial institutions using Ripple products. In other words, it includes xCurrent, xRapid and all the banks using them.
Because of its relatively limited use to date in cross-border transfers, some have suggested that Ripple’s value is not in the token, but rather in xCurrent’s software that streamlines payments. They point to the relative interest in xCurrent as opposed to xRapid as evidence that the token is not necessary for Ripple’s technology to be useful.
Furthermore, some claim that the token’s volatility precludes it from being a practical payment mechanism.
Ripple supporters, however, insist that use of xCurrent is a first step towards broader use of xRapid and the XRP token. While xCurrent relies on correspondent banking and liquid currency corridors, not needing to maintain accounts in correspondent banks – using XRP as a bridge between currencies – would free up banks’ liquidity.
And as for the volatility, Ripple argues that the exchange between fiat currencies and XRP in xRapid happens too quickly for token price movements to matter.
Many Ripple detractors insist that XRP doesn’t even qualify as a cryptocurrency, since it is controlled by one company (at time of writing, Ripple owns over 60% of XRP tokens, although most of those are held in escrow).
Also, transactions are processed by validators authorized by Ripple. The company has made an effort to diversify the list of approved validators (known as the Unique Node List), but the list is still permissioned, not open to everyone, and therefore not truly decentralized.
Ripple maintains that full decentralization of the XRP Ledger is not necessary for its purposes, and that for security reasons it needs to be limited to “trusted” parties.
An existential split
One of the core issues at the heart of the centralization/decentralization debate is whether Ripple could survive without XRP and vice versa.
On the surface, it seems that if Ripple (the company) disappeared tomorrow, the token would continue to trade on exchanges, and could have value if users decided to use it as a currency bridge themselves, or even as a payment token.
However, the amount of XRPs held by Ripple imply a symbiotic relationship going forward, as well as a perceived (and possibly real) influence over the token’s price.
As for whether or not Ripple needs XRP to survive, it could decide to shelve development of xRapid and focus on xCurrent, which doesn’t need the token. It has repeatedly, however, stated its commitment to making XRP the “bridge currency” for cross-border transfers in the near future, and the company’s wealth is tied up in the token’s value.