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Ripple (XRP): An overview

Source: Ripple.com

Ripple (XRP) is a digital payment protocol that operates on an open-source, peer-to-peer (P2P) decentralized platform. It allows seamless transfers of any form of money, whether fiat or crypto. Ripple seeks to streamline cross-border bank transfers, offering a faster alternative to traditional methods. 

Essentially, it aims to make global transactions as straightforward and cost-effective as sending an email.

XRP is the inherent digital currency of the Ripple system, operating on the XRP Ledger (XRPL). Within the Ripple framework, it acts as a digital representation for transferring value across the network.

Unlike many other digital currencies, XRP was pre-mined and has a cap of 100 billion. The distribution of its entire supply is as follows:

• 80 billion XRP was initially allocated to Ripple Labs, the overseeing company.
• 20 billion XRP was distributed among Ripple's co-founders and the primary team.

As of September 2023, 53.2 billion XRP are circulating in the market.

Let’s take a look at its role in the Ripple ecosystem.

Bridge currency: XRP can act as a bridge between two fiat currencies, ensuring that liquidity is always available without the need for parties to hold large reserves of any particular currency. This facilitates smooth and efficient cross-border transactions.

Anti-spam mechanism: The small amount of XRP that's burned as the transaction cost acts as a deterrent against spamming the network. By attaching a minor cost to transactions, malicious actors are dissuaded from overloading the system.

Settlement: Transactions using XRP can settle in just a few seconds, making it much faster than many traditional banking systems or even other cryptocurrencies. This rapid settlement time is one of the features that makes XRP attractive to financial institutions.

How does Ripple work?

Source: Ripple/Facebook

Here are the two main components of the Ripple ecosystem:

XRPL

XRPL functions as an open-source, decentralized blockchain responsible for executing and validating transactions within the network. It uses the XRPL consensus protocol:

• Consensus, not mining: Unlike Bitcoin's (BTC) Proof of Work (PoW), XRPL achieves consensus without competitive computational work, allowing for faster and less energy-consuming transactions.
• Validators: These are nodes that validate and propose transactions for the ledger. They ensure the network's decentralization and that any entity can run a validator.
• Unique node list (UNL): A list of trusted validators chosen by each server on the network. A transaction is validated when there's at least 80% agreement among the validators in a server's UNL.
• Consensus rounds: Validators propose versions of the next ledger. If a supermajority agrees on a transaction set, it's validated. This typically occurs in seconds.
• Fork prevention: The consensus mechanism ensures the network doesn't split into multiple chains. Disagreements are resolved in subsequent consensus rounds.
• Safety and security: Prioritizing safety, the protocol can stall the network during disruptions but won't validate incorrect transactions.

Listed below are the numbers:

• Transactions settle on the XRPL in 3-5 seconds. 
• XRP transaction fees average $0.0002 per transaction. 
• XRPL technology can handle 3,400 transactions per second. 
• There have been 80 million closed ledgers since 2012. 
• XRPL is 61,000 times more energy-efficient than PoW blockchains. 
• It has a global network of over 100 validators.

RippleNet

RippleNet is essentially a network of institutional payment providers, such as banks and other financial organizations. These entities utilize RippleNet to offer a frictionless experience to send money globally. 

An essential component of RippleNet is On-demand liquidity (ODL). Traditional cross-border transfers often require banks to have "nostro" accounts in the recipient country, pre-funded with the local currency. ODL negates this need. 

When a financial institution wants to make a cross-border transfer, they can use ODL to convert their currency to XRP and then immediately convert that XRP to the destination currency. This two-step conversion happens almost instantly, making the transfer process much faster.

The transaction process

Here's a breakdown of how a transaction on the Ripple network is completed: 

Gateway setup and participation: Within the Ripple network, gateways act as the intermediary link between two parties wanting to make a transaction. A gateway acts as a middleman for credit, facilitating the receipt and transmission of currencies to public addresses on the Ripple network.

When you deposit money into a gateway's account, you receive an IOU (I Owe You), which can be sent, received, traded, or redeemed.  The gateway will handle fiat deposits and withdrawals, ensuring the IOUs it issues are backed by real assets.

Establishing trustlines: Before you can receive an IOU from a gateway, you have to set up a trustline. This indicates how much you are willing to trust the gateway with IOUs (essentially, IOU credit limits).

Trustlines are critical for ensuring the security of the Ripple system. They ensure that IOUs are only issued by parties that users have explicitly trusted.

Initiating a transaction: A user who wishes to send a payment using Ripple will create a transaction specifying the amount, the recipient, and possibly the currency they wish the recipient to receive. Ripple's protocol will then begin pathfinding.

Pathfinding: One of Ripple's unique features is its ability to find the most efficient path for a transaction. When making a transaction, the protocol searches for the shortest and quickest path between the sender and the receiver, even if it involves multiple currencies and intermediaries. This ensures that transactions are not only fast but also efficient in terms of costs.

Transaction settlement: Once the best path is found, the transaction is executed. If IOUs are involved, they will be transferred between parties accordingly. If conversion is required, it will be carried out through market-making activities within the Ripple network.

The evolution of Ripple

Source: Ripple/Facebook

Ripple’s history and evolution can be traced back to the early days of the cryptocurrency movement. Here's an overview:

Pre-Ripple era: Conception and early days (2004-2012)

Before Ripple and XRP, there was a system called Ripplepay, introduced by Ryan Fugger in 2004.  Ripplepay was a forerunner to Ripple. It was designed as a decentralized platform, but the idea of a consistent cryptocurrency like XRP wasn't part of this early system. Fugger sold the business to Jed McCaleb.

The birth of Ripple (2012-2015)

In 2012, McCaleb invited Chris Larsen to co-found OpenCoin. They aimed to develop a new digital payment protocol based on a concept by Ryan Fugger.

Following this, XRPL and XRP were introduced in 2012 as the digital currency for the Ripple payment protocol. In 2013, OpenCoin changed its name to Ripple Labs, Inc. This was later changed to just Ripple in 2015.

XRPL Foundation (2020)

The XRPL Foundation was founded in September as an independent, nonprofit entity. Its mission is to boost the development and widespread adoption of the decentralized XRPL. 

Major blockchain entities like Coil, Ripple, and Gatehub provided initial donations exceeding $6.5 million to fund the foundation’s endeavors, showcasing their commitment to nurturing the XRPL’s ecosystem.

The SEC-Ripple saga

On December 22, 2020, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Ripple Labs. The lawsuit stated that Ripple had raised $1.3 billion through the sale of XRPs being unregistered securities.

To sum it all up, the SEC argument implied that XRP should be considered a security rather than a cryptocurrency and hence would come under their ambit to charge tax on the sale as a security.

After almost two years in court, Ripple secured a partial victory against the SEC. On July 13, 2023, U.S. District Judge Analisa Torres ruled that Ripple's sale of XRP on public exchanges did not breach federal securities regulations.

Judge Torres also determined that the $728.9 million in XRP transactions conducted by the company with hedge funds and other institutional clients were unregistered securities sales, granting the SEC a partial win.

However, in early September, the SEC officially challenged the ruling, suggesting that the battle is not yet over.