1. Ripple Inc as a lender of XRP. Risk exposure goals: keep upside, protect borrower from downside

2. Improved market stability, derived from the ability to short XRP

3. How would Exchange MM’s use XRP in a PayChan without exposing the Exchange to downside risks.

~ Introduction

For those who have read my ramblings on XRPchat.com or have a working knowledge of the concepts emerging out of the Ripple community, No need to read this intro, just skip to point 1.

My writings are simply an exercise of cross domain application. My overall focus is to create an application of these Financial concepts and the Technical tool kit, not for Payments, but rather to a different financial market, the Risk Markets.

The Risk Markets currently burn up a lot of the Value which enters the insurance system (Home & Auto). Roughly 40% of the value end users deposit into the system, is simply burned up and is not allocated to achieve the goal for which the value was put into the system, ie Coverage.

The Insurance System, when boiled down, is a credit market. Industry folks will argue this is a false statement.

Most of these concepts are articulated in a Yet To Be Published mini series on the future of the Risk Markets, which should be published through InsuranceThoughtLeadership.com soon.

In this article, I do not discuss the Risk Markets but rather, I will mostly focus on my interpretation of how to deploy a new feature built into Rippled, PayChan to create a credit facility, and enable Shorting of XRP.

Lets talk PayChan…



  1. Ripple Inc as a lender of XRP. Risk exposure goals: keep upside, protect borrower from downside

Lets jump in, here is a chart showing the lifespan of a PayChan. From inception to close. Both “Up & Down” price movements of XRP are considered.

If I am observing these risk exposures properly, I think the functionality of the PayChan feature enables an asymmetric payoff for Ripple Inc on their XRP holdings. This represents the “3rd Brilliant Idea” imho, to come out of the Ripple Team. At least from a Financial Engineering point of view. The first being “The Market for Float” and XRP as a “Bridge Currency”, the second being “Interledger Protocol”, and the third is enabling Ripple Inc to act as “An XRP Credit Facility” without taking on additional risk exposure onto the Ripple Inc balance sheet.

It is important to observe the asymmetric risk exposure to Ripple Inc, and the protection from downside risk to the Borrower.

Downside Risk means the PayChan Sender “Ripple Inc”, must top off the PayChan to maintain an agreed amount of USD Value. This has not increased Ripple Inc’s exposure to negative price movements, because they already inventory billions of XRP.

Upside Risk means the PayChan Sender “Ripple Inc” is exposed to upside risk on positive price movements… Creating Bookable Seignorage Gains. These gains accrue to the Ripple Inc’s balance sheet when the PayChan is closed, and create an excess of USD Value locked up in the PayChan. From the Borrower’s perspective, the Seignorage Gains (the -9.09) amount to Ripple Inc having overfunded the Line of Credit.

The borrower is not exposed to the Downside Risk as long as Ripple Inc has enough XRP in inventory to top off the PayChan, bringing the USD Value back to an agreed amount, agreed upon between Ripple Inc (Creditor) and an Exchange (Borrower).

This could enable some “priming the pump” of RCL’s “market for float”, with or without leverage. The PayChan’s leverage being derived from XRP which Ripple Inc has in inventory, but which is not locked up in the PayChan… or Ripple Inc could simply over fund the PayChan, if say the agreement was for a max credit line of 1000 XRP and the PayChan is funded with 1500 XRP.

If leverage is enabled, a reasonable level of judgment should be applied, maybe to the degree of compliance with each PayChan Borrower’s jurisdiction regulations. In any case, Ripple Inc should have in inventory enough XRP to top of any PayChan line of credit they extend should XRP depreciate significantly. Maybe holding 9 XRP in inventory for each 1 extended to a line of credit via a PayChan, but the correct amount is really dependent on the Borrower’s confidence level.

As XRP valuation increases, this becomes less of an issue, because each PayChan will be cushioned by the Seignorage Gains, making the PayChan over-funded.

2. Improved market stability, derived from the ability to short XRP

With this post I consider the risk exposures of an Exchange which enables Traders to Short XRP

1. The Trader has voluntarily taken the downside risk exposure, not Exchange.

2. The Exchange does not have to engage the open market, or borrow from other Trader’s accts, to lend the XRP. They can simply tap the PayChan from Ripple Inc.

3. (I have not looked into this in detail) but the Exchange could be getting MM incentives from Ripple Inc, possibly with additional positive upside exposure to XRP.

Enabling “Shorting” of XRP has the potential to improve RCL market stability, or at least help Traders put a floor under their Valuation of XRP. This is because if/when Institutional Investors are able to Short XRP, “Hedging Strategies” become possible. “Hedging Strategies”, enable Risk to be controlled and managed. Once Risk can be managed, “Worry” can be satisfied with by hedging the Risk Exposure.

3. How would Exchange MM’s use XRP in a PayChan without exposing the Exchange to downside risks.

If an Exchange is able to obtain a PayChan from Ripple Inc, this amounts to an available stock of XRP which the Exchange can turn around and re-extend to Traders who want to borrow XRP to Short XRP.

The Exchange need not accept risk for enabling Shorting of XRP. Take a look at the chart above. If an Exchange as the borrower is confident enough to sign a contract (maybe a Smart Contract) that legally forces Ripple Inc to maintain a set amount of USD Value then… If USD:XRP exchange rate drops below the agreed $100 USD Value, then Ripple Inc must top off the PayChan with enough XRP to bring USD Value back to at least $100. This is just like a Margin Call to Ripple Inc.

This type of business arrangement between Ripple Inc and an Exchange seems plausible, given Ripple Inc has well more than enough XRP to fund a PayChan with several Exchanges at whatever amount each Exchange would like to access via a PayChan Line of XRP Credit… and have enough XRP to ensure each PayChan that if it becomes underfunded, Ripple Inc will add more XRP.

Tomorrow on the W3C Interledger group’s call they are supposed to do a demo showing how PayChan & Interledger can enable a connection between the Ethereum ledger and the Ripple ledger. I may update this post after reviewing that demo.

That is it for now. Thank you for reading.

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