8 Reasons Why Ripple Will Fail
Recently, Ripple announced that 13 financial institutions will be integrated into their blockchain network. The total number of partnered institutions has now exceeded 200. In addition to this, Ripple has surpassed Ethereum and is now the second largest cryptocurrency in terms of market capitalization.
However, blockchain is a technology that hopes to revolutionize commerce and society for decades to come. The small gains made by Ripple today will be dwarfed by the real innovations more sophisticated blockchain’s like Ethereum will produce as the network continues to scale and as DApp developers get more familiar with using solidity. Though Ripple has dominated the headlines as of late, we believe that their long-term prospects are inconsequential compared to other projects. In this article we will address the eight biggest reasons why we are not excited about Ripple’s long-term trajectory.
1. Ripple (XRP) and Ripple (Ripple Labs) are separate entities:
As a financial technology company specializing in cross-border remittances, Ripple offers xCurrent, xRapid, and xVia solutions to help financial institutions and general companies send value internationally.
xCurrent is used to help banks settle cross-border transactions. It is similar to SWIFT in that banks can message one another in real-time to confirm payment details, initiate transactions, and confirm settlements. XRapid is a liquidity vehicle for financial institutions that are using Ripples XRP token as a bridge currency. XVia is Ripples newest product and is used by corporations, payment providers and banks who want to send payments across multiple networks, all while using a standard interface. XVia’s API requires no software installation and enables users to send payments globally.
Currently, international payment systems are slow and fragmented. So even though the XCurrent product provides a better alternative to current solutions like SWIFT, this product does not use the XRP token whatsoever. A lot of the asset growth XRP has undergone is due to news about Ripple Labs partnerships in the banking sector. However these partnerships are for these cross border vehicles like XCurrent, the actual XRP token is a different entity. Conveniently, Ripple Labs does a very poor job at differentiating these core business functions, so a lot of the excitement around XRP actually stems from the work thats being done with Ripple’s enterprise solutions; not the token itself.
2. Ripple’s centralized ecosystem is its biggest risk:
In the ecosystem’s of Bitcoin and Ethereum respectively, anyone can become a developer and submit improvement proposals. For Bitcoin, such proposals are called BIP’s (Bitcoin Improvement Proposals), and Ethereum has their own democratic approval process known as EIP’s (Ethereum Improvement Proposals). However the Ripple ecosystem has no such solution. Instead of a democratic approach to platform improvement, the only improvement submission that can be implemented by Ripple must come from Ripple Labs.
Another component of Ripple that is centralized, is their balance freeze function. This function means that Ripple can freeze or even confiscate the user’s tokens at any time. So while Ripple might excel at cross border payments, the method by which they achieve this is not decentralized at all. When using Ripple you are still putting a certain degree of trust into a centralized entity, and hoping that they do their part, both effectively and ethically.
Another centralized component of Ripple is the circulation of XRP. Ripple holds a large number of XRPs, 100 billion XRPs were distributed before the network was was even enterprise-ready. The first 80 billion shares were given to the company Ripple, which they slowly release into the market, and 20 billion were distributed to the founders. If we look at the chart below then we can see how Ripple still controls more than half of XRP in circulation. This poses a lot of market risks as just a few market participants have the capital required to manipulate the market.
3. Information surrounding XRP is incomplete:
We are not able to know the exact distribution of XRP because parts of its ledger are inaccessible for formal audits and financial analyses.
According to an analysis performed by BITMEX, Ripple has been unable to retrieve the first 32,570 blocks from the Ripple ledger and none of the nodes could repair or obtain the data. This means that Ripple cannot a complete a audit of their blockchain, nor a transactional analysis of the 100 billion XRP coins.
4. Ripple’s ousted Co-founder is a pump & dump waiting to happen:
As one of the founders of Ripple, Jed McCaleb left the company in 2016 with nearly 6 billion XRP. Originally, McCaleb tried to liquidate his entire position all at once. But a multitude of lawsuits from Ripple Labs stopped that, which would have assuredly triggered a market sell-off. Both parties were able to come to an agreement, but the public sentiment regarding this has never been high. To many, Ripples market cap is one legal document away from spiralling down to zero.
McCaleb would later go on to create Stellar, a blockchain protocol that is competing with Ripple in the arena of international payments. What was largely touted as a direct shot at his old colleagues at Ripple, McCaleb said:
A blockchain project should be decentralized to succeed…
5. The practical application of XRP is very limited.
XRP has a large transactional volume on cryptocurrency exchanges, but the amount actually used for cross-border payments is very small . Currently, only 12 financial institutions have either implemented, or are planning to implement xRapid.
For products like XRapid to improve, there needs to be a sustainable supply of institutional partners who will use XRP as a liquidity vehicle. However, as other blockchain protocols continue to scale and become more secure, it is possible that other digital asset ecosystems will blossom much faster then Ripple’s, and poach away these prospective partners. Bitcoin, Ethereum, or some widely accepted stablecoin might fill the void that Ripple has failed to address.
6. The Ripple consensus mechanism is highly centralized.
A consensus mechanism is the process used to achieve agreement on a single data value from a distributed process or system. With respect to Bitcoin, agreement on the network is done through a consensus mechanism known as “Proof-of-Work”. To reach consensus on the Bitcoin network, all nodes on the network must reach a 51% consensus on the decision at hand.
Comparatively, the Ripple consensus algorithm relies on transaction validation from a fixed group of nodes. Ripple’s clients are recommended to use this list of identified and trusted participants that are known as the “Unique Node List” (UNL). Only the votes cast by these “UNL” nodes are used to validate transactions, this is unique from other blockchain protocols like Bitcoin as they rely on every node to reach consensus. Since the identity of participating voting nodes is known in advance, the algorithm is more efficient than the anonymous consensus algorithm such as the aforementioned Proof-of-Work. The transaction confirmation time takes only a few seconds, which is much quicker then other popular consensus algorithms like Proof-of-Work or Proof-of-Stake. However, what Ripple has gained in efficiency, they have sacrificed in decentralization and democratization. The unique value behind anonymous consensus algorithms is that they are “trustless”; anyone, anywhere in the world can validate your transaction. In Ripple’s case however, all of their nodes have been identified before-hand, and as a participant on the Ripple network you have to trust this small group of nodes. If these pre-vetted nodes suddenly wanted to act in a unethical manner, shareholders or other stakeholders involved with Ripple would not be able to do anything about it.
Since 2014, Ripple has used the above diagram to explain its “distributed” consensus mechanism, but it is misleading to think that the Ripple system is distributed.
7. XRP does not have a wallet and has limited security.
Another huge risk with Ripple is XRP’s lack of integration into web and hardware wallets. Their is a web wallet available on Ripple’s website, and a few individual hardware wallets have opted to support XRP, like the Ledger Nano S. However, almost no third party software wallets have integrated with Ripple. Compared to other popular digital assets, the lack of wallet integration should be highly concerning for investors, as storing your digital funds in a wallet is one of the only ways to ensure they are stored safely.
8. Lawsuits and Litigation are frequent for Ripple:
Operating in the largely unregulated blockchain space, Ripple has been subject to numerous lawsuits. This revolving door of legal troubles creates the risk that investors and market participants might start to look at Ripple through a negative lens.
In May 2015, US regulators imposed a fine of $700,000 on Ripple Labs for violating the Bank Secrecy Act for unauthorized sale of Ripple.
In May 2018, plaintiff Ryan Coffey said that Ripple was suspected of violating US securities laws;
In June 2018, the plaintiff Vladi Zakinov stated that Ripple was a security operated by Ripple Labs;
In July 2018, the plaintiff David Oconer said that Ripple was a security
Although Ripple is now in full swing, it is targeting a sector that is really just the lowest hanging fruit of blockchain’s full potential. Cross-border payments is an effective use case for blockchain technology, however when evaluating the broad reaching implications decentralized systems can have, this is a very short sighted use case for adoption. The Ripple network has amassed 200 partnerships to date. But as other blockchain projects continue to scale, how many of these partnered institutions will be around for the full life-cycle of XRP and Ripple Labs?
