Everything to know about Ripple — Part 1: How Ripple Works

Why Am I Writing this?

I think a lot of people in the cryptocurrency space really have not taken the time to research and understand Ripple because of the bad representation it gets throughout the crypto community and I believe this immediate disregard does a disservice to the community as a whole and I, personally, felt a passion to want to write about it. Hope everyone can learn something new from this series.

Ripple as a payment System

Within the Ripple system, money isn’t actually transferred from one place to another only the promise of payment is transferred. How is this done?

Enter the Hawala system. The Hawala system first started in ancient South-East Asia and is still used to this day, often by immigrants living in developed countries trying to send money home to their families where formal banking is expensive or difficult to access. There are at least four members involved in each transfer ( Sender, Recipient, Hawala Dealer A, and Hawala Dealer B ). Below is an image describing the steps of a Hawala based transfer:

Step 1: Sender gives cash to Hawala Dealer A. Hawala Dealer A gives Sender a code —Step 2: Hawala Dealer A tells Hawala Dealer B how much cash was given. — Step 3: Sender gives code to Recipient as well as stating cash amount. —Step 4: Recipient gives Hawala dealer B the code and dealer B gives cash to Recipient.

Ripple runs similar to that of the Hawala system except instead of Hawala dealers, there are Ripple gateways. These gateways (validators/ servers) are typically financial institutions such as Bitstamp and TheRockTrading. The Ripple network is a relatively large network where not everyone using Ripple knows and trusts one another. To get around this, Ripple uses chains of trusts to interconnect Ripple gateways. Chains of trust are essentially links between two gateways that trust each other, although as shown in the next image, there can be indirect links of trust between gateways as well.

Since gateway B doesn’t directly trust gateway A, there is no direct link connecting them to each other. However, gateway A trusts gateway C, which trusts gateway B, so there is an indirect link of trust from A to B. The trust is rippled across the network.

Ripple gateways transport payment IOU information to each other using https: the same protocol that banks already use for secure online credit card payments. 3 to 4 seconds after a payment is made, the Ripple network triggers the gateways involved in the transaction to update their ledgers.

Each transaction requires an average fee of 0.00001 XRP (10 drops) and may increase upon higher than usual load. Who are the beneficiaries of these transaction fees? These tokens are actually destroyed and so the beneficiaries are all the XRP token holders themselves via decrease of token supply.

Is Ripple Decentralized?

The following video is Ripple Labs current CTO David Schwartz answering this exact question

How are transactions verified?

According to Ripple Labs consensus whitepaper, rather than mining, Ripple works by consensus. The Ripple system isn’t operated by Ripple Labs and is a peer to peer system, in which participating devices all connect to the network. Some nodes just make and receive payments for their users while others operate as validators carrying out the consensus process. These validators “look” at the ledger, which is a snapshot of the current state of transactions on the network, and agree upon the current state utilizing the Ripple Protocol Consensus Algorithm (RPCA). Prior to verification, validators take all the valid transactions it has seen that have not yet been applied to the current ledger and makes them public as a list known as the “candidate set”. Each validator then groups the candidate sets of all validators on its UNL (unique node list) and votes on the accuracy of all transactions. Transactions that receive more than a minimum percentage of “yes” votes are passed on to the next round while transactions that do not receive enough votes will either be discarded, or included in the candidate set for the beginning of the consensus process on the next ledger. The final round of consensus requires at least 80% of a validator UNL agreeing on a transaction. All transactions that meet this requirement are applied to the ledger.

Ripple as a cryptocurrency (XRP)

`The Ripple Network can be used for ANY type of currency or asset that Ripple gateways are willing to accept. XRP is the native currency used on the Ripple system. If the network can’t find a chain of trust between two Ripple gateways, then the two gateways can transact with XRP. While other currencies used by the Ripple system are based on the IOU Hawala system, the gateways can actually send and receive XRP.

Ripple is designed to set the transaction fee dynamically based on demand as an anti-spam measure. The impact of any potential XRP manipulation is minimized by increases in network size as the market cap and transaction volume increase.

Disclaimer: As of this writing, I do NOT hold any long OR short positions in XRP