What is Ripple (XRP)?
Explanation & Advantages & Disadvantages
Ripple (XRP) is an open-source protocol that is to be used as a distributed peer-to-peer payment system, particularly in banking and finance. The interesting thing about Ripple technology is its currency independence. Basically, a transaction in the Ripple network can be processed in any currency imaginable. In this way, Ripple wants to solve a fundamental problem in the international monetary system. This is because complicated currency exchanges lead to high fees, especially for transactions across national borders, and banks must remain constantly liquid and have so-called Nostro accounts in the receiving countries. (I get commissions for purchases made through links in this post.)
The technology behind Ripple
Ripple plays a special role in the world of blockchain technologies. While other projects follow a path that rejects the classical banking system, Ripple tries to cooperate with them. To this end, RippleLabs, the organization behind Ripple, has launched several products, xRapid, xCurrent and xVia, which can be used by banks to process their global transactions. The XRP token, which is used to process the transactions, serves as the bridge currency in the Ripple network.
In plain text, this means that an input currency is exchanged in XRP and transmitted over the network prior to a transaction. Once it reaches the recipient, it is exchanged back into the output currency. This means that transactions in two different currencies are also possible. XRP is currently the only coin used in RippleNet. Nevertheless, it would theoretically be possible for banks to create their own coins and use them in the network.
So-called gateways operate in the network and take on the role of intermediaries. These have the function of an intermediate station that receives an incoming payment and forwards it accordingly. A transaction can also run over several gateways. This is even the rule, especially in the case of a currency change. As soon as a transaction in the ripple network runs across several gateways, the borrower’s notes (IOUs — “I owe you”) are created that must be settled by the subsequent party. This allows transactions to be quickly routed through the network without having to wait for the IOUs to settle.
The Function of the XRP Token
As already mentioned, the XRP tokens are used for currency balancing and payment of transaction fees. Each transaction is subject to a fee of 0.00001 XRP, which is then destroyed and no longer available. This is to avoid spam attempts in the highly frequented RippleNet. In this context, the transaction fee is often referred to as 10 drops. A drop is the smallest unit in relation to the XRP token. It is important to know that XRP is not mined, but is already fully distributed. A total of 100 billion XRP were issued, of which 63 billion are owned by RippleLabs. The XRPs held serve to finance the project and network.
The XRP token is independent of the organization behind Ripple and will continue to exist even if RippleLabs closes. As with a traditional SWIFT transfer, a transaction with XRP involves some price risk and is affected by price fluctuations. However, since an average transaction in RippleNet is completed after approximately 5 seconds, the risk of a strong fluctuation is significantly lower than with a SWIFT transfer that takes several days. Investors and users can save their XRP in the official online wallet, but also unofficial desktop wallets.
The Functionality of the Protocol
Most modern payment systems are based on trust in the state or in financial institutions such as banks. This applies in particular to digital accounts of government currencies, since the money is not possessed here in principle and an institution watches over the amount and disposes of it. Ripple is an attempt to transfer this mechanism of trust to digital currency by storing all transactions and liabilities between users and institutions in a public register.
Behind this system are so-called IOUs. The abbreviation stands for the English phrase “I owe (yo)u” and is a kind of promissory note. In the Ripple Register, the user’s promissory notes are stored, i.e. which person owes how much of which currency to another individual and vice versa. In addition to the debt system, the protocol also enables an extensive foreign exchange market in a similar way, which is constantly evolving.
Advantages and Disadvantages of Ripple
Advantages of the Ripple Protocol:
- Almost forgery-proof
- Fast transactions within seconds
- Open standard
- Can act in its final stage as a universal translator of any currency
- Enables quick lending and borrowing of money amounts
- Loans by IOU (a type of promissory note)
- Simple connection of payment networks
- Many new possibilities due to maximum compatibility
Disadvantages of the Ripple protocol:
Ripple not only had positive developments to report but the company behind the protocol, in particular, was often criticized for various business practices. Among others, it is stated that although the company promised to pass on a large proportion of the XRP to the users of the network, so far only small amounts have been transferred. In addition, Ripple Labs has retained nearly half of all existing XRP to benefit from value creation.
Distribution of Ripple
RippleLabs’ largest customers include the major Spanish bank Santander, American Express, UniCredit and Western Union. Some financial services providers also use technology for their internal transactions. All banks use Ripple to process their global transactions, saving up to 70% of the usual transaction and management fees. Most companies and banks use the xCurrent and xRapid products developed by RippleLabs, which directly address the complex needs of financial institutions.
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