Boris Alergant, Head of DeFi at Ripple — On traditional finance going digital and decentralized

In today’s episode, Nate Gee sits down with Boris Alergant, who leads Decentralized Finance at Ripple.

Check out the Episode on Spotify | Soundcloud | Apple Podcasts

In this episode, Nate and Boris discuss:

Ripple’s origins — how it focused on cross-border payments to address inefficiencies that persist today as businesses transact money.

Boris: We saw areas where there is the most friction in traditional financial services, and we zoned in on the cross-border payments space. Cross-border payments, even today, can take two or three days to settle, while at the same time you could send a message or a photo immediately with a snap of a finger. So we built a product that helps facilitate cross border payments.

If you distill a payment, there’s really two components. The first component is that messaging layer that says: move funds from this bank to this bank. That was the foundation of RippleNet, and it’s really a kind of a two-way messaging layer. If you think of SWIFT, it’s really like the fax machine; it’s a one-way message where you have no read receipt, and that’s why you’ve heard of payments being lost. The second component of a payment is really the settlement layer. And that’s where our product On-Demand Liquidity came out. ODL leverages the XRP digital asset as a bridge currency to move funds between two countries.

Let’s say you’re sending money from the US to Mexico. What our software does is it takes your US Dollars, converts it into XRP, then takes that XRP and sends it over the XRP Ledger into a Mexican exchange, which does the reverse transaction and sells that XRP into Mexican Pesos. Now you have Mexican Pesos in Mexico and then the last mile through SPEI (the local payment rails in Mexico) moves from this exchange into a user’s bank account. That whole process takes three seconds, so it’s a huge advantage over the current nostro/vostro account relationships that banking rails are built on today.

XRP Ledger, the decentralized blockchain on which Ripple builds its solutions, and the consensus mechanism with which it operates

Boris: XRP is the native asset of the XRP Ledger, one of the oldest blockchains ever, running for over 10 years. Key features of the XRP Ledger are that is it’s cheap and it’s fast. Now cheap and fast in this day and age — 10 years since bitcoin has been out — is not really as big of a competitive advantage; you have a lot of a lot of layer 1s and a lot of blockchains that are cheap and fast, but very few are stable. Very few have been going block for block for the last 10 years. And part of that is, you know, the design of the XRP Ledger, it’s consensus mechanism: “proof of association” or Byzantine Fault Tolerance.

With Bitcoin, it’s proof of work which requires a ton of electricity and a ton of miners to perform complex calculations in order to come to consensus to figure out whether transactions real or not. The pro is that there are mining rewards. As a miner, I can run a miner rig, and I find the block and if I perform that function faster than anyone else on the network, I get rewarded with Bitcoin. The con of proof of work is it’s expensive, draws a lot of electricity, and not very green. You see some stats out there about proof of work’s electricity consumption, and it’s quite staggering.

Now with proof of stake. That’s what Ethereum and a lot of other layer 1s have as a consensus mechanism. It no longer requires the need to mine, to use a lot of heavy equipment heavy and electricity. It requires the use of your tokens to prove that you’re doing the right transaction. So the idea of proof of stake is that if you are an illicit actor, you’re staking your assets and you’re saying hey, trust me, here are my assets. And if it’s wrong, the assets get taken away. The positive of that is really that it’s an answer to Bitcoin’s proof of work and the electricity consumption. The con, however, is that larger players who are larger holders of that native asset tend to have an outsized influence in the network.

With XRPL consensus, it’s neither proof of work nor proof of stake. It doesn’t matter how much XRP any individual has in the network; they have the same influence on it as anyone else. And that’s because of this proof of association algorithm, which is a Byzantine Fault Tolerance. There’s a UNL or “unique node list” of trusted counterparties that the community comes together around, and those nodes are responsible for validating transactions on the network. If any one of those nodes is a bad actor, because it is a community-based approach, that node will be removed from that trusted node list.

The view on XRP Ledger is that it’s, I would say, more of a Web 2.5 approach. If you’re building a business on top of a network, even in the Web 2 space, you are going to run your own servers; the idea is that you’re running nodes on XRPL because you’re building a real business. Some of the node operators include our payment providers, and there’s a lot of universities that are on there too.

Decentralized finance: where it’s headed, how it may reshape traditional finance, and Boris’s role as the head of DeFi at Ripple

Boris: There’s really three financial services functions that DeFi can enable: payments, lending, and trading. Today, if you look at it in the traditional financial services world, payments, lending, and trading are all done with through centralized counterparties. So when you trade a stock, you trade through your Schwab account, but ultimately, the stock trade goes through the New York Stock Exchange; they take a fee every time. The beauty of blockchain technology is that it can remove the need to trust that centralized counterparty. It can bring the cost down for the end consumer because you no longer need to pay a fee to the New York Stock Exchange to match that order, if you can do it in a decentralized way. The same thing happens with lending and payments, right? You go to your bank, they charge a fee for origination of that loan. They’re also using consumers’ deposits on the other end as the as the money to fund your loan. Imagine you could get rid of that centralized institution, and you could significantly decrease the costs.

Now, what are the advantages? We’ve seen the issues SVB had with the mismanagement of its assets and liabilities; theoretically, DeFi can bring a lot more transparency to this entire system. And in a world of DeFi where these are fully funded assets and liabilities, you wouldn’t have this banking crisis. Now, my role at Ripple heading up DeFi is figuring out how to implement these types of solutions and create businesses around those three primary financial services functions, how to bring about institutional adoption of that decentralized finance, and how to build that on top of the XRP Ledger. So for me, it’s enabling those three functions through partnerships or through building out that technology ourselves, but also figuring out an ecosystem of services.

How do we bring about institutional DeFi adoption? Having those three functions and using the technology to enable them it’s just step one, but what about the rest of that ecosystem? Compliance, taxes KYC, monitoring, all of that needs to be in place in order for institutions to come on board and really take decentralized finance to the next level.

DeFi, banks, and financial inclusion

Boris: I see banks and financial institutions being the enablers. They’re going to be the first adopters; the reason they would adopt is because it could create efficiencies for them and bring their costs down. If it does that, and grows their bottom line, they’re going to then roll that out to the retail user base. Most of us will interact with our financial institutions to send a payment, or to do a trade. And do we ultimately care if that trade is done through a decentralized exchange where that payment said, through a decentralized manner? No, we just care that the payment gets there, the trade gets done, that it’s cheap, that it’s fast, and it’s secure. I see institutions bringing about that change, and really being the drivers of that adoption.

We always talk about the underbanked population, that there’s a huge number of people in the world that are not banked. And we don’t really ask the reason why. The real reason is because it’s just not economically profitable for these banks to bank them under the current set of technology that they have. So DeFi could bring about what we firmly believe at Ripple is this “Internet of Value.” It could make it profitable for all of these unbanked people to now become banked through the adoption of this technology.

Automated market maker functionality

Boris: As a software company, we are one of the contributors to the XRP Ledger and we do from time to time put amendments where we feel are important for the growth of the XRP Ledger. One of the amendments we put forward with XLS 30, an automated market maker function. And the automated market maker is really an application that you see on a lot of other blockchains. It’s really the cornerstone for decentralized finance trading. And the way automated market makers work is the price of an asset is set by the relationship between two assets in a liquidity pool. An automated market maker removes the need for a central limit order book. And the reason why this was important on Ethereum and other chains where it’s gotten quite a bit of adoption is because the block times are too long in order to support a central limit order book. On XRPL, there’s actually a central limit order book native functionality, and the liquidity pools and this AMM amendment. We saw this as further augmentation of the central limit order book in order to build out even more liquidity, so now individuals can provide liquidity and may potentially earn yields on their assets.

Why this is important, and why we’re excited about it, is that this AMM functionality that we’re proposing is very different than the functionality you see on the AMMs like Uniswap, etc. First off, this functionality is native, so the liquidity will be shared amongst all of the applications that are built on top of XRPL. So with Ethereum you have Uniswap, SushiSwap, those are two segregated liquidity pools. What’s great about the native functionality is that it will be shared.

Also, liquidity pools and AMMs suffer from what’s called impermanent loss. As a liquidity provider, if I deposit my two assets, say ETH/USDC, if the price of ETH goes up, I won’t get the same amount of assets when I withdraw from the liquidity pool. And that’s just a common problem for AMMs. David Schwartz, our CTO, has come up with a way to minimize and reduce impermanent loss through what’s called a constant auction mechanism…effectively, it does minimize the impermanent loss, which is super exciting and solves a huge pain point with existing AMMs today.

And to put that into the institutional context and the idea of institutional DeFi adoption, institutions are incredibly sensitive to the bottom line. Impermanent loss can have a big impact on the bottom line; being able to reduce the impact of impermanent loss will ultimately drive more adoption for institutions. So as an institution, I care about every single penny, right? That’s why it’s really cool. And we’re very much excited about it.

Central bank digital currencies: the evolving landscape and Ripple’s involvement

Boris: This is actually a product that Ripple has. We’ve announced pilots with a number of countries. Central banks and governments are looking at the applications of digital currencies and the efficiencies they can create in very cash heavy societies. And we’ve seen quite a bit of success there. And our CBDCs team has been incredibly busy filling out RFPs and getting inbounds from a number of central banks.

The way I would see CBDCs is really coexisting with stablecoins. In the future, I’d like to see that happen. I think CBDCs might be the digital currency that is used domestically, potentially, or the digital currency used between banks and central banks to settle deposits, differences, etc. Then, you could have other stablecoins, which are more retail-facing. And those are maybe used in cross-border or used in other parts of the ecosystem. And they ultimately back settle into these CBDCs. That could be one way of this evolving, and I’m putting my money on that’s the way things go.

Takeaways from the challenging fintech and crypto environment of 2022

Boris: What does this mean for Ripple? Look, we’ve always worked with the regulators. Given that our customers have always been financial institutions, they expect the highest level of compliance, both regulatory KYC, AML, etc. And so for us, this isn’t anything new. We’ve always held ourselves to, I would argue, banking-like standards. And you can ask anybody who’s partnered with us and worked with us; we definitely have some of the highest, most scrupulous KYC, AML, and regulatory standards. We’ll continue to build on that we’ll continue to be active in those dialogues with the regulators. Because we’re going to continue to serve that highly regulated, financial institution, customer base, it’s business as usual for us.

Pursuing an MBA as a career transition from traditional finance into fintech/crypto

Boris: For me, the MBA definitely was life changing. It was the way for me to pivot. Sometimes in financial services, you can get pigeonholed into a single sector. I was a power and utilities banker towards the end. And this was, frankly, the way I could hit the reset button, but still leverage my existing skill set and transition into an industry that I found more exciting, and I was truly passionate about.

I chose Wharton because it had very great alumni network, great resources on the fintech side. And at that time, fintech and crypto wasn’t really an industry right? And so being able to tap into the huge alumni network, the Penn Blockchain club, the FinTech club, to really understand the sector and all the different moving pieces. The mentoring resources I’ve received also through Wharton have just been unbelievable. I also did the Lauder Institute and for me, crypto is global. And fintech is global. And so having a global perspective was really important. Best decision I’ve ever made, and never looked back at it with regret.

Boris’s advice for learning about crypto

Boris: The best way to learn is really put your money where your mouth is. You tell me you’re passionate about crypto, but can you actually do anything in crypto outside of hey, I just bought Bitcoin and Ethereum? Do you actually have a MetaMask wallet? Have you traded on Uniswap? Have you staked assets on Aave? I’m not telling you to put in hundreds or thousands of dollars. Put 20 bucks in and play around. You need to understand how these pieces work together. Buy an NFT. Genuinely go out and do things. That’s the only way you really learn this space. There’s really no great textbook. Ultimately, this industry moves so much faster than textbooks can be written. There’s always new innovations that you need to stay on top of. So if you’re really passionate about this space, you’re really interested, put your money where your mouth is.

About Ripple

Ripple Labs, Inc. is a technology company founded in 2012 with a primary focus on digital cross-border payments via a decentralized blockchain, XRP Ledger. Ripple now offers additional solutions to meet enterprises’ needs with respect to digital assets. Ripple also works with central banks around the world to issue central bank digital currencies (CBDCs) on the XRP Ledger.

About Boris Alergant

Boris joined Ripple full-time in 2019 and is now the company’s Head of DeFi. Before joining Ripple, Boris earned an MBA and MA at the Wharton School and Lauder Institute. Prior to business school, Boris spent the first seven years of his career in investment banking and sales and trading at JP Morgan and MUFG.

About the Author

Nate Gee is an MBA and MA Candidate at the Wharton School and Lauder Institute. He’s a member of the Wharton FinTech Podcast team and is excited by fintech’s capacity to improve the efficiency and accessibility of financial services across the globe. Don’t hesitate to reach out with questions, comments, feedback, and opportunities at ngee@wharton.upenn.edu.

As always, for more FinTech insights and opportunities to collaborate, please find us below:

Wharton FinTech: Medium Blog | Twitter | Our Website | LinkedIn

Suggest a Podcast Guest: https://airtable.com/shrdbokQPxAJzgVh7

Hire Wharton FinTech MBAs: https://www.whartonfintech.org/recruiting