What is Ripple? | The Ultimate Beginner’s Guide
Ripple is a distributed open source internet protocol that facilitates a real-time gross settlement system (RTGS), currency exchange, and remittance network. Ripple is most often used by banks and other financial institutions to fortify their operational infrastructure. According to the Ripple website, they are the world’s only enterprise blockchain solution for global payments.
The name Ripple refers to three things: Ripple Labs (the company that oversees the development of Ripple), the Ripple Transaction Protocol (RTXP), and the network’s native cryptocurrency, XRP, or simply Ripples.
We’ll cover each of these components in the following topics:
- What is Ripple?
- Ripple Use Cases
- Reactions to Ripple
- How to Buy XRP
- How to Store XRP
Ripple’s story goes back to 2004 when Ryan Fugger, a web and decentralized systems developer, was working on a local exchange trading system in Vancouver. His goal was to develop a decentralized monetary system that would allow people to create a medium of exchange for whatever purposes they saw fit. He eventually launched the first iteration of this idea with RipplePay.com
In 2012, developers Jed McCaleb and Chris Larsen approached Ryan Fugger with their idea for a digital currency. The system would rely on transactions verified by a consensus process among members on the network, instead of the mining verification method used by Bitcoin and many other cryptocurrencies.
After deliberation with McCaleb and others within the Ripple community, Fugger decided it was best to allow McCaleb and Larsen to take over Ripple. Following this decision, McCaleb and Larsen co-founded OpenCoin.
From there, OpenCoin immediately began working on the Ripple protocol (RTXP) and the Ripple payment and exchange network. The company received angel funding from several different venture capital firms.
Things were looking great for OpenCoin, but less than a year after its founding, McCaleb left the company. On September 26, 2013, OpenCoin officially rebranded themselves as Ripple Labs, Inc. and decided to become fully open-source as they released the peer-to-peer full node Rippled. By becoming open-source, the Ripple protocol was now viable independently from Ripple Labs. While they can and still do lead the development on the network, the Ripple network technically does not need the company in order to remain active.
The next few years would prove difficult for Ripple, as they received a $700,000 fine from the US Treasury’s Financial Crimes Enforcement Network (FinCEN) for “willful violation of the Bank Secrecy Act by acting as a money services business without registering with FinCEN.”
By corporatizing themselves, Ripple Labs exposed themselves to government regulation in a way that some other cryptocurrencies are safe from. Bitcoin, for example, is not backed by a corporate entity and leaves any sort of regulatory liability on the users of the network rather than a centralized group.
After their run in with FinCEN, Ripple obtained a virtual currency license from the New York State Department of Financial Services. This allowed Ripple to continue business as usual and Ripple became only the fourth company to hold a BitLicense, or a business license of virtual currency activities. Now that Ripple was a fully licensed and recognized virtual currency firm, they were able to continue operation.
By this point, Ripple had been working on several Ripple protocol projects and the shift away from a simple peer-to-peer currency had begun. The protocol had been adopted by a growing number of financial institutions as an alternative remittance option for consumers. Remittance refers to a transfer of money by a foreign worker back to their nation of origin.
This shift was seen as an opportunity by Ripple’s CEO Chris Larsen as he said in 2014,
“…we think that the bigger opportunity is not just to create another digital currency — there are plenty of those — but rather to use that technology as a way of building a settlement system with no central operator.”
Ripple began collecting partnerships with major financial instructions around the world. Companies like American Express, BMO Financial Group, the Royal Bank of Canada (RBC), and many others have identified Ripple as a means to bolster their operations. Some see it as a way to fight back against other cryptocurrencies often viewed as direct competitors to banks.
Those who consider their investments in digital assets as a means to insulate themselves from the corruption and general failings of the traditional banking system often view Ripple with distrust as it is clear that Ripple has aligned with their perceived enemy.
That being said, Ripple is seen as a safe entry point into crypto investing by some simply because of its banking utility. Many digital currencies claim to have world changing technology with not much to back up their claims. Ripple on the other hand, has proven utility and the trust from the banks has drawn the attention of traditional investors and large sums of money.
The Ripple Protocol Consensus Algorithm is the title of a white paper published by Ripple Labs in 2014. The paper addresses failures in traditional transaction systems and distributed payment systems like blockchain-based cryptocurrencies.
In contrast to these other cryptocurrencies, the Ripple protocol uses a common shared ledger, or distributed database, and operates with a consensus protocol to validate transactions and account balances on the network. This differs from the typical proof-of-work system used by Bitcoin and other blockchains. Proof-of-work requires computers connected to the network to act as miners, where the computing power of their hardware is used to validate and compile ledger entries, earning rewards when blocks are completed.
The consensus protocol of Ripple validates transactions in a way that improves the overall integrity of the system to prevent double spending. Distributed nodes on the network confirm transactions by participating in a poll that determines the majority vote on whether the transaction was carried out properly. For example, if you had 50 XRP in a wallet and you tried to send the entire balance to multiple addresses, the validators on the network would be polled to determine which transaction input occurred first. Only the first input would be recognized and completed.
XRP is the native currency used on the Ripple network, not unlike Bitcoins or Ether on the Ethereum network. However, XRP, in contrast to the above coins, is primarily designed as a liquidity instrument of the Ripple network. It acts as a bridge currency, meaning it can allow for transactions between two typically unrelated currency pairs.
There are other currencies on the Ripple network, but XRP is the only one free from counterparty risk, or the possibility that a counterparty will not fulfil their obligation to pay. This is a risk native to insurance policies, bonds, or other contracts.
During the development of Ripple, it was determined that there would be 100 billion total XRP to be introduced into the market. Of the 100 billion created, 20 billion were retained by the founders of Ripple Labs. XRP are divisible by up to 6 decimal places. The smallest unit is called a drop with 1 million drops totaling 1 XRP.
Ripple is designed to facilitate fast, seamless transactions between banks, payment providers, corporations, and digital exchanges. The network utilizes multiple instruments, like XRP, to complete transactions that are typically slow and costly.
XRP can act as a bridge currency between other currencies and assets. It allows for the open exchange of fiat and cryptocurrencies by creating liquidity without the need to increase your holdings of liquid assets.
One way this would prove useful compared to traditional banking would be their use of nostro accounts. A nostro account is an account in which a bank holds a foreign currency in another bank. Most of the large commercial banks of the world have nostro accounts in every country that uses a convertible currency.
Ripple eliminates the need for these accounts because instead of holding all of these currencies in reserve, you can simply hold an amount of XRP and complete foreign exchange transactions as needed without all of the added accounting measures.
Perhaps the most important feature of performing business transactions with Ripple is that it is nearly instantaneous. Everyone knows the struggle of receiving a check and waiting for it to clear; standard transactions can take days to complete. Ripple transactions, on the other hand, can be initiated and verified in seconds, and that includes foreign exchange processes that are even more costly and time-consuming.
Ripple is one of the most polarizing matters in the cryptocurrency community and it all stems from one concept. Decentralization.
Decentralization is the majority goal of blockchain developers. They distribute decentralized ledgers so that no central force can impose undue influence on the network and its users. Ripple is often accused of being a centralized cryptocurrency for three reasons. Ripple Labs is holding 20 billion XRP, they control the non-circulating total of XRP in addition to that 20 billion and they have solidified themselves as the most trusted validator on the Ripple network.
In the XRP section of this guide, it is mentioned that Ripple Labs created 100 billion XRP. This is already a deviation from the norm as cryptocurrencies are typically created through mining by users on their network. The Ripple creators then decided to retain 20 billion XRP for themselves.
Now this is obviously controversial as it gives just a handful of people 20% of the entire supply of a currency. On an open market, these few massive holders hold incredible power. They could theoretically dump their holdings and crash the price.
Not everyone sees this as a problem though. Supporters consider the retention of Ripple by its creators as no different than founders of a company holding a certain number of shares when their business goes public.
Nevertheless, some of the Ripple founders have agreed to slowly sell their holdings of XRP at a careful rate over several years in order to add stability to the market. Some of their holdings have also been donated to worthy causes.
This leads us to what happened to the other 80 billion XRP. As of the time of this writing, over 39 billion XRP are in circulation. With the majority of the currency in the hands of the company that created it, some believe this makes Ripple Labs too powerful in the financial ecosystem it created. Crypto markets are not mature and prices can fluctuate wildly when large holders decide to buy or sell holdings.
Perhaps the biggest concern Ripple opponents have with the controversial cryptocurrency is its role in maintaining the network. Ripple Labs is the primary validator on the Ripple network, meaning they could potentially do anything they wanted to their distributed ledger. As mentioned above, it is theoretically true that the Ripple network could continue operating without the control of Ripple Labs, but at the moment, they hold a monopoly on its processes.
Ripple has recognized these criticisms, however, and is working on a plan to implement a decentralization strategy. They are encouraging additional validators to join the network, leading them away from a monopoly on the system. If these additional validators are free from the control of Ripple, then over time the system could become truly decentralized and the network could upgrade and evolve as the community sees necessary.
Although those decentralization strategies are official statements, Ripple critics remain skeptical. Banks are seen as the enemy in this metaphorical war, and Ripple has chosen its side.
Even though XRP is markedly different from most digital assets in terms of technology and usage, it can be purchased on many of the world’s popular cryptocurrency exchanges.
Check out our guide step-by-step on how to buy Ripple XRP here.
There are many options for storing your XRP after you acquire it from an exchange. Digital assets traded on exchange will be stored in their hosted wallets and they belong to you, but it is not a good idea to leave your funds in an exchange’s wallet, as there have been instances of hacking in the past, most notably the Mt. Gox hack that resulted in about 850,000 Bitcoins being stolen.
While Bitcoin wallets are free, Ripple wallets require 20 XRP to hold your wallet address. Because of this, it is advisable to store your XRP on a single wallet rather than across several.
One of the best options for XRP storage is a hardware wallet called the Ledger Nano S. Hardware wallets are often considered to be one of the most secure methods of storing your cryptocurrencies, and the Ledger Nano S supports XRP along with a number of other coins.
Ripple is lumped in with the thousands of cryptocurrencies because of similar underlying technologies and financial implications, but it is something that is fundamentally unique. By focusing on partnerships with banks and major corporations, Ripple is on a different path than that of Bitcoin, Monero, or other projects that are built around the idea of disruption. Ripple isn’t trying to disrupt banks, it is trying to give the banks a fighting chance against the wave of cryptocurrencies gunning for them.
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