Ripple is a for-profit technology platform and also a cryptocurrency (XRP), developed by Ripple Labs. The company focuses on providing real-time payment settlements and currency exchange services to financial institutions such as banks and payment processors. Over 100 companies worldwide have adopted Ripple software to guarantee fast, frictionless transactions.
As a result of this strong financial industry adoption, the Ripple cryptocurrency, XRP, is currently the third most valuable cryptocurrency by market cap, after Bitcoin, with a valuation of over $90 billion in January 2018. While you can buy XRP, it’s not intended for consumer use. Instead, it’s a token that provides liquidity for banks as they facilitate cross-border transfers.
Unlike most blockchain technology that’s secured by a decentralized network of miners, Ripple is secured by a network of validating servers with an internal ledger that guarantee transactions based on consensus. Instead of mining rewards, all 100 billion Ripple coins are pre-mined, and Ripple Labs controls the dispersion of new coins. So far, there are 38.7 billion XRP in circulation, and Ripple Labs will release more as needed to control money supply.
Transactions on Ripple are not limited to XRP, however. Ripple also supports fiat currencies like dollars, euros, pounds, and yen. Ripple also includes support for other cryptocurrencies like Bitcoin and even other markers of value like frequent flyer miles or gold. Ripple is primarily a payment processor and currency exchange, and the XRP currency is necessary but secondary to Ripple’s mission. In that sense, Ripple does not strive to compete with Bitcoin or Ethereum. Instead, it competes with prevailing payment validation and remittance systems like Swift or ACH, and new technologies like Payoneer. Ripple brings the speed and security of blockchain to the $155 trillion cross-border payment industry.
Ripple is a reimagination of a very old idea that dates back to medieval times. In those days, there were no banks, so if you wanted to send money from city to city you had to visit a payment agent that would help you send the money. The process worked like this:
An essential requirement here is that payment agents trust one another. If your agent doesn’t trust your friend’s agent, you’re out of luck.
Ripple works the same way, connecting payment agents to facilitate payment across borders. In addition, Ripple’s algorithm discovers a trusted path for transactions. If a third agent trusts both your agent and your friend’s agent, then that third party can be a middleman between middlemen. On Ripple, the agents are called “gateways,” and they’re usually banks or other places that accept deposits to transfer money.
But it’s not just cash. Theoretically, this system of trusted agents – or gateways – could work with anything. I could give my gateway a piece of gold, or a car, or some beer; and your gateway could give you those things, provided the gateway was equipped to transact in gold, cars, or beer. The power behind Ripple is its ability to transact anything, especially multiple currencies at one time, and the IOUs between agents/gateways are posted to the Ripple ledger and can be resolved in real time.
History & Team
Ripple started in 2012, but it began as an idea in 2004. In 2005, Ryan Fugger launched RipplePay.com as a precursor to blockchain currencies. RipplePay provided online secure payment options for communities but didn’t gain widespread adoption. In 2011, Fugger was soon approached by Jared McCaleb and Chris Larsen to replace RipplePay with a digital currency system where community consensus verified transactions, rather than miners like on the Bitcoin network.
Work began on the Ripple Transaction Protocol in 2012. The protocol was designed to facilitate quick, direct money transfers between two parties in fiat currencies, without the wait times or transaction fees of traditional money transfer services. To provide greater liquidity, the protocol also provided for the creation of a new value token known as XRP.
By 2014, what began as a person-to-person money transfer option began to gain traction with banks as another option for settling remittances in a quicker, more cost effective way than traditional technologies. In 2014, several banks and payment processors signed on to utilize Ripple in a testing capacity. Ripple has added more institutions every year since, with over 100 clients in 2017.
It’s important to note that Ripple is a privately-held company. They raised funding through institutional investors and venture capital, and their revenue model is based on professional services and creating integrations to the RippleNet for financial institutions. As of 2017, Ripple is cash positive.
The Problem: What Ripple Solves
In the age of constant, instantaneous connectivity, financial institutions are still using technologies developed in the 1970s to resolve payments. For cross-border transactions, a $155 trillion market, banks and payment processors charge high fees and take days to process payments. As a result, global trade and cross-border consumer behavior has not advanced at the same pace as technology. Reducing the fees and processing times could result in an explosion in globalization and cross-border collaboration, especially for small transactions that were previously unfeasible with fees and exchange rates.
While banks surely enjoy lining their pockets with hefty transaction fees, there are reasons why cross-border transactions are currently so expensive and slow. Chief among these inefficiencies is the practice of nostro/vostro accounts. Instead of using the agent/gateway model I described above, a domestic bank will have an account at another foreign bank (nostro), and the foreign bank will have an account at the domestic bank (vostro). These accounts are used to transact in the two currencies and have to be reconciled before transactions can be approved. Often a third, correspondent bank enters the equation to facilitate and verify the reconciliation process.
The indirect nature of nostro/vostro account reconciliation makes it expensive and time consuming. Additionally, there’s no established standard for cross-border transactions. Each bank must follow its home country’s regulations, and each bank has different processes for verifying incoming foreign transactions.
xCurrent: Ripple’s Payment Processing
Ripple’s ultimate goal is making money move with the same ease and speed that information does in the digital age. Ultimately, this means low-fee, instantaneous payments in currencies that people actually use in their daily lives. Instead of thumbing their noses at the banking system like most of the cryptocurrency community, Ripple seeks to upgrade the underlying infrastructure that runs our banking system, making transactions faster and cheaper for the average user.
xCurrent is the first step in Ripple’s implementation of global payment verification. Instead of nostro/vostro accounts, xCurrent is enterprise software that allows banks to instantly settle transactions. The technology also allows banks to review information about transactions and resolve any compliance issues before authorizing the transaction. This allows for high straight through processing rates and lowered overhead on fixing or reversing bad transactions.
The payoff for financial institutions is reduced costs and increased processing rates. If you make cross-border transactions instantaneous and cheap, more customers will choose to use your bank’s services, and the overall market for cross-border transaction grows with each cost and time reduction.
Many people wonder what makes Ripple different from a company like PayPal or Stripe in terms of payment processing. While PayPal and Stripe are direct to consumer solutions, Ripple operates more as infrastructure for banks than as a standalone solution. Additionally, the RippleNet doesn’t rely on Ripple the company to continue to function. If PayPal were to shut down, so would their payments. If Ripple shuts down, the RippleNet will continue to exist. Finally, PayPal still relies on older technologies like ACH to process its transactions. Ripple is a payment processing technology itself that directly integrates with banks and other partner gateway institutions, with faster processing times and lower fees than PayPal.
Ripple also hopes to become an industry standard. Their system of verifying servers is meant to act as a third-party authority that sets standards for cross-border transactions. Some banks could try to implement a similar technology to Ripple, but ultimately that technology would be limited to the banks that created it and would be less useful compared to an open-source, international standard that any bank could join.
xRapid & xVia: Liquidity & Standard Interface
Ripple’s newest projects, xRapid and xVia, build on xCurrent’s foundation.
xRapid is a project that aims to help payment processors enter emerging markets by reducing the amount of liquidity required for entry. For instance, consider a payment processor that wants to expand their operations to include Nairobi, one of the most important cities in East Africa. Such a payment processor would have to be prepared to accept deposits in Kenyan Shillings and have enough Kenyan Shillings on hand to cover any withdrawals.
xRapid allows payment processors to source that liquidity as XRP, instead of the local currency, and Ripple partners with local financial institutions to complete the conversion from XRP to the local currency. Since the liquidity is in XRP, it’s easily transferable as Kenyan Shillings, Japanese Yen, or Mexican Pesos on-demand.
xVia is an API that allows companies, banks, and payment processors to integrate with the RippleNet to send payments. Along with those payments, senders can include rich information, like invoices or supporting documentation. xVia is the link between money and information for all kinds of payers.
Let’s Get Technical: Open-source Infrastructure
The RippleNet is an open source project, and it’s cryptography is different from other crypto projects. Unlike other blockchain projects, Ripple relies on institutions to operate its network. While anyone can run a node of the Ripple network, these trusted gateways (like banks and other institutions) are the ones who facilitate transactions on Ripple, providing currency exchange, fiat deposits, and other means of transfer.
Gateways accept deposits from individuals or institutions and issue balances on the Ripple ledger. Gateways can also have their own requirements like Know Your Customer (KYC) and Anti-Money Laundering (AML) processes that require identifiable information about individuals involved in transactions. RippleNet operates as the infrastructure beneath these institutions, connecting them to one another to resolve payments and transfer funds.
The gateways on the network do not mine or stake their Ripple. In fact, all 100 billion XRP is pre-mined. Since the RippleNet does not rely on mining, its transaction times can be very quick. Typically, a payment between gateways takes four seconds between initiation and completion. Ripple’s network is capable of processing 1,500 transactions/second, far outstripping Bitcoin’s 4 transactions/second or Ethereum’s 15 transactions/second.
Since its coins are pre-mined, the only incentive to join the RippleNet and contribute computing power to the ledger is access to the system. As such, most of Ripple’s computing power comes from the institutional gateway users who use Ripple to process payments. The RippleNet uses a consensus-based approach to creating the ledger, with each verifying node compiling its own version of the next block based on the transactions it has received. The nodes compare their proposed blocks and a new block is verified when a supermajority of nodes agrees on the block’s contents.
Vulnerability, Centralization, & Competition
While Ripple’s open source code is widely regarded as secure (banks wouldn’t use it otherwise), it is important to note that Ripple’s seeming centralization does open it to attack. While the RippleNet would continue to exist, even if the company went away, Ripple Labs controls the money supply in the network, limiting the network’s viability without a controller. Researchers from Purdue have also found that Ripple’s use of gateways leaves some users vulnerable to being locked out of their funds if a gateway disappears.
Another concern is Ripple’s status as a private company. While the network itself is open source, the company running the network has financial aims for the project, and we can expect that company to listen to the needs of financial institutions (the company’s clients) over the concerns of the average user.
There’s a lot to like about Ripple, and it has gained mainstream adoption in the financial sector where no other cryptocurrency has. It deserves its place as one of the top cryptocurrencies and cryptotechnologies to keep an eye on over the coming years. It could very well transform the global payment industry.