How Ripple Can Transform Traditional Banking

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Ripple runs on an open-source, peer-to-peer decentralized infrastructure that enables the seamless transfer of money in any form, including fiat currencies and crypto. It is a system in which financial organizations such as governments, banks, and investment firms have centralized authority over the flow of money and other activities. It applies to all traditional financial services. It is a global payments network with large banks as customers. Its native token, XRP, is used to facilitate the conversion of different crypto tokens.

Centralized finance, or CeFi, is an ecosystem in which a central authority handles financial assets and services while customers use the services. This central authority can be exercised by a single person, a group, or an organization. The main advantage of CeFi is that it provides better stability and security for investors by requiring users to validate their identification before accessing platforms such as centralized exchanges.

Ripple: A Brief Overview

Ryan Fugger started RipplePay in 2004. Users could use it to provide credit to others. Jed McCaleb began working on the XRP blockchain in 2011. In 2012, he assembled a team, found investors, and approached Fugger about using his RipplePay network, who agreed to hand over control of RipplePay. They launched the XRP blockchain in 2012. It was initially known as NewCoin before being renamed OpenCoin and eventually Ripple. The XRP Ledger records all transactions issued in a given currency by each user. All credits and transactions are publicly viewable on the XRP ledger.

Ripple uses HashTree as its consensus mechanism. The difference between this system and a Proof-of-Work (PoW) system is that consensus is reached by comparing only a single value derived from summarizing the ledger’s data. Individuals, banks, and institutions run these independent validation servers. Its validating system is run by individuals or organizations, such as banks. The Ripple network uses drops as a unit of measurement for XRP transactions, making them inexpensive and accessible. Ripple can handle large transactions per second, making it an attractive alternative for fintech companies that need robust infrastructure and a crypto payment gateway.

Centralized Finance (CeFi) and its Components

Centralized finance is a financial activity in which investors can earn interest and acquire loans on their crypto holdings through centralized exchanges. Private keys to crypto assets would be handed to the desired third-party company to carry out crypto transactions. It aims to improve the performance and cost-efficiency of crypto transactions. It combines the yield services of decentralized finance (DeFi) with the reliability of conventional financial services to enable crypto lending, purchasing, and trading. Some essential CeFi components include centralized exchanges (CEXs), higher interest rates, and fiat conversion flexibility.

A centralized exchange is a platform owned and maintained by a single business that serves as a middleman between buyers and sellers. This intermediary facilitates transactions by providing liquidity for supported tokens. It uses an order book system to set crypto prices same as traditional institutions like banks. Users deposit funds into an account kept by the exchange, which acts as a custodian of the funds. Centralized finance (CeFi) protocols set their interest rates, which makes them comparatively more stable, but these rates are much higher than DeFi protocols. Centralized entities offer more adaptability for converting crypto to fiat and vice versa. Usually, trading cryptos for money necessitates the intervention of a centralized entity; however, DeFi solutions do not do so.

Advantages and Limitations of Ripple in CeFi

Advantages

Fast settlement: Transaction confirmation speeds are fast in the Ripple network. It takes about four to five seconds to complete a transaction in Ripple compared to days in CeFi institutions.
Low fees: The cost to complete one transaction in Ripple is just 0.0001 XRP.
Versatile network: Apart from XRP, Ripple can also process transactions in other fiat currencies and crypto.

Limitations

Centralized: Ripple is partially centralized as it has a list of its validators, which goes against the principle of decentralization.
Large pre-mined XRP: Most Ripple token supplies are not in circulation but stored in escrow, and large amounts of tokens can be introduced at any given time, affecting the price of the token.

The Impact of Ripple XRP on CeFi and DeFi

Ripple does not require only XRP to function, as any currency or crypto asset can be used to transact in its network. However, XRP acts as a bridge between two currencies when liquidity is required. RippleNet eliminates the need for pre-funded accounts with on-demand liquidity. Ripple has partnered with financial titans such as Bank of America, Santander, and American Express to facilitate cross-border transactions.

You can use XRP in the same way as other digital assets, for transactions or investments. Ripple can also be used to conduct other types of transactions, like currency exchange.

For example, if you want to convert INR to USD, you can first exchange your INR for XRP and then use it to buy USD, rather than conducting the currency conversion directly through a bank or exchange. This method can be quicker and less expensive than paying the high fees that money transfer companies may demand. XRP’s main function is to act as a bridge asset, allowing financial institutions to convert crypto and fiat currencies at low costs.