Ripple and XRP are often used interchangeably. While the Ripple coin on almost all exchanges is denoted as XRP, they are different. Ripple is the organisation behind the XRP ledger and the XRP token. Ripple has built payment solutions beyond just XRP. To put it simply XRP is a digital asset whereas Ripple is the centralised organisation controlling the majority of XRP tokens.
XRP was founded in 2013. Chris Larsen, James Caleb, David Schwartz, Stephen Thomas, and Arthur Britto are recognized as the founders of XRP and the XRP ledger. They have individually contributed to different parts of the XRP infrastructure.
Unlike Bitcoin and Ethereum which have positioned themselves as a store of personal wealth, XRP is aimed at simplifying money transfers at an institutional level. XRP can be referred to as an enterprise solution.
XRP currently has a market capitalization of $ 17 billion and is the 7th largest Crypto in the world.
The Problem Ripple Is Trying To Solve
Ripple enables global financial institutions to transfer value instantly at a fraction of the costs these institutions bear currently.
The way money is transferred between nations has not changed much since the 70s. It is estimated that roughly $ 180 trillion is transferred every year between nations and the approximate cost to make these transfers is $ 2 trillion. It is a mind-numbing cost.
Cross-border transfers are carried out by a protocol known as SWIFT ( Society of Worldwide Interbank Financial Telecommunications). Let us understand how a cross-border transfer happens through the SWIFT system before discussing how Ripple solves this problem.
To send money offshore a bank would need a partnership with a foreign bank. An account that a local bank has in a foreign bank is known as a Nostro account(meaning “ ours” in Latin). The same account in the eyes of the foreign bank is known as the Vostro account( meaning “ yours” in Latin). To facilitate a cross-border payment the SWIFT system gives an instruction for money to be debited from the Nostro/Vostro account and sent to the local account.
Let’s suppose there needs to be a fund transfer from Bank of America in the USA to the National Australian Bank (NAB) in Australia. Here is how a transaction would take place.
- National Australian Bank would have its Nostro account in Bank of America. This account holds money in the form of US dollars.
- When money is deposited into this account, these funds are transferred to a National Australian Bank account in Australia through a SWIFT order.
- The received money would then be converted into the local currency and distributed to the recipients.
In case a local bank does not have a partnership with a foreign bank, correspondent banks act as middlemen to carry out this process. The process is further complicated when remittances need to be sent to multiple countries. Banks also have to hold up capital in their foreign accounts because of which they have to incur opportunity costs.
Intermediaries take commissions that eat into the money being sent. On top of the costs incurred, it usually takes 3-5 days for a settlement to take place. Senders and Receivers do not have any visibility of the movement of their money.
How Does Ripple Work
Ripple is designed specifically to solve the above-mentioned problems. Ripple enables RTGS ( Real-time gross settlement) for the direct transfer of assets through the Ripple Blockchain ledger. The Ripple(XRP) ledger can be used by a network of banks for instant settlement of fund transfers. A typical fund transfer through XRP can be settled in less than a minute. Each transaction costs less than a dollar. This allows senders and receivers to have complete clarity on what is happening. According to Ripple, banks can save close to 60% of their costs using this system.
- Since XRP transfers work on a blockchain, the network unifies all the banks irrespective of the geographic location
- Banks can hold the XRP on their balance sheets instead of holding foreign currency
- Money can be credited in the form of XRP to the local accounts which can then be converted into the local currency
- The markups on Foreign exchange rates can be avoided
The nodes on the Blockchain network validate the transactions similar to any other blockchain. When more than 80% of the nodes on the network verify a transaction, it is validated. These nodes are run by various institutions. This network of validators is known as the Ripplenet. The validation method used on the Ripple network is known as the federated consensus mechanism. It is based on the trust which the network has in the nodes. This is also a reason why, unlike Bitcoin and Ethereum, XRP cannot be mined by anyone.
Read about: What Is a Blockchain Layer?
How To Mine XRP
XRP cannot be mined by retail investors, unlike Bitcoin and Ethereum. XRP nodes are operated by financial institutions that are part of the network. The most realistic way for retail investors to own / mine XRP is to purchase XRP with a fiat currency or swap XRP with any other coin.
Advantages of Ripple
- Settlement Time: Ripple’s settlement time is instantaneous which is way faster than the current SWIFT system.
- Cost: It is much cheaper to send value through the Ripple network when compared to the current SWIFT system.
- Elimination Of Middlemen: Ripple network eliminates the need for correspondent banks thereby saving costs for banks who do not have partner banks in other countries.
- Boundaryless: The Ripple network eliminates geographic boundaries as all the institutions are on the same network. This allows several banks in the poorer parts of the world to be included in a global network.
Disadvantages Of Ripple
- Tussle With SEC: SEC has slammed a lawsuit against Ripple that the company allegedly raised around $1.3 billion through unregistered security offerings. If the SEC wins this lawsuit Ripple’s status can be changed to a “ security”. The lawsuit is still being examined in court and the verdict is yet to be decided.
- Centralised Network: Ripple blockchain cannot be called fully decentralised as the nodes on the network are a handful of financial institutions and not retail investors.
Read about: Centralised Vs Decentralised Networks
Future of Ripple
Now, Is XRP a good investment? Ripple is a viable alternative to the current system and is trying to solve an ignored problem in the current financial system. A decrease in the volatility of the XRP asset could also encourage more institutions to adopt this solution. Currently, more than 100 financial institutions use the Ripple network which is less compared to around 10000 institutions on the SWIFT network. While time will tell if the Ripple Blockchain will be adopted, it is for sure a formidable solution to most foreign exchange problems. As an investor, it is essential that you conduct thorough due diligence before you take a buy or sell decision.
You can now buy XRP instantly and securely on ZebPay Australia.