Ripple (XRP)

Ripple (XRP) is a digital currency issued by OpenCoin, now known as Ripple Labs.

The Ripple Network

Ripple is the world's first open payment network, enabling the transfer of any currency quickly and easily. Transactions are confirmed within seconds, with near-zero fees, eliminating cross-bank, cross-border, and international payment charges.

The Ripple open payment system is a virtual currency network (a distributed P2P clearing network) and a future electronic payment platform. First implemented in 2004 by Ryan Fugger, Ripple aimed to build a decentralized virtual currency system allowing anyone to create their own currency. Currently, Ripple is developed, operated, and maintained by Ripple Labs.

History of Ripple

While Ripple might seem like a latecomer, the project predates Bitcoin. Ryan Fugger launched the first version in 2004, envisioning a decentralized system where anyone could create their own currency. Money within the Ripple network is represented as "debt," with all transactions reflected as changes in account balances.

Its operation resembles a bank clearing system: when transferring funds between banks, the actual settlement is postponed until the end of the day. At that time, banks calculate their net positions with each other. Incoming and outgoing payments might offset, eliminating the need for actual transfers. Even if not fully offset, the final settlement amount is usually much smaller than the sum of individual customer transactions.

Ripple's initial goal was to create a distributed P2P clearing network where individuals act as their own banks, issuing and accepting loans while facilitating transactions for others.

Although initially successful with Ryan Fugger's solo efforts, Ripple remained niche. Its reliance on pre-existing relationships and trust chains limited its reach. To use Ripple for remittances or loans, users needed pre-existing connections within the network to establish trust.

XRP Token

Ripple issued a total of 100 billion XRP tokens, divisible to six decimal places. The smallest unit is called a "drop." 1 XRP equals 1,000,000 drops (1 XRP = 1,000,000 dXRP).

XRP is the native currency within the Ripple network, similar to Bitcoin, facilitating transactions across the entire network rather than within limited circles. Traditional currencies are stored within specific financial systems like VISA/Mastercard or Alipay. Transferring between them often incurs high fees and stringent identity checks.

XRP is used to pay minuscule transaction fees within the Ripple network. Each transaction costs only 1/1000 of a cent, preventing system abuse through excessive transactions.

Features of XRP:

1. Low transaction fees: Cross-currency transactions often carry high fees. Ripple transactions are consistently below $0.01.

2. Anonymity: The Ripple network doesn't require user emails, names, or other personal information, ensuring privacy.

3. Security: Sending XRP is like sending cash; no further charges apply after receipt. Credit card and check payments require personal information, increasing the risk of fraud.

4. Reliability: Irreversible transactions allow merchants to trade with anyone, eliminating the risk of chargebacks.

Functions of XRP:

1. Two-way flow between fiat and virtual currencies

2. Multi-currency P2P exchange and payment

3. P2P network credit

4. Personal network clearing

Advantages of XRP:

Similar to Bitcoin, the Ripple network functions as a shared public database and a global ledger. Its consensus mechanism enables all computers within the network to accept ledger updates automatically within seconds, bypassing central data exchange centers.

This speed is a major engineering breakthrough, enabling transaction confirmation within 3-5 seconds, compared to Bitcoin's 40 minutes.

Similarities with Bitcoin:

The Ripple network aims to seamlessly transfer any form of currency, be it USD, EUR, GBP, JPY, or Bitcoin. Stephen Thomas, a senior Ripple developer and Bitcoin advocate, believes Ripple will provide more gateways for Bitcoin users, bridging it with mainstream finance.

Similarities include:

1. Open source and P2P network propagation

2. Direct account-to-account transfers without third-party software

3. Internet-based, irreversible transactions with digital counterfeit protection

4. Shared underlying cryptographic technology

5. Multi-signature support

6. Minimal transaction fees

7. Permissionless node operation (anyone can run a Ripple server)

Differences from Bitcoin:

1. Multi-currency support: Beyond XRP, Ripple supports fiat currencies (USD, EUR, JPY, etc.) and plans to integrate Bitcoin and potentially all virtual currencies.

2. Automatic exchange rate conversion: Users can pay each other with any currency, enabling global circulation.

3. Fast transaction confirmation: Ripple's "Consensus" mechanism verifies and confirms transactions within seconds through special node voting.

4. Lightweight client: Ripple clients don't require downloading the entire blockchain. They discard older validated ledgers, retaining only recent ones and a link to historical data, reducing synchronization and download workload.

5. No mining: Ripple doesn't rely on mining.

6. Deflationary model: Ripple's total supply is fixed at 100 billion XRP and cannot be increased. The company plans to release 75% and promises no further issuance. Each transaction destroys a tiny amount of XRP, leading to gradual deflation.

Profitability of XRP:

Like Bitcoin, XRP is based on mathematics and cryptography. However, unlike Bitcoin's lack of inherent utility, XRP serves as a bridge currency and security mechanism within the Ripple system. Gateways participating in the protocol must hold a small amount of XRP.

Theoretically, gateways require minimal XRP at a low cost (currently around $0.1). Like Bitcoin, XRP's supply is capped. However, transaction fees are destroyed, leading to gradual scarcity.

If Ripple becomes the dominant global payment protocol, gateway demand for XRP will surge. This increased demand, coupled with decreasing supply, could drive up XRP's value.

Ripple Labs holds 77 billion XRP. Assuming a $0.1 valuation, their holdings are worth $7.7 billion. To encourage participation, they plan to donate 55 billion XRP to users, retaining 22 billion.

If Ripple achieves mainstream adoption and XRP appreciates, Ripple Labs could still retain significant value despite donating a large portion of their holdings.

However, this is speculative. Convincing traditional banks to adopt a new payment protocol is a significant challenge. While Fidor Bank's adoption is promising, widespread adoption remains uncertain.