Ripple (XRP) 101 – what you need to know before investing
Thanks to the popularity gained by Bitcoin in the recent “Cryptocurrency Revolution”, Ripple’s cryptocurrency has gained some spotlight as well. Not going too far, the market cap of XRP, Ripple’s cryptocurrency was just over $9 Billion on December 10, 2017. However, on December 17, at the time of writing, the market cap shot up by almost 3 times to $29 Billion.
So what is this shadowed currency and how does it work?
Technically speaking, we should be using XRP instead of Ripple when referring to the currency. But in common parlance Ripple is used for both the company and the currency.
Founded in 2012, Ripple is both a cryptocurrency and a digital payment network. XRP is the cryptocurrency associated with the network. The payment platform is built on an open source and peer to peer decentralized platform and allows transfer of money in any form, irrespective of the currency.
To understand how the ripple platform works, let’s imagine that A wants to send some money to B.
So to do that A gives his money to his agent P who will, in turn, inform B’s agent Q about the transaction. To ensure that some imposter is not acting as B, B will have to provide the secret password to receive money. Once B tells the password, he will get the money.
Ripple’s network works in a similar way. Here, if one person wants to send some money to another, he will send that money to something called a gateway. Now a gateway is similar to the agent P in the example above. That is, the gateway is the medium between the sending and receiving parties. There can be multiple gateways in a transaction. Now the gateway will receive the money and forward it to the next gateway which will again forward it to the next and so on till it reaches the receiver’s gateway. From here, the receiver will get his money.
Anyone can register and open a new gateway. This gives the registrant the permission to act as a middleman for exchanging currencies. Ripple is not only limited to transfer of cryptocurrencies. It also supports fiat i.e currencies like USD, CAD etc. And there are different gateways for different types of currencies. So we have CADBluzelle for CAD, BTCbitstamp for bitcoin and USDsnapswap for USD.
Money to be sent across the network is first converted to XRP and then again reconverted back at the receiver end. For example, if A wants to send some money to B and A uses CAD and B prefers BTC, then A will give money to the gateway in CAD. This money will be converted to XRP and will remain in XRP till it reaches B’s gateway. After that, when B will get the money, again conversion will take place but this time from XRP to BTC.
That being said, whenever we trust something/someone with our money, there is a risk associated that the other party will default. We call it the counterparty risk. If the gateway is untrusted, the user might lose his money. To prevent this, skeptical users can transact with a trusted gateway which will, in turn, transact with the untrusted one.
Moving ahead, Ripple is different from other cryptocurrencies like Bitcoin in the sense that it doesn’t use proof of work or proof of stake. Transactions rely on consensus protocol to validate account balances and transactions. An obvious question that arises now is how to prevent double spending in this case? If a user tries to double spend on the Ripple network, all the transactions except the first one will be deleted. To find out the first transaction, individual nodes take a poll and based on that they decide on the first one.
Thanks to the no mining mechanism, transactions on the network are extremely fast and take roughly 5 seconds. This is better than the traditional scenario where banks are the ones confirming the transactions. What used to be 4-5 days for a wire transfer is now reduced to a couple of seconds with Ripple. It’s not that the number of transactions occurring is less. Millions of transactions occur daily on the Ripple network. What’s more is that the minimum transaction fees are 0.00001 XRP which is lesser than banks thereby making Ripple more affordable.
That was all for the mechanism part. But what about its future? And is it used anywhere in the present? Surprisingly, Ripple is the one accepted by the Bank of Tokyo instead of the expected Bitcoin. The fact that Ripple is faster might have contributed to the cause. According to The Market Mogul Ripple is partnering with 60 institutions around the world including firms such as UBS, RBC, UniCredit, and Santander. 40% of Japanese banks will be connected to Ripple. This does not end here. RBS and BAML will use Ripple for both retail and commercial payment in 2018. And as if this wasn’t enough, The National Bank of Abu Dhabi uses Ripple for international transactions.
Even though Ripple is not as well known as Bitcoin/Ethereum yet, it’s rising. With the growing interest in cryptocurrencies, investors are looking for more affordable options. Ripple is just a few cents at present. Hence it looks like an attractive option. For who knows, with the widespread adoption of cryptocurrencies, Ripple might replace traditional banking systems.