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How Ripple Does Everything Right, And Ends Up Wrong

Lower intra-bank fees attract capital, but they don't excite the crypto base.

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Ripple has a problem. Their token has lost five-sixths of its value since December. That’s not the problem. Ripple is facing a couple of class action lawsuits. That’s not the problem either. Possible classification as a security by the SEC, then? Nope.

The real challenge faced by Ripple is  the perception the “bankers’ coin” isn’t cool. And it’s not just teenage drama. There’s also the fact that Ripple is not XRP, and XRP is not Ripple.

The qualities that make Ripple attractive to institutional money—efficiency, speed, and a banker-friendly approach—also set Ripple very far apart from the rest of the cryptosphere.

Its multi-billion dollar valuation depends on a cryptocurrency token, XRP.

So its token depends on the crypto community – at least to some degree, institutional investors are also drawn to it.

And the community, to some degree, isn’t fond of the banking system – or excited about it. And if community support for a coin specifically aimed at financial institutions falters, then the value of XRP…

We’ve previously detailed how Plain Jane Ripple went from being the ugliest dorkling to one of the hottest figures in cryptocurrency. Last time we heard, she was partying it up with Snoop and putting the crip in crypto. Forget about talking to her, man. She’s out of your league. 

This is Ripple’s answer to the question of how to keep the cryptosphere engaged? Throwing a party with your dad’s favorite rap artist?


Ripple’s Promise

Before we get into the economic thickets, it’s important to explain what makes Ripple such a powerful idea. 

If you’ve ever tried sending money abroad, you know how broken the payments system is. The Society for Worldwide Interbank Financial Telecommunication might as well run on Morse Code, with cables costing around forty or fifty dollars as they bounce around correspondent banks to arrive several days later. And that’s for people who have a bank.

As for everyone else, millions of migrant workers and travelers are currently lining up in post offices and grocery to send their pittances home at enormous expense. 

Indians working overseas send home $65BN dollars per year, according to the World Bank. Overseas Filipinos—whose brains and muscles constitute their country’s most valuable export—send home $28-37BN. The total value of the international remittance market is $600BN, seven percent of which disappears into the pockets of various middlemen. Needless to say, people who line up at grocery stores to send money do not have much money to spare.

This is one of Ripple’s prime target markets, and it’s no surprise that people are getting excited about it. Unlike other crypto projects, this one doesn’t require any sci-fi leaps of faith.


But…. Oh, Ripple!

The only way to gain Ripple-like efficiency is to compromise on decentralization. For Bitcoin maximalists, this disqualifies Ripple from being considered a cryptocurrency at all. “Crypto” means “secret,” and there’s nothing less secret than a transparent ledger whose accounts can be frozen, including, perhaps, under government orders.*

The trouble with the Ripple protocol was identified as early as 2013, attracting comment by, among others, a young contributor by the name of Vitalik Buterin.  “Ultimately, Ripple does not provide a cryptographic solution to the trust problem,” Buterin wrote in Bitcoin Magazine, “and keeping fraudulent gateways under control will have to be done by more traditional mechanisms instead – clear, industry standard, expectations on gateways’ security… and outright fraud will have to be met with the help of the good old-fashioned legal system.”

Reliance on the “good old-fashioned legal system” is exactly the kind of recourse many of us were trying to reinvent.

Those Visa-like transaction speeds come at significant costs in network security. In currencies like Bitcoin, mining serves an important role, not only to irritate Jamie Dimon but also to reward network participation. In Ripple, the incentive for participation is….well…nothing. Here it is from the horse’s mouth: “The primary incentive to run a validator is to preserve and protect the stable operation and sensible evolution of the network.”

In other words, validating the Ripple network is like recycling: the only mining reward is a warm sense of civic duty.

Nor have those protocol-level issues been fully resolved. A recent study by Bitmex thoroughly weeded through the Ripple software, and found that “the Ripple system appears for all practical purposes to be centralised,” and lacking in the advantages—like censorship resistance—which inhere to truly distributed projects.

Nick Szabo, one of Bitcoin’s intellectual heavyweights, seconded these concerns. “Ripple is far from trust-minimized,” he tweeted earlier this year. “As a result it has high governance costs, including the disputes described [by BitMex], and poor social scalability.”


Ripple and XRP

Then there’s the XRP token itself, a tenuous value even by cryptocurrency standards.

Although holders like consider ourselves “investors,” most cryptocurrencies do not come with any of the benefits of a real financial contract. Instead of equity or dividends you get a token which you hope will one day be valuable–as if the MTA crowdfunded a new line by selling subway cards, or a theater paid for its expansion by selling movie tickets in advance. This may not convince the SEC, but if you believe in a project, it’s easy to believe your money will grow. 

Not so simple with XRP. Not only did Ripple benefit from an enormous premine (the founders were billionaires before it reached a penny) it isn’t even the main token used in the Ripple networks.

XRP powers xRapid, but not xVia or xCurrent, the main settlement ledgers for banks and international markets. It’s as if Ripple Labs were funding their new subway line by selling tickets in advance—except what they’re selling to you is actually bus tickets.

No wonder Ripple is in such hot water, not only with regulators but also with their own investors. While Ethereum seems to be in the clear, Ripple is still in Securities limbo—and facing a class-action lawsuit to boot. Unlike Ethereum, Ripple Labs looks very much like a third party promoter. 

 

And the verdict on Ripple?

All of which conspire to make the payments platform of the future seem a lot less revolutionary on second glance. Many of us came to cryptocurrency because it promised to change the financial system.

One would hope that the crypto-revolution has more to offer than more efficient banks and an occasional throwdown with Snoop.

 

*An earlier version of this article generalized Ripple as “a transparent ledger that can be frozen under government orders.” As has been pointed out several times, XRP cannot be frozen, but issuers can freeze non-XRP balances–including, according to developers, “to meet regulatory requirements.” The article has been amended to clarify the distinction. 

The author is invested in BTC, ETH and XRP. 

 

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