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What Is Ripple? Introduction To XRP

Aimed primarily at financial institutions, Ripple has proved attractive to private investors.

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What is Ripple, this token that seems to soar and swoop through the markets on an almost daily basis? And why are so many banks and financial companies seemingly interested in partnering with Ripple Labs, the company behind XRP?

Designed for enterprise and institutional use, Ripple is, in many ways, the most notable effort at a compliant cryptocurrency. Its intent is for use by banks and payment providers as opposed to the peer-to-peer nature of payments of most cryptocurrencies. Ripple aims to service transactions between banks and other types of financial institutions (like remittance services such as Western Union) in a secure and fast manner.

Ripple sports a lightning-fast consensus mechanism, which to the layman means it settles transactions in a matter of seconds. Ripple is developed and operated by Ripple Labs, a company which has engaged in lobbying on behalf of the cryptocurrency industry and designed the Interledger suite of technologies, among other important offerings in financial technology.

There are three important terms when discussing Ripple, all of which can have independent meanings:

What Is Ripple Protocol?

The Ripple protocol uses a different consensus mechanism than Bitcoin to process transactions. As a result, Ripple is technically faster, by a long shot, at settling transactions.

Ripple utilizes trusted validators. In the same way that Bitcoin miners process transactions, validators ensure that transactions are legitimate, that the funds being transacted exist; and processes them near-instantly.

Adoption of Ripple

Santander was the first bank to join the Ripple payments network. Since then, more banks have tagged along. A four year lapse between launch and adoption may seem like a long time to the reader, but to stand by as much would be to discount the serious perceived miasma associated with cryptocurrencies from the perspective of bankers and traditional financiers.

Major remittance services MoneyGram and Western Union have confirmed they are looking into adopting the Ripple protocol. It is one of a growing list of legacy financial institutions which are looking to implement blockchain technology into their operations but prefer designs which are more naturally attuned to know-your-customer regulations than is Bitcoin and other traditional cryptocurrencies.

Massive XRP Price Fluctuations

Ripple has seen severe demand increases in recent times. Until 2017, Ripple’s price never cracked the 2 cent mark, but beginning in April of that year it began to steadily climb, reaching a high of more than $1 per XRP.

$700,000 Fine

Ripple Labs was among the first to be fined by the US Government, receiving a $700,000 fine in 2015 for “willfully violat[ing] several requirements of the Bank Secrecy Act (BSA) by acting as a money services business (MSB) and selling its virtual currency, known as XRP, without registering with FinCEN, and by failing to implement and maintain an adequate anti-money laundering (AML) program designed to protect its products from use by money launderers or terrorist financiers.”

Since then, the level of interest in Ripple and partnerships established by Ripple Labs has been on a steep incline.

Stellar And Ripple: A Fractured Relationship

Seemingly like any great cryptocurrency project, it wouldn’t be complete without a “hard fork” version. In 2014, Ripple co-founder Jed McCaleb launched a new organization and network, the Stellar Development Foundation and Stellar. At its outset, Stellar was a carbon copy of Ripple, and the primary reasons for McCaleb’s leaving were, at heart, philosophical and creative differences.

At the time, McCaleb held a significant amount of XRP (9 billion, give or take), and some hijinks arose at Bitstamp in the spring of 2015 when McCaleb sought to sell some 100 million XRP. Ultimately a settlement was reached, and in the intervening years Stellar has gone on to fully differentiate itself from Ripple.

Benefits of Ripple

  • Lowers Banking Fees

As more and more banks and payment providers integrate Ripple, the cost of their transactions will come down, and these savings will be translated into more competitive fees offered by such institutions.

  • Increased Efficiency

While centralized banks will always suffer from opacity and a greater potential for fraud (the very reason that Satoshi Nakamoto created Bitcoin in the first place), greater efficiency is possible in the old world of command-and-control ledgers.

  • Useful Beyond Banking

When governments look to modernize and improve their tax collection services, it’s likely that they will look to companies like Ripple Labs for guidance and help. It’s no surprise, then, that members of the Ripple staff have already been selected for things like the Federal Reserve Faster Payments Task Force.

Problems With Ripple

  • Centralization of Distribution

From an investor’s perspective, a great deal of the value of Ripple depends on the actions of just one entity, Ripple Labs, as opposed to the mood and swing of the market at large.

  • Not Designed for Peer-to-Peer

Again from an investor’s perspective, the most exciting cryptocurrencies today are those which enable users to communicate financially across borders and other divides. Ripple focuses on institutional level transactions, and as such, overall demand for the token can fluctuate.

  • Dependent on Banks / Replaceable

We have already mentioned Stellar, which has all the same functions of Ripple (and even some innovations beyond, such as Lumens). The necessary marketing and partnerships surrounding Ripple make it vulnerable to replacement by alternatives in ways that currencies with more dominating network effects are not.

Massive banks have still yet to decide how they will implement blockchains, and if they pass over Ripple in favor of something else, not only would it have an effect on the price but ultimately it might speak loudly to the actual necessity of the thing.

Whereas banks might find a need for Bitcoin yet Bitcoin can function just fine without them, the utility of Ripple very much relies on traditional financial and FinTech to succeed.

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