Margaret Rouse is an award-winning technical writer and teacher known for her ability to explain complex technical subjects simply to a non-technical, business audience. Over…
Ripple is a decentralized platform that allows digital and fiat currencies to be transferred across international borders on the same network without an intermediary, in real-time. Ripple is known for its digital payment protocol and XRP, its native cryptocurrency.
The platform, which was developed and promoted by Ripple Labs, has two main components: RippleNet and XRP Ledger (XRPL).
RippleNet is a network of financial institutions that use Ripple’s technology to enable cross-border transactions. XRP Ledger is a decentralized, open-source blockchain that processes and verifies transactions on the network.
XRP, the ledger’s native currency, acts as a bridge currency to increase the speed and reduce the cost of cross-border transactions. Using XRP as a mediator currency reduces the need for pre-funded accounts and enables more efficient transactions than was previously possible through traditional financial institutions.
While Ripple itself is not a decentralized finance (DeFi) platform, it has played an important role in promoting DeFi by providing the necessary tools and infrastructure for the development of new DeFi projects. The Ripple Transaction Protocol (RTXP) and XRP, for example, have been used as building blocks for DeFi applications that bridge the gap between traditional financial institutions and decentralized financial services.
Ripple’s supporters maintain the platform has contributed to the growth of the DeFi ecosystem and helped make financial services more accessible and inclusive for people in unserved and underserved parts of the world.
It’s important to note, however, that Ripple also has critics, many of whom question whether the platform is truly decentralized.
One important question has to do with the way the platform’s consensus mechanism works. Unlike cryptocurrencies that employ decentralized consensus mechanisms, such as proof-of-work (PoW) or proof-of-stake (PoS), Ripple employs a unique protocol that requires a limited number of nodes called validators to arrive at a consensus.
The decentralization of a cryptocurrency is an essential aspect of its security because it prevents any single entity from having too much control over the network. With Ripple’s consensus protocol, however, a small group of validators has the power to approve transactions. Critics point out this also gives them the power to collude and manipulate the network.
Critics have also questioned XRP’s usefulness as a bridge currency when other cryptocurrencies and fiat currencies could be used for the same purpose. There has also been quite a bit of debate over whether it’s really necessary for a majority of the total supply of XRP to be held in escrow by Ripple Labs and its founders.
Ripple was created in 2012 by Chris Larsen and Jed McCaleb, two well-known entrepreneurs and pioneers in the cryptocurrency and blockchain industry. In 2013, OpenCoin rebranded Ripple Labs. Since that time, Ripple Labs has worked to improve the XRP Ledger, promote the use of XRP as a digital currency, and nurture partnerships with banks, liquidity providers, and other financial institutions.
Here’s a high-level overview of how Ripple works:
On the back end, the Ripple platform consists of a currency exchange, a real-time gross settlement (RTGS) system, and a remittance network.
The Ripple cross-border payment platform is designed to be used by individuals as well as businesses and financial institutions such as banks and payment providers.
Today, some of the largest financial institutions in the world, including Santander, Standard Chartered, and American Express, are using Ripple’s technology to eliminate many of the inefficiencies and delays associated with sending money from one country to another. The platform is used to:
Ripple Labs also offers a range of products and services beyond cross-border payments. They include:
On-Demand Liquidity: A service that leverages the digital asset XRP to provide instant liquidity for cross-border transactions. Financial institutions can use Liquidity Hub to source liquidity on-demand, eliminating the need for pre-funded nostro accounts and reducing the cost and time associated with cross-border payments.
RippleNet Cloud: This is a cloud-based service that allows financial institutions to easily connect and integrate with RippleNet, Ripple’s global payment network. RippleNet Cloud is known for enabling faster deployment, lower operational costs, and easier maintenance compared to traditional on-premises solutions.
Line of Credit: Ripple Labs offers a line of credit service to eligible customers, allowing them to access funds for cross-border payments using XRP through ODL. This service aims to help businesses grow by providing upfront capital for investments or expansion.
University Blockchain Research Initiative (UBRI): Ripple Labs launched UBRI to support and accelerate academic research, technical development, and innovation in the blockchain, cryptocurrency, and digital payments sectors. The initiative partners with universities worldwide.
Ripple uses the Ripple Transaction Protocol, the Ripple Protocol Consensus Algorithm, and the Interledger Protocol to transfer digital and fiat currency across borders on the same network.
Each protocol plays a specific role in facilitating fast and cost-effective cross-border payments. RTXP (Ripple Transaction Protocol) outlines the overall structure and components required for transactions. RPCA (Ripple Protocol Consensus Algorithm) ensures the integrity and security of the Ripple ledger, and ILP (Interledger Protocol) facilitates cross-ledger transactions between different blockchain networks and traditional banking systems.
RTXP is an open-source protocol that uses a distributed ledger technology that’s similar to blockchain to facilitate cross-border payments. The protocol is known for its unique consensus mechanism, pathfinding algorithm, gateways, and IOUs. Gateways are trusted currency exchange entities that act as entry and exit points for transactions within the Ripple network. Transactions are facilitated through IOUs, which represent debt obligations between users and gateways.
RPCA is a consensus process based on the Practical Byzantine Fault Tolerance (PBFT) algorithm. The nodes on the Ripple network that participate in the consensus process are known as validators. Validators are required to hold a minimum amount of XRP as a security deposit to ensure they have a stake in the network’s operation. Here is how the protocol works:
ILP is a decentralized, open-source protocol that enables transactions across different payment networks and ledgers. ILP relies on connectors, a routing protocol, conditional payments, and a cryptographic unlocking mechanism to ensure secure, efficient, and interoperable transactions between diverse payment systems. Here is how the protocol works:
Ripple continues to be a subject of debate as concerns about centralization and the way Ripple Labs sold XRP raised questions about how the bridge currency should be treated under current laws and regulations.
In 2020, the United States Securities and Exchange Commission (SEC) filed a lawsuit against Ripple Labs, its CEO, Brad Garlinghouse, and its co-founder, Chris Larsen, alleging that even though Ripple Labs and its executives were aware that XRP could be considered a security under federal securities laws, they continued to sell XRP as an unregistered security to fund their operations.
The outcome of this lawsuit is expected to have significant implications for the cryptocurrency industry because it could set a precedent for how current U.S. laws and legislation could be used to oversee the crypto industry. If the SEC prevails in the case, and XRP is deemed a security, it’s possible that other digital assets might face similar regulatory scrutiny and be required to comply with U.S. securities laws.
Following the lawsuit, several cryptocurrency exchanges suspended or delisted XRP trading because of the negative sentiment surrounding Ripple Labs. The lawsuit also inspired media coverage that highlighted the regulatory risks associated with investing in cryptocurrencies, especially those with unclear legal status. This, in turn, increased the volatility of XRP tokens as well as Ripple liquidity
Some investors, on the other hand, viewed the lawsuit as an opportunity. The negative sentiment and uncertainty surrounding the lawsuit initially led to a drop in XRP’s price, which provided investors who believed in the long-term potential of the project with an attractive entry point.
In spite of the controversy, XRP is still one of the top cryptocurrencies by market capitalization and has a high trading volume because it is often used as a base currency for trading pairs on cryptocurrency exchanges.
Here are the steps required to purchase and store XRP as an investment:
Once the order is executed, the XRP will be credited to the exchange account. Although XRP can be stored on the exchange, it’s considered a best practice to transfer it to a digital wallet for better control. There are different types of XRP wallets available, including software wallets (desktop or mobile), hardware wallets, and paper wallets.
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Margaret is an award-winning technical writer and teacher known for her ability to explain complex technical subjects to a non-technical business audience. Over the past twenty years, her IT definitions have been published by Que in an encyclopedia of technology terms and cited in articles by the New York Times, Time Magazine, USA Today, ZDNet, PC Magazine, and Discovery Magazine. She joined Techopedia in 2011. Margaret's idea of a fun day is helping IT and business professionals learn to speak each other’s highly specialized languages.
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