Ripple and XRP are synonymous with each other. Ripple coins are denoted as XRP on most crypto exchanges, but they are different. The XRP token and ledger are backed by Ripple. Ripple has built other crypto payment solutions beyond XRP. Ripple is a centralized organization controlling the majority of XRP tokens, whereas XRP is a crypto asset.
XRP was introduced in 2013. James Caleb, Chris Larsen, Stephen Thomas, David Schwartz, and Arthur Britto are the founders of XRP tokens and ledgers. They have each worked on different parts of the XRP infrastructure.
XRP aims to simplify money transfers at an institutional level, unlike Ethereum and Bitcoin, which have positioned themselves as a crypto platform to store personal wealth. You can say XRP provides an enterprise solution.
XRP is the seventh largest cryptocurrency in the world and has a market capitalization of $17 billion.
The Ripple solution
The Ripple blockchain enables global financial institutions to transfer value instantly. Money transfer occurs at a fraction of the costs currently borne by financial institutions using the Ripple blockchain.
The method of money transfer between nations has not changed since the 1970s. Every year, roughly $180 trillion is transferred between nations. The cost of completing these transfers is $2 trillion currently.
The Society of Worldwide Interbank Financial Telecommunications, or SWIFT, is the protocol used to carry out cross-border transfers. First, let us understand how transfers occur through the SWIFT system before discussing the problem with the SWIFT system that Ripple solves.
Your local bank must have a partnership with a foreign bank before you can send money overseas. A Nostro account is a foreign bank account owned by a bank. The same account is known as the Vostro account for the foreign bank. The SWIFT system gives a command for money to be debited from the Vostro/Nostro account and sent to the local account. This process is how the SWIFT system facilitates cross-border payment.
For example, there needs to be a money transfer from Chase Bank in the USA to Axis Bank in India. The below steps is how the transaction would take place.
- Axis Bank would have a Nostro account at Chase Bank. This Nostro account holds money in the form of US dollars.
- These funds are transferred to an Axis Bank account in India through a SWIFT order when money is deposited into the Nostro account.
- Funds are transferred to the recipients after it is converted into the local currency.
Correspondent banks act as middlemen to carry out the SWIFT process when a local bank does not have a partnership with a foreign bank. Also, remittances are sent to multiple countries, further complicating the process. Local banks incur opportunity costs as they have to hold up capital in their foreign accounts.
Additional costs, such as commissions to intermediaries, add to the transfer cost. Transactions usually take 3–5 days to complete a cross-border transfer, on top of the high transfer costs. The movement of money can not be tracked by senders or receivers.
How does Ripple work?
Ripple is aimed at solving all the problems with the SWIFT process. The direct transfer of assets through the Ripple blockchain ledger occurs through RTGS (Real-time gross settlement). A network of banks uses the Ripple (XRP) ledger to complete fund transfers instantly. It takes less than a minute to settle fund transfers through XRP. Each fund transfer costs less than a dollar through XRP. There is complete clarity between the senders and receivers using this system. Financial institutions can save close to 60% of their costs by using the Ripple system.
- The XRP network can unify all the global banks, irrespective of location, as XRP transfers work on a blockchain.
- Local banks can hold XRP tokens on their balance sheets instead of foreign currency.
- Margins in foreign exchange rates can be avoided.
- XRP can be credited to the local accounts, which are converted to local currency.
Like other blockchains, the nodes on the Ripple blockchain network validate the transactions. A transaction is validated when 80% of the nodes verify it. Various institutions run the nodes in the network. The RippleNet is a network of validators. The federated consensus mechanism is the validation method used on the Ripple blockchain network. This system works based on the trust the network has in the nodes. This feature is why XRP cannot be mined by anyone, unlike Ethereum and Bitcoin.
How to mine XRP?
Unlike Bitcoin and Ethereum, retail investors cannot mine XRP. Financial institutions that are part of the network operate the XRP nodes. A realistic option for retail investors to own or mine XRP is to buy XRP tokens with a fiat currency or trade XRP with any other crypto coin.
Advantages of Ripple
- Cost: It is cheaper to send funds through the Ripple system compared to the SWIFT system.
- Settlement time: Transactions are settled instantly in the Ripple system, faster than the current SWIFT system.
- Cross-border transfers: All the financial institutions are on the same Ripple network, eliminating geographic boundaries. Many banks in poorer countries are included in the global Ripple network.
- No need for middlemen: Banks that do not have accounts in other foreign partner banks need a correspondent bank to complete transactions. The Ripple blockchain network eliminates the need for such correspondent banks.
Disadvantages of Ripple
- Centralized network: Nodes of the Ripple network are operated by a few financial institutions, so the Ripple blockchain can never be completely decentralized.
- Issues with SEC: SEC has alleged that Ripple has raised around $1.3 billion through unregistered security offerings and slammed a lawsuit against the Ripple blockchain network. Ripple assets can be changed to security class if the SEC wins the lawsuit. A verdict has yet to be reached.
Future of Ripple
So, is XRP a good investment? Ripple can solve many of the issues of the current financial system and is a viable alternative to the current SWIFT system. More institutions can be encouraged to adopt this fund transfer solution if the volatility of the XRP asset decreases. More than 100 financial institutions use the Ripple blockchain network, but this is less compared to the 10,000 institutions on the SWIFT network. The Ripple network is a formidable alternative to the current fund transfer system, but only time will tell if it will be widely adopted. It is imperative to conduct thorough research for any investor before deciding to buy or sell a crypto asset.
