Ripple is a decentralised transaction protocol created in 2012: like many other cryptocurrency platforms, it is open-source, based on a blockchain ledger and functions using its own native currency, the XRP (also referred to as “ripples”). It focuses on providing global financial transactions without charging fees. While the system was originally created by one particular company (OpenCoin), in a centralised fashion, it has since been decentralised and can now operate without the company’s support. The company is also now unable to shut it down.
Ripple (XRP) Chart
Goals of the Ripple platform
As opposed to other similar systems such as Bitcoin, Ripple does not have as its goal to replace traditional currency with XRP; instead, XRP is simply a tool used to facilitate financial transactions carried out on the Ripple network.
This Ripple approach to financial transactions is generally compared to Medieval banking or the Eastern system of “halawala”: a payment relationship reliant on trust lines. This means party X can hand party Y an IOU note to settle a debt, instead of actual currency, provided X and Y trust each other. This can be extended: if X trusts Y and Y trusts Z, then an IOU from X can be used to pay Z, because Y vouches for both of them. This is the type of trust chain Ripple uses for its transactions.
Ripple was therefore not designed to replace traditional currencies, but focuses specifically on facilitating financial transactions, with the XRP as a tool of last resort to replace trust links if none can be found, rather than a central element of the protocol. It therefore also processes transactions in traditional currencies (but using its protocol) in its blockchain ledger, which companies such as Bitcoin do not.
Ripple and traditional banking systems
Another key element of the Ripple system is that, as opposed to Bitcoin, it does not actually position itself in opposition to or as a replacement of traditional financial institutions.
On the one hand, Ripple does pride itself on being cheaper and faster both than banks and than other cryptocurrency systems such as Bitcoin; unlike banks, it uses a decentralised blockchain system without fees for middlemen, and unlike Bitcoin, it does not use a proof-of-work algorithm for verification and can thus process many more transactions at once.
At the same time, however, it does not aim to replace financial institutions so much as to become part of them. From 2014 onward, Ripple developed the Codius project, which is a new smart contract system for financial transactions and which has been adopted by a number of banks worldwide during the subsequent years.
These institutions thus enable their customers to use the Ripple platform to conduct their international transfers of funds, but add to this their own user verification and security protocols, so that Ripple as used by banks does not necessarily rely simply on trust chains anymore.
Since Ripple does not have as its goal to replace traditional currencies with XRP, users’ reasons for buying the currency are slightly different from those users may have in buying other cryptocurrencies. For this reason, users are less likely to see XRP as an investment, and more as a tool in order to be able to use the platform.
Uses of XRP
The way XRP is used within the Ripple platform is two-fold. Firstly, it is used as a bridging tool; since trust lines may sometimes falter, especially when exchanging two relatively rare currencies, XRP is a go-to bridging currency that can be securely and freely exchanged with both. From 2015 onward, Ripple also offered an auto-bridging feature in order to make this even easier.
Secondly, however, the use of XRP is also an anti-spam measure; since Ripple is not free, but charges a nominal fee per transaction, this discourages spammers from abusing the system, since while the fee is very affordable during legitimate use, it becomes expensive when spamming.
Before buying Ripple
Before considering buying XRP, users must acquire a Ripple wallet. Such a wallet is a program or application that generates and maintains the user’s Ripple address, which he will use to conduct transactions, and as such it is the basic tool for any user. It is important to remember that because XRP is not yet as established as BTC, this will impact a user’s choice of available wallets.
Once the user has selected and installed a wallet, he must choose an exchange, which is a website through which to exchange traditional currency (or different cryptocurrencies, such as Bitcoin) for Ripple.
Selecting a Ripple exchange
A wide range of cryptocurrency exchanges exist and users must bear in mind a number of factors when selecting one, such as the exchange’s reputation and security level and the countries it can be accessed from. At the same time, however, users must also ensure a particular exchange allows for the purchase of XRP and must bear in mind that not every payment method can be used to acquire XRP.
Purchasing XRP is not as straightforward as buying BTC, which can be done using credit cards, PayPal, even cash. For this reason, it may be necessary to first purchase Bitcoin (since this is the most widely used cryptocurrency) and then use a separate exchange to trade Bitcoin for XRP.
Once a user has selected an exchange that sells XRP at a price acceptable to him, he will register on this exchange. This requires the submission of some personal information to the system, which will vary depending on the jurisdiction involved. At this point, the user can start buying XRP or a fraction of one XRP, since the currency can be subdivided up to six decimals.
Whatever funds a user purchases are initially stored within the user’s account on the exchange system. It is crucial, then, to transfer these coins from the exchange to the user’s wallet’s address, so the coins can no longer be touched if something were to happen to the exchange. This transfer may also incur a fee, but from this point onward, the XRP are entirely owned and controlled by the user, protected by whatever security systems are operative on the wallet.
Ripple does not use a proof-of-work algorithm and it is not possible to mine or harvest Ripple: a finite amount were created and distributed in 2012 and a certain amount of XRP is destroyed upon each transaction. This means Ripple will get rarer with time and eventually disappear, unless more XRP is released before this happens.
Since Ripple works in a different way from traditional cryptocurrencies and does not have a replacement of traditional currencies by XRP as its goal, the way prices have and are evolving is also by definition different. This page will explain how.
Many cryptocurrencies have issues with price volatility; this means that they suffer from very rapid inflation followed by inevitable price crashes. They’ve proven to be more volatile in this way than mainstream currencies, which users have taken advantage of to score rapid profits, but which can also mean users’ investments can become worthless virtually overnight. Between 2010 and 2014, for example, Bitcoin had an annual year-to-year volatility of more than 100%, eighteen times greater than that of the US dollar.
However, this is different in terms of XRP, which has an incentive to remain relatively stable vis-à-vis traditional currencies; because it is used by financial institutions and largely meant as a bridging device between such currencies. For this purpose, volatility would actually be a major issue that would scare off banks from using the currency.
Like Bitcoin, there is a fixed amount of XRP: 100 billion XRP were created in 2012 and this was meant to be a finite supply, with no more XRP becoming available at any point and no mining or harvesting opportunities available.
Since a Ripple transaction costs 10 so-called “drops” (which amounts to 0,00001 XRP) and since the amount used for this is burned forever and cannot be reused, however, the supply of XRP will be reduced over time and its value will therefore go up, which is not the case with Bitcoin.
In this sense, Ripple is a deflationary system: it has an inbuilt mechanism against inflation, since as inflation happens, the currency will become rarer and prices will rise to meet inflation. This also helps keep the currency stable over time.
Gradual rise in price
Nonetheless, Ripple developers have also commented upon the advantages of managing a gradual and controlled price rise of XRP. Firstly, of course, it means that any sale of additional XRP at any point will produce more revenue to then be reinvested back into the system.
Secondly, however, more value attached to the – currently finite – amount of XRP in existence means a greater potential in terms of liquidity and trade volumes. These, in turn, will make Ripple more competitive as a cryptocurrency platform in the global marketplace; it needs to be able to handle greater amounts of money in order to do this.
Thirdly, a gradual price rise is good for the public perception of the platform: while it is not necessarily so important for the functioning of XRP as a tool that it be worth greater amounts of money, people’s perception of Ripple is inextricably linked to the value of its associated currency. An XRP of greater value will therefore incentivise people to investigate the platform.
A cryptocurrency wallet provides “storage” for digital currencies such as XRP, but not quite in the same way traditional wallets store traditional currency. Instead, it is a software application to manage and secure a user’s XRP coins through the transmission of a secret code. Because of this, it can take a number of different forms, which this article will discuss in further detail.
Desktop and mobile wallets
Firstly, a desktop wallet is an application the user installs on his own computer. This requires some installation time and effort, since the user has complete responsibility for the security of his own system. At the same time, however, it also means the user has complete control over the wallet, and can then use it to create an XRP address to manage their Ripple transactions and store a private key to access this address.
A mobile wallet is different; it is a smartphone or tablet application which one can use to access one’s XRP anywhere.
Desktop and mobile wallets can be either full or lightweight clients. Full clients download a full copy of the Ripple blockchain and use it to verify transactions, whereas lightweight clients access, but do not download, the whole blockchain. Lightweight clients require more trust from the user, but they also require less storage space and CPU power, which makes them more attractive for mobile wallets.
A web wallet can be used from anywhere and without any particular device; in this way, it is similar to a mobile wallet. It is hosted by a provider and thus requires less setup and expertise from the user. This does also mean, however, that the user must trust the provider to maintain high-level security for his funds.
Hardware wallets, then, are specific devices made to serve as cryptocurrency wallets; a user can use them to maintain and manage his Ripple transactions. The user’s data is thus stored offline, which means it is safe from hacking, providing a layer of additional security. It must however be borne in mind that as opposed to many other non-physical wallets, hardware wallets are not free and can cost upward of $100.