Ripple has built a reputation as the 'banks' cryptocurrency.' However, there is still a great deal of confusion as to what the Ripple ecosystem entails, how its payment solutions work and how these affect the value of XRP. In this article, we endeavor to shine a light on the different facets of the Ripple ecosystem — and what people are actually investing in when they buy XRP.
Ripple the company
'Ripple' is a privately held company responsible for the creation, development, and deployment of assets and services like XRP and RippleNet. Registered in Delaware as Ripple Labs Inc, and operating in California as a "Foreign Corporation" (which in layman's simply means it is registered out-of-state) the company rebranded to Ripple in 2015. Retail investors cannot invest in Ripple Labs Inc.
The initial idea behind Ripple and its solutions is credited to Ryan Fugger and Jed McCaleb. In 2011, McCaleb began working on a digital currency which was able to achieve consensus without the mining process witnessed in bitcoin but rather would verify transactions when all members of the community were in agreement.
Since 2004, Fugger had been working on a monetary system which would be decentralized in nature and would facilitate the creation of value systems specific to a community. In 2012, McCaleb, working with well-known FinTech investor and disruptor Chris Larsen, engaged Fugger with the idea of combining their ideas in order to fill a gap in the market.
Ultimately Fugger gave leadership over to McCaleb and Larsen who subsequently co-founded OpenCoin in September 2012. OpenCoin, a private company, started working on the creation the of a set of tools designed for use in the global context as a way to quickly and efficiently transfer value. At the time the set of solutions comprised the ripple protocol (RTXP) and the Ripple payment and exchange network.
OpenCoin held two funding rounds in 2013. In the same year, OpenCoin changed its name to Ripple Labs. Now going just by Ripple, the company is responsible for creating the digital currency Ripple (XRP) as well as RippleNet.
The XRP digital currency
XRP is the native cryptographic asset of the XRP ledger. In the cryptocurrency market, it is sometimes referred to as Ripple because of its association with its parent company.
Ripple Labs Inc is currently defending a number of class action lawsuits which allege the sale of the XRP token was promoted as a security. The company rejects the allegation and requested last November that the David Oconer against Ripple Labs case be heard in Federal Court.
In response to the confusion common in the market regarding the distinction between the two, Ripple has enunciated the difference stating: "XRP is the digital asset native to XRP Ledger. The XRP Ledger is an open-source, distributed ledger. Ripple is a privately held company."
The XRP ledger is used to record and the ownership and transfer of the XRP digital currency. In its initial days, the code was only accessible to the company. However, in 2013, Ripple Labs made the code open-source, allowing the community to be able to maintain the Ripple network. This was in response to concern regarding the centralized nature of the Ripple network at the time.
However, there are still concerns that the XRP ledger is centralized due to the fact that the Ripple company controls a large number of the validator nodes on the network. The company has pledged to gradually reduce this number. As at October 2018 Ripple controlled just under 50% of the XRP validator nodes.
The XRP digital currency has a maximum cap of 100 billion units. In another major criticism of the project, the Ripple company is holding the majority (around 52 billion) in escrow, and in all about 64 billion XRP are not in circulation. This means that only 36 percent of the digital currency is actually held by users, a stark contrast to the majority of major cryptocurrencies.
XRP can be traded for US dollars on digital currency exchanges such as Kraken, Bitfinex, Bitstamp and a few others. On most exchanges, however, XRP trading is crypto to crypto only. While the use of XRP is essential to one of the services contained in the RippleNet ecosystem, it is currently not a requirement for the majority of them.
XRP features fast settlement times. Ripple claims it achieves finality in just four seconds and "can handle 1,500 TPS – a throughput on par with Visa and other card networks. This is because XRP was created specifically for enterprise use to provide liquidity for international transactions."
The 'RippleNet'
RippleNet is a set of tools developed by Ripple designed to improve the global value transfer systems especially as it pertains to financial institutions and businesses. RippleNet is comprised of three payment solutions: xRapid, xCurrent, and xVia.
In reference to RippleNet, the company has explained: "As a global payments network, RippleNet creates a modern payments experience operating on standardized rules and processes for real-time settlement, more affordable costs, and end-to-end transaction visibility. It allows banks to better compete with FinTechs that are siphoning off customers disappointed by traditional transaction banking services."
xCurrent is Ripple's answer to the Swift system used by financial institutions to process transfers across borders. It allows banks to message each other in real-time and results in instantly settled cross-border payments. The software finds the quickest and most efficient pathway to settling transactions. xCurrent is currently at varying stages of deployment by a number of leading banks. However, it is important to note that it does not require the use of XRP and supports the use of fiat currencies.
xRapid is the logical continuance of the current service. xRapid works similarly to xCurrent. However, it requires the use of the XRP digital currency. XRP provides the liquidity needed in cross-border transactions and negates the need for costly Nostro accounts (the bank accounts that banks hold in foreign currency in another bank to facilitate foreign exchange transactions).
While Ripple has not provided the statistics of how many of the financial institutions which are part of the RippleNet ecosystem actually use xRapid, and therefore XRP, to transfer value, it is _has _stated that some of them do.
Lastly, xVia is the solution in the RippleNet ecosystem designed for payments between corporates, payment providers and banks. It is an API which connects users to the standardized RippleNet ecosystem. It offers specialized tools essential for businesses such as invoicing.
What are you investing in?
As mentioned above, retail investors cannot buy into Ripple the company, and only the XRP cryptocurrency can be purchased on exchanges. They are not the same thing.
While the increase in adoption of RippleNet has helped to cement XRP firmly in the top three digital assets in the market (both XRP and ETH have held the #2 spot by market cap in the last couple of months), it is important for cryptocurrency investors to be aware of the fact that XRP is only actively used by one of RippleNet's payment solutions — and that is not the one that is seeing the most commercial user uptake.
Recent announcements about major institutions partnering with Ripple should be examined carefully, as typically these engagements are about payment processing technologies and do not involve the use of XRP.
If you are holding XRP because of its potential future value based on fundamental demand, the adoption of xRapid is be a key metric to monitor, in addition to other potential future XRP adoption use cases as they will drive the real-world demand for XRP.