Betting On Ripple To Challenge Bitcoin: Think Twice
Written by Crypto Guru
In terms of market cap, Ripple occupies the second spot among all cryptos with an impression valuation of $128 billion. That valuation sits above that of Airbnb, Uber and Slack put together and we need to factor in a pocket change of $20 billion. Ripple was also the best performing all cryptocurrencies in 2017 rising an astounding 36,000% during the year.
From 2012, Ripple has been riding the success wave raising about $93 million from top VC firms in the Silicon Valley. These are VCs who have routinely invested in startups like Slack, Facebook and Uber just when they were starting. Therefore, the same VCs backing Ripple is an affirmation of the belief they have in Ripple’s mission and its team. But, if you are looking at Ripple to be the next Bitcoin, you should think twice before you make an investment decision.Here are some of the top reasons:
XRP and Ripple are not the same
Many people believe that everything Ripple is XRP. There is a misnomer here because with most other the coins are the same as the crypto. For instance Ethereum vs. ETH or BTC vs. Bitcoin. But, with Ripple things are different and therefore it takes an understanding of Ripple as a company.
Ripple started in 2012 and was named Opencoin at that time before transitioning to Ripple in 2015 and is presently based out of San Francisco in California. The company employs over 150 people, enjoys a nice office and sells banking software built on the blockchain technology.
What are Ripple’s activities
It has the following 3 products:-
XCurrent, XVia and XRapid.
The flagship product is XCurrent and presents banks with the ability to make cross border payments efficiently. This product uses RippleNet, which is the Ripple blockchain, but the XRP is not used. The software has been widely accepted by banks because it gives them the opportunity to save time and money while sending payments without introducing several changes or risk with their workflow. XRapid is helpful for banks to improve liquidity while trading in the emerging markets. This is also the singular product from Ripple’s basket that uses the XRP.Banks love this because it frees up large volumes of money they are stuck with, but also dislike it since it also brings along the unknowns like the XRP volatility. XVia is a product currently in the works and scheduled to be released somewhere in the first half of 2018. While being similar to XCurrent, XVia will allow entities apart from banks like payment providers and corporations for instance to send cash through banks . XVia too does not involve use of XRP
Impressed that 100 plus financial institutions are working with Ripple?
It is true that Ripple’s clients list of financial institutions is growing steadily and is beyond the 100 mark now. But, all of them use xCurrent and xCurrent does not work with XRP. Just one out of all the100 plus clients Ripple has uses the XRP and that is a small non banking financial institution named Cuallix which uses xRapid. The growing partnership with banks brings loads of good for Ripple as a company, but precious little to XRP. No, this does not mean that XRapid will never be used by banks (and therefore XRP) at any time in the near future. As a matter of fact, Ripple has laid out its business plan carefully right from the word go. Once the banks get used to XCurrent, Ripple can cross-sell XRapid to the banks, or perhaps, there may be no such move. For Ripple, the company, this could be a low priority and for investors, it could mean a long waiting game.
Compete with SWIFT?
Many people can potentially misinterpret Ripple’s focus on banking and financial institutions to assume that Ripple would rise to compete with Bitcoin given the massive volume of transactions involved in cross border payments (about $5 trillion is transacted through SWIFT) everyday. SWIFT has already woken up to the potential threat to its nearly 5 decades of existence and with an all new SWIFT Gpi having been rolled out, Ripple will need to cross several hurdles before it can hope to make any significant dent in SWIFT’s pre-eminent position in cross-border payments. SWIFT’s profits stood at $31 million during 2016 and that is a bunch of cash to let go. SWIFT employs over 2600 people and works with more than 11,000 institutions.
Ripple is not alone in revolutionizing banking
There are other companies doing this similar to Ripple. They may be lesser known because they are doing identical work WITHOUT a coin of their own. R3 is one example and has partnered with as many as 70 of the largest banks in the world. It would also be interesting to watch out if SWIFT comes out with a coin of its own, given the fact that they have already adopted Blockchain.
In 2014, Jed McCaleb who founded Ripple created Stellar Lumens (XLM) to address problems he encountered with Ripple. Stellar now occupies the 8th spot in terms of market capand boasts of deals with IBM as well as payment providers in countries like Australia, Malaysia, Indonesia and Korea. Stellar also has the potential to overtake Ripple when they shift their focus outside the banking industry. Stellar protocols also support smart contracts which is a key component of Ethereum. Stellar has also recently won KiK which is a $1B messaging app.
Ripple is controlled by RippleNet and hence not decentralized
RippleNet is controlled by Ripple and the company owns a massive 62% of all the XRP coins that exist. XRP investors are understandably worried over this and Ripple responded by locking up 55 billion coins in an escrow. As with other centralized systems, investors can only trust Ripple to keep their promise. Given the company’s strategy to release 1billion coins every month till the 55 billion coins are exhausted, they are more likely to keep the promise. But, that also puts a lot of cash into the kitty from the sale of all those 55 billion XRP tokens at the prices ruling now. But, a centralized system has more risks than whether the company will focus on fair play and have the investors’ best interests in mind.
Regulation can easily kill centralized digital currencies
Resilience is another issue with centralized digital currencies. Regulation is one weapon that can easily kill centralized digital currencies. Decentralization is a major factor that helps Bitcoin survive while the early entrants like Liberty Reserve and E-gold have fallen by the wayside. Similar weakness applies to Ripple too. Inevitably, when things start going wrong, regulators can attack a single entity.
XRP adoption will not give a price increase
Assuming that everything works according to current plans, and Ripple’s client base grows manifold and Ripple XRP is adopted by banks for all their transactions including the high value transactions, and SWIFT is nearly wiped out of business, the price of XRP should go through the roof – right? Well, this may not necessarily be so, since the price of XRP is driven up by investors who hold the coins believing it will appreciate in future. Banks moving large volumes of money across continents are not speculators. Conversely, banks will have a disincentive holding XRP sine the natural volatility of the coin will devolve on them and that is a risk they may not want to take. So, the banks will be holding the token for the least possible time they can. Considering the Ripple Net speed, that time factor is a mere 4 seconds. When actual users of the coin XRP do not hold on to the coins, the market cap of the coin will start climbing down and even taking the current transaction volume of SWIFT, it can translate to just about $230 million which is a far cry from the speculative market cap of $128 billion ascribed to Ripple
Conclusion
Ripple has demonstrated its abilities in the banking and financial industry. But, for XRP the gains would be minimal since Banks/financial institutions will neither hold nor speculate with the XRP tokens. SWIFT is already changing course to address age old issues of delays, problems with tracking transactions, and transparency. That is not good news for the XRP tokens though the impact would be less on Ripple as a company.
If you are investing in XRP, you must be concerned about the future of the coin since the company is unlikely to share its fortunes with you.
Disclaimer: This article is NOT an investment recommendation, please see our disclaimer - Get ...
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I think many misunderstand the role of xrp in RippleNet. To understand it you must understand the difference between what payment is and what settlement is. When you initialise money transaction band or FI first make payment. The payment usually consists of crediting bank contacting beneficiary bank, exchange messages about value being transferred, transaction fees, customer KYC etc. No actually money is being moved in this process. This is what SWIFT protocol does and what essentially xCurrent does. xCurrent modern day payment solution which process payments in order of magnitude better than SWIFT. For e.g. every bilaterally exchanged info is digitally signed and every misformed data is detected. This way xCurrent protocol guarantees transaction completion. With Swift protocol around 6% transactions are lost due to obsolete system no validating every data integrity being transferred between nodes.
The second stage of transaction is settlement. This actually means moving money. Before beneficiary Bank can credit it's customer with received payment, the payment must be settled. In conventional system this is done either by physically moving money from bank A to bank B or use system of so called nostro accounts. Nostro account is an account your bank or 3rd party bank holds a funded account in beneficiary bank (CLS banks). This is expensive and slow to do it because you have to have a lot of dormant money in foreign banks abroad or have to pay fees to every FI which is on the settlement path. Also due to slow settlement completion you have to insure cross border transaction to exchange price fluctuation. Because of expensive and clogged way the nostro accounts operate the money transfer is usually done once per day in so called batch payments. This is also why this days cross border remittances are so slow and expensive.
This is where xrp comes to play. Xrp ledger is open sourced and decentralised blockchain protocol to transfer value from point A to point B. Transactions on xrp ledger can be settled in under 4 sec for a fraction of a cent in terms of fees. Also xrp ledger is permissionless meaning anybody can run node and validate transactions on ledger without any special permission. Especially you don't need to be approved by ripple or added to Ripple's UNL (universal node list) to participate in transaction validation. There are many independent validators not under ripple's control.
How does it fit into RippleNet? For RippleNet to be realtime gross settlement system or RTGS, it is missing fast real-time transaction settlement. By real-time I mean that transaction is completed and settled in short time frame when it was issued (up to few minutes but no more then 5 min). This is where xrp ledger fits in. Xrp can already be used directly by FIs in xCurrent protocol to settle transaction or it can be used indirectly via xRapid or 3rd partly liquidity providers. Xrp ledger is a tool to fast gather liquidity for your transaction from multiple pools in real-time. You don't need to directly see xrp in your transaction when you initialise payment but xrp can be used in transaction without you or your bank realising it's being used.
E.g. Bank A transfer 100$ from USA to bank B. Bank B receives payment in euros (80.64€). Bank A will use 3rd party liquidity provider which uses xRapid to settle this transaction. The path goes as follows: Bank A credits it's liquidity provider with 100$ -> liquidity provider buys from open market (or already have) 100$ worth of xrp -> transfers xrp to bank's B liquidity provider or bank B directly -> bank B debits it's liquidity provider or liquidity provider sells xrp for euros on open market and transfer the money to bank B.
In this example xCurrent guaranteed transaction path and xRapid via xrp ledger settled the transaction. The execution of such transaction should be completed in about 3 mins instead of 3 days or more.
Some general concerns:
S: Banks which are using xCurrent will not use xrp.
A: They don't need to but with xCurrent they save 30% of charges. Using xrp on the path can save bank up to 60% per transactions. Why would not FI which already is participating in RippleNet now use full solution that Ripple offers?
S: Banks could make there own cryptocurrency.
A: There is not one unity of banks. There are big corporation banks tied to politics and governments and there are small independent banks which mostly pay high fees to the big guys to manage the tx settlement. Because of banking nature banks are in constant competition. Everything in banking system and FI system revolves around trust. Why would my bank use your bank's coin? Xrp is here as independent, decentralised, arbitrary medium so banks do not need to trust each other.
S: Swift can create it's own bc solution.
A: Swift already played with the ideal of making bc solution. They made PoC solution named SWIDT gpi based on hyperledger. Altho it was only PoC there solution was made to upgrade and fix their existing payment protocol not settlement. It enhanced the nostro account path finding, not the settlement itself. Besides it had to open 500 channels for 30 participants, for the whole system it's estimated around 100k channels needed to be open. Xrp ledger is single blockchain solution. You only have to be connected to one single channel / ledger in order to participate in global economy.
S: Banks could use bitcoin to settle transactions.
A: Altho bitcoin brought the blockchain technology to the world it has some drawbacks to be replacement for trustless settlement protocol. Namely slow transaction random confirmation time and small transaction throughput which leads to high transaction fees when transactions clog up the system is small concern. Greater problem with bitcoin protocol is that it relies on random PoW mechanism which is not censorship resistant. Transaction can be in any time censored or orphaned and you do not have any mechanism to detect rogue miner.
On the contrary xrp relies on deterministic consensus algorithm. Every validator has identity and any malicious validator can be detected and you can remove it from your UNL. One example: Transaction that was not accepted in the current ledger block must be accepted in the very next one. The validator which opposed can be safely determined as rogue and be removed from UNL. Xrp ledger also does not consume enormous amount electricity in order to prevent double spending attack.
References:
ripple.com/build/xrp-ledger-consensus-process/
https://www.youtube.com/watch?v=7abKUs9tYZg
https://github.com/ripple/rippled
medium.com/.../how-to-run-a-ripple-validator-digitalocean-7e5fca1c3d77
https://bithomp.com/validators
twitter.com/.../members
en.wikipedia.org/wiki/Real-time_gross_settlement
en.wikipedia.org/wiki/Nostro_and_vostro_accounts
www.investopedia.com/terms/n/nostroaccount.asp
https://en.wikipedia.org/wiki/CLS_Group
www.quora.com/How-does-the-settlement-of-payments-work-in-banks-Specifically-how-do-payment-systems-that-are-connected-to-multiple-banks-actually-settle-the-amount-between-two-banks
www.swift.com/file/7131/download?token=XzHk1ySb
www.swift.com/.../swift-gpi
Wow, scary article. Would be happy to know other experts opinion are here.
Wow, thanks for the lengthy explanation.
Good analysis. Of course, each currency will do what it can with its partners to pump up the currencies value until it doesn't work. Banks are most likely to be the least trustworthy to hold a currency in a downturn.