What is Ripple XRP?

Ripple is an open-source, decentralized payment network that allows for the transfer of money in almost any form, including traditional fiat currencies like the U.S. dollar and euro. Unlike most cryptocurrency platforms, Ripple is used by major banks, businesses, and financial institutions, and it uses bank servers to confirm transactions as part of its consensus mechanism.

Ripple uses the independent XRP cryptocurrency, which is valued at $0.388 as of February 23, 2023. XRP has a total market capitalization of almost $20 billion, which makes it the sixth-most valuable cryptocurrency project on the planet, ahead of Cardano, Polygon, and Solana. It also boasts more than a quarter of a million active users.

In this AAG Academy guide, we’ll explain what Ripple and XRP are in more detail, cover how Ripple works, and look at the differences between Ripple and Bitcoin. We’ll also highlight the platform’s advantages and disadvantages, find out whether Ripple is a good investment, and answer some of the most frequently asked questions on the project.

What is Ripple?

It’s rare that the cryptocurrency industry mixes with the traditional financial world, but Ripple is a project that was built to change that. It is a decentralized platform designed to address some of the biggest inefficiencies of traditional banking — such as slow processing times, geographical restrictions, and expensive fees — by taking advantage of blockchain technology.

Ripple is mostly seen as a replacement for SWIFT (Society for Worldwide Interbank Financial Telecommunication), the communication system that allows for the execution of worldwide transactions between different banks. SWIFT basically acts as a trusted agent between two parties, and Ripple more or less does the same, while allowing users a lot more flexibility.

Unlike SWIFT and other traditional financial systems, Ripple not only supports the transfer of fiat currencies like the dollar, but also cryptocurrencies like Bitcoin. This combination of capabilities makes it a unique system that serves both the cryptocurrency industry, as well as the traditional banking industry. In fact, some of the biggest banks in the world now rely on Ripple.

What is XRP?

XRP is an independent cryptocurrency that runs on the XRP Ledger, an open-source blockchain created by Arthur Britto, David Scwartz, and Ripple co-founder Jed McCaleb. It is closely linked with Ripple because it is the network’s official cryptocurrency, chosen for its fast, efficient, and reliable nature. It’s also carbon-neutral, and supports Ripple customers’ compliance efforts.

Just like other popular cryptocurrencies, XRP is available to purchase from a wide range of centralized and decentralized exchanges, including Binance, Coinbase, Kraken, PancakeSwap, and SushiSwap. You’ll need XRP to use Ripple since that’s what all transaction fees are paid in. The average cost of a transaction is just $0.0002, making it incredibly affordable.

XRP’s blockchain works a little differently from other decentralized networks when it comes to validating transactions. Rather than opening up the ledger and verification process to anyone who wants to participate in it, XRP uses a somewhat centralized consensus mechanism, officially named the XRP Ledger Consensus Protocol.

Each participant in the protocol chooses a set of validator nodes that are run by different parties, which they essentially report to. Transactions are grouped into batches and passed onto the validators. As long as a large enough percentage of these validators agrees on a set of transactions, the server declares consensus and the transactions can go ahead.

How does Ripple work?

As we touched upon above, Ripple was designed as a replacement for SWIFT — a trusted agent between two parties. Its network infrastructure, known as RippleNet, gives banks a quick, low-cost, and reliable way to send money internationally. To explain how it works, let’s use a simple example of a Ripple transaction between two different banks.

For this example, we’ll say Bank A needs to send money to Bank B in a different country. When a transaction like this takes place, money doesn’t actually change hands, since that would be a logistical nightmare. Instead, the “hawala” method of transferring money is employed. So, Bank A provides Ripple with the funds that it wants Bank B to receive, and pays the transaction fee.

A gateway is used to “bridge” the original currency with another currency — one that is compatible with Bank B. For instance, if Bank A was in the U.S. and Bank B was in Spain, the funds would be exchanged from dollars into euros. If necessary, this can be a mix of fiat currencies and cryptocurrencies. Finally, the bridged funds are released to Bank B.

Each currency supported by Ripple has its own gateway, and multiple gateways can be used to bridge a currency if necessary. This means that if there is not a direct bridge between the currencies used by Bank A and Bank B, it’s still possible for the funds to be exchanged as necessary.

How to use Ripple (XRP)?

1) How to Activate:

• Before you can receive any XRP in a new wallet, you have to fund it with a minimum of 20 XRP. This amount is called the “base reserve.”
• Once you send 20 XRP (or the current base reserve amount) to your new XRP address, your wallet will be activated, and you can start using it fully, i.e., send and receive XRP beyond the initial amount.

2) Why Activation is Required:

• Anti-Spam Measure: The XRP Ledger is designed to be efficient and scalable, processing transactions very quickly. The requirement for a minimum balance is primarily to prevent malicious actors from spamming the network with a large number of accounts, which could bloat the ledger.
• Reserve and Trust Lines: Apart from the base reserve, there’s another type of reserve related to “trust lines.” If you set up a trust line to another asset/token on the XRP Ledger, your wallet’s required reserve increases, usually by an additional 5 XRP. This serves the same anti-spam purpose and ensures that users setting up trust lines have some skin in the game.

How to mine XRP

Many decentralized cryptocurrencies can be “mined,” which means new tokens can be generated by participating in the process of validating transactions. However, XRP does not rely on a mining process in the same way because all of its tokens were “pre-mined.” In other words, all 100 billion units of XRP that will ever exist have already been created.

Those tokens were created by the XRP Ledger, which releases a certain number of new ones into circulation periodically. A significant portion of those are owned by Ripple, which has the ability to sell 1 billion of them every month. This gives Ripple a huge incentive to help grow XRP and ensure it is successful — and its tokens become more valuable — over time.

Another portion of XRP is held in reserve and can be released into the market through sales. There is some concern that too many tokens could be released at once, thereby reducing its scarcity and diluting the value of the XRP already in circulation, but that is yet to happen.

The only way to acquire XRP through mining, then, is to first mine another cryptocurrency, such as Bitcoin or something that is easier to obtain, and then swap it for XRP using an exchange.

Pros and Cons of Ripple

Ripple’s biggest benefits, which we’ve touched on throughout this guide, are its speed, low fees, and its versatility. It is significantly faster than SWIFT, which can take over a week to send funds between banks in different countries, and considerably more affordable. In addition, Ripple doesn’t just support fiat currencies, but also digital assets, which gives it a huge advantage.

Furthermore, Ripple, unlike the vast majority of cryptocurrency platforms, is widely supported by banks and other financial institutions. Some of its customers include the biggest banks in the world, including Bank of America, Santander, Novatti, and SABB. However, Ripple is not a perfect system, and it’s important to understand its disadvantages as well.

One of those is, as we mentioned above, the somewhat centralized nature of XRP’s consensus protocol, which heavily relies on a list of default validators that goes against the original decentralized philosophy — and could increase the risk of corruption. XRP’s “pre-mined” tokens are also seen as a downside, since there’s also a risk that too many will be released at once.

The biggest disadvantage of Ripple, however, is the ongoing investigation by the Securities and Exchange Commission (SEC) in the United States. The SEC filed a lawsuit against Ripple in December 2020, insisting that it should be registered as a security since it has control over the release of XRP. Ripple denies this allegation, but the lawsuit could cause problems in the future.

Is Ripple a good investment?

With or without that SEC lawsuit, Ripple is still considered a good investment by many cryptocurrency investors. It has seen incredible growth since it launched, and with the backing of some of the biggest names in the financial industry, it seems like Ripple is here to stay. It also suggests that Ripple will attract other major partners in the future.

However, like all cryptocurrency projects, Ripple, or more specifically XRP, is volatile. Its value fluctuates considerably on a regular basis, which many investors do not appreciate. Whether or not it’s a good investment for you depends on your own situation and objectives, and as is always the case, it should be carefully researched before you put any of your money into it.

References

• Ripple Definition
• What is ripple xrp
• What is ripple a beginners guide for understanding ripple
• Which banks use ripple xrp and why