Although bitcoin is still the king of the cryptocurrency hill, there are many pretenders to its throne, and some of them are quite different. One of the most intriguing in its diversion from several crypto-norms is Ripple, a much more centralized cryptocurrency in a very decentralized space.
What is Ripple? It’s still classed as a cryptocurrency, but the way it was founded and the way it operates are very different from some of the others out there. That’s why if you’re thinking of investing in Ripple, you need to do your research first and what better place to start, than right here.
Want to know what Ethereum is all about too? We have a guide for that as well.
Ripple is the catchall name for the cryptocurrency platform, the transactional protocol for which is actually XRP, in the same fashion as Ethereum is the name for the platform that facilitates trades in Ether. Like other cryptocurrencies, Ripple is built atop the idea of a distributed ledger network which requires various parties to participate in validating transactions, rather than any singular centralized authority. That facilitates transactions all over the world, and transfer fees are far cheaper than the likes of bitcoin. Unlike other cryptocurrencies, XRP transfers are effectively immediate, requiring no typical confirmation time.
Ripple was originally founded by a single company, Ripple Labs, and continues to be backed by it, rather than the larger network of developers that continue bitcoin’s development. It also doesn’t have a fluctuating amount of its currency in existence. Where bitcoin has a continually growing pool with an eventual maximum, and Ethereum theoretically has no limit, Ripple was created with all of its 100 billion XRP tokens right out of the gate. That number is maintained with no mining and most of the tokens are owned and held by Ripple Labs itself — around 60 billion at the latest count.
Even at the recently reduced value of around a dollar per XRP, that means Ripple Labs is currently sitting on around $60 billion worth of the cryptocurrency (note: Ripple’s price crashed hard recently, and may be worth far less than $60 billion by time you read this). It holds 55 billion XRP in an escrow account, which allows it to sell up to a billion per month if it so chooses in order to fund new projects and acquisitions. Selling such an amount would likely have a drastic effect on the cryptocurrency’s value, and isn’t something Ripple Labs plans to do anytime soon.
In actuality, Ripple Labs is looking to leverage the technology behind XRP to allow for faster banking transactions around the world. While bitcoin and other cryptocurrencies are built on the idea of separating financial transactions from the financial organizations of traditional currencies, Ripple is almost the opposite in every sense.
Backed by banks
You may have heard a lot of cryptocurrency investors and financial commentators discussing the idea of regulation. While we don’t think that’s of any meaningful concern, many worry about banks cracking down on bitcoin and the like. That’s even less likely to happen with Ripple, as it’s backed by some of the world’s major financial institutions. Santander, UBS, American Express, RBC, Westpac, and more, all have a hand in its operation and proliferation.They can even charge their own specified fees for completing transactions. That control is the biggest differentiating factor for Ripple.
In many ways, this isn’t wholly surprising, as blockchain technology holds a vast number of benefits for companies that are able to employ it effectively. However, backing a cryptocurrency like Ripple is certainly an outlier and is something that needs to be understood by potential buyers and sellers, because it gives those financial institutions a much greater level of control over Ripple than most other cryptocurrencies out there.
Where bitcoin, Ethereum, and similar are entirely decentralized, backed by thousands if not millions of global miners, meaning that nobody has any real control over the network, Ripple’s nodes are handled by these financial institutions and Ripple Labs itself. Those independent servers don’t have to provide proof-of-work calculations like bitcoin, the nodes simply validate transactions themselves — much like traditional banks do.
When that’s combined with the fact that no new XRP are being created, and that the existing numbers’ circulation is strictly controlled, it leads many to have concerns about Ripple’s future.
All of that control of the Ripple network that’s held by particular entities means that they have some abilities which are unique to this sort of cryptocurrency. The one that has detractors concerned the most is the “freeze.”
“The XRP Ledger gives addresses the ability to freeze non-XRP balances, which can be useful to meet regulatory requirements, or while investigating suspicious activity,” the Ripple guide to the feature reads. While that is something that is commonplace in traditional banking, many would argue it is the complete opposite of the true purpose of cryptocurrencies: to remove that regulation and oversight.
Effectively, Ripple nodes can severely limit XRP wallets on an individual basis, or all wallets associated with a particular node. This was demonstrated in 2015, when original Ripple Labs founder Jed McCaleb attempted to sell more than a million dollars worth of Ripple. Ripple Labs purportedly persuaded a Ripple node, Bitstamp, to reverse the transaction.
Although there are elements to the story which suggest McCaleb breached a contract with the sale, the fact that the freeze was possible at all, with centralized authorities controlling the currency’s owner’s ability to transact with it as he wishes, has others concerned for Ripple’s future. If the founding company, exchanges, and banks can control XRP to that extent, is it worth trading in Ripple at all?
At the very least, it’s important to be aware that where other cryptocurrencies give the owners near-complete control over their coins — as long as you use the right wallet-type — Ripple has much greater oversight and middle-man control.