Ripple keeps delivering but what does it mean for XRP?

This company’s version of Steve Jobs’s famous disruptive imperative to put a “dent in the universe” would be a ripple in the pond. That might sound less mind-blowing but it is fair to say that the mission of payments startup Ripple may be no less momentous as its payment solutions continue to gain traction.

Since its birth in 2012, Ripple – or Ripple Labs as it was previously known and OpenCoin before that – has divided opinion. A major reason for that is the centralised nature of its technology, despite the blockchain that is integral to how it works, and this has been a key criticism by crypto “true believers” since the company’s inception.

Another cause for concern, or at any rate confusion, stems from the structure of the organisation itself and the products therein.

Ripple is in business to shake-up the real-time settlement systems used in business-to-business payments, especially by banks. But it is about much more than that and its vision is encapsulated in its formulations about the “internet of value”, in a vision which sees moving value being as easy as sending an image over the web or posting a comment on a social network.

However, it is Ripple’s solutions for cross-border payments by corporations that getting the most attention, in both a commercial sense and in the public consciousness. Almost every week sees Ripple announcing a partnership, with the central bank of Saudi Arabia the latest to ink an agreement to run a pilot program.

Ripple’s success in getting banks on board is the pay-off from five long years of work in which it has focused on convincing banks and other corporations that there is a cheaper and more efficient way of conducting international payments.

The growing interest in Ripple last year led to rumours that US exchange Coinbase was going to list its token, XRP. That didn’t happen but it is available on other top-tier trading platforms. Mati Greenspan, eToro’s senior market analyst, commenting on the burgeoning Ripple popularity, said: “The demand from our clients for Ripple’s XRP token has been outstanding. As a service that seeks to integrate with the banks rather than replacing them, it simply makes sense for many alternative investors to add this as part of their portfolio. As with everything crypto, we must be aware of the risk and always diversify our investments.”

Ripple’s medieval roots

Before considering Ripple’s product offerings it is worth stepping back a little – in fact as far back as the medieval trading networks of the Middle East known as hawala, and still in use today, because in essence that is what Ripple technology is based on.

The hawala networks sprang up to conduct long-distance trade. They worked because they established a channel of trust, comprised of agents at both ends of a transaction channel.

When A wants to send money to B, the individual writes down a password that only they and B know, and then gives the agent the money they want to send to B and the code. The agent, in turn, draws up an IOU note and along with the code A has provided, sends it to the agent at the other end of the channel. No money is transmitted. Instead, the receiving agent accepts the IOU, checks that B knows the password and then makes the payment to B out of the receiving agent’s own funds, which the agent trusts will be repaid by the sending agent at a later reconciliation date.

What we have just described has been repurposed by Ripple in its xCurrent “IOU” service, with the help of blockchain. In the Ripple set-up the agents are replaced with what it calls gateways. In xCurrent, IOUs are issued in tokenised form and made redeemable for the asset being transacted. If there is not a direct “trust line” between two parties the system can try to find other intermediary channels to route the payment through, and ultimately connect payer and payee or debtor and creditor.

Who’s using the XRP token?

But here’s the rub, most of the partnerships that Ripple has signed with banks are using  xCurrent, which does not use the XRP token. Ripple’s xRapid is the service that uses XRP and it is the only one that does. More often than not the many banks running trials of Ripple technology opt for xCurrent, although xRapid is also a real-time settlement system. A notable exception is money transfer outfit MoneyGram, which publicly announced it would be testing the XRP-powered xRapid.

Both of the services mentioned use Ripple’s RippleNet blockchain but it is important to appreciate the differences between the two.

If a bank uses xRapid it must meet its liquidity needs by holding sufficient XRP at both ends of its payment channel. The upside with XRP however, is there is no counterparty risk as there is with xCurrent – a bank does not have to trust that XRP is redeemable in the way they would have to with xCurrent IOUs.

The beauty of both xCurrent and xRapid (Ripple has a third service called xVia that’s only recently out of development) is that transactions can be settled in real-time precisely because no funds are actually moving down the payment channels. Instead, a message is sent – in a similar way to the SWIFT payments currently used in banking but with the difference that Ripple includes the settlement aspect –  and because there is sufficient liquidity on the gateways at both ends of the channel, the system merely releases the funds as required.

Positives and negatives

This has implications that are both positive and negative. Because XRP is not at the centre of most of its partnerships, it suggests that the speculation surrounding the price could be overdone. On the other hand, the fact that Ripple has a business that is growing, regardless of the lack of take-up of XRP, provides investors with an element of diversification – if the bottom drops out of crypto, Ripple will still have its xCurrent service.

XRP is a bridging currency, which means it can be deployed to swap in and out of fiat but that exposes banks to exchange rate risk, and even more so if the token is in thrall to speculative investors that serves to fuel price volatility – not what a bank wants when its moving funds around.

Returning to the issue of centralisation, that too has its pros and cons. There is a supply of 100 billion XRP tokens with around 60 billion of that figure held by Ripple. There is no mining involved in the Ripple blockchain and therefore no block rewards to mint new currency. Some have argued that this means there is nothing to stop Ripple from one day dumping billions of tokens on the market, but it is difficult to see why it would want to sabotage its own business. Nevertheless, the lack of transparency concerning token emission led to Ripple placing 55 million of its supply in escrow, with a release schedule of 1 billion a month for 55 months.

And what of its much vaunted “internet of value”? It has a nice ring about it and it is true that any fungible asset – where one unit is identically interchangeable with another unit of the same asset, as with crude oil say – can be exchanged, via a token through a channel but in practice none have been. There is a danger that Ripple becomes trapped in banking, thereby limiting its use-case application elsewhere in the economy. Having said that, an investor could plausibly say why worry? Given the size of the global banking industry, valued at $134 trillion in 2016, the possible rewards in this sector alone would be quite enough to chew on.

Finally, it is worth bearing in mind that Ripple, as you might expect, has competitors. For example, there is the R3 consortium which has partnerships with many banks and Stellar Lumens, set-up by a Ripple founder Jed McCaleb in 2014 and which takes a diametrically opposed route to Ripple with an open source mined currency (XLM) and a non-profit organisational structure that instead solicits donations. BlackRock, one of the world’s largest mutual fund managers is a donor.

Ripple has a lot going for it but there are possible downsides too so, as always, do your own research and due diligence.


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