What is XRP?

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robertstevens

Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.

While Bitcoin has popularised the notion of cryptocurrency as a store of value (a fancier way of saying ‘speculative investment’), this is far from the only use of cryptocurrencies. XRP was launched in 2012 by the co-founders of Ripple Labs, a payments company that maintains the XRP network and builds tools to hasten its adoption. As of May, 2021, the coin has a market capitalization of $60 billion USD. The figure is reached by multiplying the 46 billion XRP in circulation by its price, $1.29. This is far smaller than the market cap of Bitcoin, which stands at $929 million as of this writing.

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What is XRP?

Though XRP launched in 2012, its story may well predate Bitcoin, which came online in 2009 after development by its pseudonymous founder, Satoshi Nakomoto.

In 2004, a precursor to XRP called Ripplepay was developed by a software engineer called Ryan Fugger. Fugger later merged this idea with work completed by Jed McCaleb, Arthur Britto and David Schwartz, who were working on a blockchain payments system.

Chris Larsen, a venture capitalist, also joined this group in 2012 and would later become CEO of Ripple. The two groups had been working on separate projects, but joined together to create OpenCoin. The company’s name eventually changed to Ripple Labs.

Between 2014 and 2018, over 100 banks signed up to use the Ripple protocol. However, these banks did not convert all of their money to XRP tokens, since the value of the cryptocurrency is incredibly volatile. Instead, they use XRP through a financial messaging technology called RippleNet, developed by Ripple Labs. As of May 2021, Ripple counts Santander, American Express and Siam Commercial Bank among its clients.

Why use RippleNet?

The main point of XRP and RippleNet is to help banks move money across the world.

International transactions can be cumbersome to process and come with large transaction fees. Moreover, current cross-border financial systems demand that businesses set aside a lot of money to fulfill their monthly payment obligations, such as salaries or taxes. Larger companies have to tie up potentially billions of dollars to fulfill these obligations. Often these amounts are in local currencies, adding another level of complexity.

These payments can take a long time to process. Normally, a supplier is paid on credit within 30 or 60 days. This credit costs money, driving up the prices of goods and services.

Ripple promises that things get a lot easier if you convert that money to XRP and send it through the blockchain. The cost of an XRP transaction is very small and transactions are processed within three to five seconds.

Funds that would otherwise be locked up for days before payments are settled can be put to better use. And suppliers could be paid a lot sooner, helping companies secure cheaper deals. A report from a Santander fintech summit estimated the potential savings of using a more distributed system at over $20 billion.

Another advantage to traditional financial payments networks is that the XRP blockchain is decentralized(ish). Transactions on the XRP blockchain are validated by a network of more than 150 pre-approved independent validators. Ripple operates six of them.

This structure is called a Federated Consensus. It means that there is less chance of a single point of failure, since those validators would all have to conspire to ruin the blockchain. (However, the number of validators is trivial compared to the number of validators on the Bitcoin blockchain, which is estimated at over 10,000).

How is XRP different from Bitcoin?

Speed and low cost are the main advantages that XRP has over cryptocurrencies like Bitcoin, where batch of transactions takes 10 minutes to clear. At peak hours, transactions can take a couple of hours. On the other hand, XRP’s blockchain can process about 1,500 transactions per second.

Bitcoin transactions are processed by a vast network of power-hungry computers. To ensure that miners remain profitable, Bitcoin users must foot their bills by paying hefty transaction fees. A single transaction can cost upward of $50. Meanwhile, XRP transactions cost less than a dollar.

Bitcoin isn’t very convenient for payments. The prospect of buying coffee with Bitcoin, once lauded as the future of finance, has been quietly forgotten and replaced with a new selling point—that Bitcoin is a decentralized store of value that’s resistant to inflation, censorship, and financial crashes.

XRP, however, is more suited for payments. It’s also more energy-efficient than Bitcoin. All that Bitcoin mining consumes as much energy as a small country, and the hardware needed to mine also contributes to a high startup cost. XRP works completely differently. All the XRP that will ever exist was created at its inception, and the vast majority of it is held by Ripple Labs.

Each month, Ripple sells more and more XRP to traders to raise money and to keep the price afloat. While this centralizes the cryptocurrency, it does greatly reduce the carbon-footprint of the currency. Chris Larsen, the co-founder of Ripple, said in a Medium post in April. 2021, that while the Bitcoin blockchain consumes the same amount of electricity as 12 million American homes, XRP uses that of 50.

XRP and Bitcoin thus represent two very different investments.

Bitcoin is a cryptocurrency that’s often compared to digital gold; it’s a store of value that derives that value from the resources used to extract it, in its case computing power and energy. It is also valued for its ability to process peer-to-peer transactions without the need for government oversight and—at least when compared to assets such as gold—low transaction costs.

XRP, on the other hand, is a cryptocurrency designed for payments. It also comes with the support of its creators, who are busy creating software to help financial institutions use XRP to move money around the world quickly and cheaply, and empowering businesses to negotiate cheaper deals. While Ripple claims that this will have a trickle down effect and benefit the consumer, the purpose of XRP is very different from Bitcoin’s goal of decentralized payments.

Buyer beware

The US Securities and Exchange Commission has, since December 2020, been battling Ripple for, it alleges, holding unregistered securities sales. In a lawsuit, the SEC claims that when Ripple distributes XRP to investors each month, it is actually selling securities. To do so, Ripple would have to have registered with the SEC, which it has not.

In response, Ripple claims that XRP is not a security. It is a currency, claims its lawyers. Moreover, the defendants vehemently oppose the nature of the case.

The price of XRP crashed following the lawsuit. It fell further when several major exchanges suspended trading of the coin in the US for fear that the SEC could call them out for selling securities. This depressed the price of the coin from about $0.58 to lows of $0.19.

However, at the time of the suit, the Bitcoin bull run only picked up. A few months later, the coin had made a spectacular recovery and hit heights of $1.8 in April, 2021—prices unseen since January, 2018.

How to buy XRP

Buying XRP is a little tricky. Several exchanges, such as Crypto.comCoinbase, and OKCoin, suspended trading of the coin until further notice. Things are generally trickier in the US. However, many large exchanges, such as Binance, Huobi Global, and Kraken still list the coin.

Crypto exchanges require traders to set up accounts and often require a form of identification. Once you have an account with the right exchange, you can buy a cryptocurrency or fiat currency that trades against XRP. On FTX and Bitstamp, you can buy XRP for US dollars. On most other exchanges, you’ll have to buy a currency like USDT, a cryptocurrency that’s pegged to the price of the dollar. You might incur charges for buying XRP. These vary according to the exchanges and the currency with which you complete your purchase.

Once you’ve bought the XRP, it’s yours! You can trade it against other cryptocurrencies such as Bitcoin and Ethereum, or sell it for fiat currencies. You can take that crypto off of exchanges and move it to your own private wallet and send it across the blockchain.

Last Updated June 29, 2021

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