Cryptocurrency has transformed the financial landscape and introduced a new investment option for many people. Not only that, it has also introduced a new way different from the traditional banking system where people can transact or store the value of the assets they hold. In the era of the digital revolution, there are several different options you can choose from in terms of which crypto asset you want to buy and hold and which blockchain you find fulfilling your requirements. One particular cryptocurrency we are going to discuss here is the XRP.
XRP is a native token of the XRP ledger, a blockchain project designed by Ripple Labs. Due to its nature of providing fast and seamless transaction speeds, Ripple uses it in solutions to help customers. The blockchain on which XRP operates is an open-source blockchain called XRP ledger (XRPL), and the transactions are facilitated by the Ripple transaction protocol (RTXP).
It is used to facilitate transactions on the Ripple blockchain network and can be found on almost all the crypto exchanges present today. Unlike some other cryptocurrencies, like Bitcoin, XRP is not mined; instead, it already comes premined, which means that the token was created or mined before the project was launched to the public.
The maximum token supply was set to 100 billion, and the distribution was made in three separate ways. Eighty billion XRP tokens were allocated to Ripple. Fifty-five billion of these tokens were locked into an escrow account to ensure a stable supply of the XRP. Twenty billion tokens were received by the co-founders and core team of Ripple. The remaining XRP are released at a rate of less than 1 billion per month.
While some may find this way of establishing a cryptocurrency to be unconventional, the company has maintained that this was a necessary step to provide a solution that would reward the project’s founders, developers, and early investors.
XRP is the fifth largest cryptocurrency in the world by market capitalization at the time of writing this article.
We will now dive into what makes the XRP cryptocurrency different from some of the most famous alternatives out there, like Bitcoin and Ethereum. To understand this, we will look into the consensus mechanism it follows and the use cases it serves. We will also find the reason why this digital asset is known for providing seamless high-speed transactions.
Unveiling the Ripple Protocol
Understanding the Ripple Protocol is key to grasping how XRP operates, as it will provide insight into the unique technology that sets it apart in the cryptocurrency realm.
Consensus Mechanism
Ripple has its unique way of validating transactions. The consensus mechanism they use derives its name from the name of the blockchain itself. The consensus method is called the Ripple Protocol Consensus Algorithm (RPCA).
This method differs from the traditional POW and POS mechanisms in a manner where the validation of transactions is dependent on a number of independent nodes. The nodes will validate a transaction once they all agree on it. The method is particularly designed to prevent double-spending as the system is designed in a way that it detects which transaction request came first and will delete all the rest. This also makes it very fast, and the average time when a transaction is completed is merely about four seconds.
Efficient and Swift
As mentioned earlier, the consensus mechanism employed by Ripple makes it conducive for completing transactions in a quick time. The other positive aspect of this method is that it makes it very energy-efficient and environmentally friendly. It doesn’t rely on high computational power and arrays of computers solving complex mathematical puzzles to validate the transaction. The role falls on the Validators, who are entities responsible for confirming the transactions after working together to achieve consensus, thus achieving integrity and security at the same time.
As a result of these innovative mechanisms, XRP transactions boast remarkable speed and cost-effectiveness. The ability to settle transactions in a matter of seconds positions XRP as a viable solution for real-world applications, particularly in the realm of cross-border payments.
Use Cases of XRP
XRP does not only serve the purpose of being a digital asset. It has several other practical applications, which we are going to discuss here:
Facilitating Cross-Border Payments
The most noteworthy application of XRP is facilitating cross-border payments. XRP has certainly revolutionized how cross-border transactions are handled in the present age. The traditional method of carrying out international transactions often had the unwanted side effects of delays and high fees being charged due to the involvement of multiple intermediaries. The XRP has eliminated the need for such intermediaries and, therefore, provides interested parties with a rapid transaction settlement involving minimal costs. The feature hasn’t gone unnoticed, as financial institutions and payment service providers are using this service to facilitate their cross-border transactions.
Partnerships and Collaborations
Bank of America, Standard Chartered Bank, and Santander Bank are some examples of major financial institutions that have formed a partnership with Ripple. The purpose of the alliance is not only to facilitate high-speed cross-border payments but also to provide liquidity solutions to banks or explore blockchain-based innovations that will become instrumental in resolving real-world financial problems.
Microtransactions and Micropayments
The low transaction fees of XRP make it well-suited for managing microtransactions and micropayments. This opens up possibilities in areas such as content monetization, online tipping, and pay-per-use services. XRP’s ability to handle small-value transactions efficiently positions it as a viable solution for emerging models of digital content distribution and online commerce.
Differences from Bitcoin and Ethereum
To understand why XRP holds a significant place in the cryptocurrency realm, we need to look at how it differs from other well-known cryptocurrencies like Bitcoin and Ethereum.
Consensus Mechanism and Energy Efficiency
Bitcoin uses the POW mechanism, which is very energy-intensive. Ethereum uses the POS mechanism, which is more energy-efficient but lacks transparency. XRP has its unique consensus mechanism, as discussed above, which is not only energy efficient but also validates transactions at a much quicker rate.
Use Case Focus
While these three cryptocurrencies serve the purpose of providing an alternate form of currency in place of traditional fiat currencies, they differ from each other in terms of the use cases they serve. For example, Ethereum is mostly used in dApps, smart contracts, and NFTs, whereas XRP is used to facilitate cross-border payments and act as a currency exchange system. Bitcoin is mostly used as an investment option or as a payment medium.
Centralization vs. Decentralization
Bitcoin and Ethereum are known for their decentralized nature, where no single entity holds the entire authority. XRP, however, has been criticized for being centralized in nature due to the validator structure and the fact that it comes premined.
We have a summary of how each of these three different cryptocurrencies differentiate themselves from each other and the specific use cases they serve.
Risks and Challenges
While XRP presents innovative solutions and distinctive features, it is crucial to address the potential risks and challenges associated with its use and adoption. Some notable events in the XRP history have raised some concerns regarding its popularity and the potential impact it can have on the crypto market.
Regulatory Considerations
The first encounter of Ripple Labs with the regulatory authorities took place in 2015 when the Financial Crimes Enforcement Network (FinCEN) charged Ripple Labs and XRP an amount summing up to $700,000. The allegations against them included selling XRP without authorization and failure to follow the Anti Money Laundering (AML) rules in the process. Ripple Labs resolved the matter by registering with FinCEN and accepting to implement the AML program.
In 2019, Ripple founders were handed a lawsuit filed by XRP investors who raised accusations against the founders for showing intent to defraud and deceive its investors.
In 2020, the SEC sued the company for selling XRP as an unlicensed security. The justification behind this allegation was since Ripple can decide when to release XRP, they should have registered it as a security. However, in July of 2023, a judge ruled that XRP is not a security which was considered a major win by the crypto community for Ripple.
The verdict also resulted in many exchanges relisting XRP onto their exchanges; the most noticeable example among them was Coinbase, which had delisted XRP in the past after it was declared by the SEC as an unlisted security. Also, it reignited the expectations of many crypto enthusiasts that the industry would be allowed to flourish in the US, which at the time, many believed was an arduous ask.
Some legal experts, however, still raised questions about how the cryptocurrency market should be regulated, and a clearer set of regulations is required in place so that such incidents can be avoided in the future that can shake investors’ confidence. The charges against Ripple also included the distribution of $1.3 billion worth of XRP tokens to its stakeholders, which was considered a violation of the SEC rules. The CEO of Ripple Labs, Brad Garlinghouse, and Execute Chairman Christian Larsen were also charged in the lawsuit. The case against Garlinghouse and Larsen was, however, withdrawn by the SEC in 2023, which was considered another major victory by the XRP enthusiasts.
Price Volatility
Like many cryptocurrencies, XRP has experienced periods of significant price volatility. Various factors, including regulatory developments, market sentiment, and broader economic conditions, can influence market fluctuations.
The notable period where XRP witnessed a significant rise was in the crypto bull market of 2017, when the XRP token reached an all-time high of $3.40. however, from there on, the token has experienced a great decline and is currently trading at $0.59 at the time of writing this article.
Another important aspect to note is that XRP’s transaction mechanism doesn’t involve a transaction fee commonly found in other cryptocurrencies. Instead, when a user initiates a transaction, a small fraction of the XRP being sent is effectively removed from circulation or “burned.” This distinctive approach positions XRP as a deflationary asset, where the total supply gradually diminishes over time. However, it’s important to highlight that the deflationary effect is a slow process; the current burn rate suggests that it would take an estimated 70,000 years for the total XRP supply to reach zero.
Community Concerns
The cryptocurrency community has raised concerns about the centralized nature of XRP and its connection to Ripple Labs. The fact that XRP is not mined and comes as premined means that Ripple holds the power of how XRP is controlled. The XRP Ledger relies on a set of validator nodes to confirm transactions and maintain the network. While anyone can technically run a validator node, the default UNL (Unique Node List) that determines which nodes are trusted is maintained by Ripple. Critics argue that this control over the default UNL contributes to a more centralized system.
Still, XRP maintains a huge following as it is one of the largest cryptocurrencies by market capitalization, and many crypto analysts and enthusiasts believe that XRP will witness a meteoric rise again and will provide many with the opportunity to make significant gains in their financial portfolio. It is important to note here that investing in cryptocurrency involves risk, and you should familiarize yourself with the risks involved as it will help you in making informed decisions.
Future Outlook and Developments
Continuous technological advancements within the XRP ecosystem, ranging from scalability upgrades to enhanced security features, underscore its commitment to innovation. As blockchain and cryptocurrencies gain wider acceptance, XRP’s potential adoption in traditional finance, particularly for efficient cross-border payments, positions it as a viable solution for optimizing financial processes.
Monitoring partnerships with mainstream financial entities provides valuable insights into the ongoing integration of XRP into traditional economic systems.
In conclusion, the exciting possibilities for XRP, from technological advancements to increased adoption, are closely tied to the broader evolution of the cryptocurrency space. Staying informed and adaptable to the dynamic nature of the crypto landscape is key for making informed decisions about XRP’s role in financial portfolios.
