The Ripple network is a protocol that acts as an intermediary for global payments between banks. For example, Bank A can transmit a payment to Bank B using one fiat or cryptocurrency (e.g., USD) and Bank B can receive the payment in another fiat or cryptocurrency (e.g., Euros). Typically, these transactions are expensive costing around $1.6 trillion per year, and time consuming taking 3-5 days to settle. Using the Ripple network, global payments are settled in a few seconds with extremely small transaction fees. This is accomplished through the use of gateways. For example, when converting between US and Canadian dollars, Bank A transmits its payment in US dollars to a first gateway, which instructs a second gateway to release funds to Bank B. Bank B then receives the equivalent amount in Canadian dollars from the second gateway. The first gateway then owes the second gateway the payment from Bank A. Instead of transmitting an IOU, the first gateway transmits an equivalent amount of cryptocurrency (the Ripple token XRP) to the second gateway and the transaction is immediately settled. As such, the Ripple token XRP is used as a bridging currency between the gateways and also to pay transaction fees to prevent users from spamming the network.

Pros: Used in a protocol for international payments that significantly reduces transaction fees and allows for real-time settlement; strong leadership in CEO Brad Garlinghouse who held senior positions at AOL and Yahoo!; banks are beginning to test and adopt the protocol

Cons: About 60% of Ripple tokens XRP are owned by Ripple; there are 100 billion XRP in circulation and the amount of XRP destroyed per transaction in fees is miniscule (~10 tokens are destroyed per million transactions), so the supply is not decaying and banks do not need to hold onto a large amount of XRP to use the protocol; XRP is currently being used as the bridging currency, but the banks can select another currency and are likely to select one that has higher liquidity such as bitcoin or ether; the Ripple protocol uses validator nodes to confirm transactions making it a centralized network

Analysis

To perform an objective analysis, each cryptocurrency is rated based on the following factors: (1) validation method; (2) leadership; (3) community participation in development; (4) transaction volume and market capitalization; (5) industry participation; (6) security; (7) usability; (8) technical features; (9) growth; (10) legal risks; and (11) estimated time of arrival.

Validation Method

Unlike Bitcoin, Ethereum and many other cryptocurrencies, Ripple does not use a proof-of-work (POW) or proof-of-stake (POS) system to validate transactions. Instead, a recommended list of a little over 50 trusted nodes are selected to validate transactions on the Ripple network. These nodes are operated by companies and organizations, such as Microsoft, MIT, and CGI. Although this validation method does not require the computing resources of a POW system, the network begins to resemble a client-server relationship where the trusted nodes act as servers. Unlike many other cryptocurrencies, the Ripple protocol is not decentralized and the trusted nodes have control over the network. For example, the trusted nodes control validation, vote on protocol changes, and can modify fees.[1]

Leadership/Community Participation

The Ripple leadership includes CEO Brad Garlinghouse who previously served as President of Consumer Applications at AOL and Senior Vice President at Yahoo!. The CTO Stefan Thomas previously created several Bitcoin libraries that are currently in use by Bitcoin businesses.[2] This team has amassed years of experience and is very knowledgeable in both cryptocurrency and the broader software technology arena. Ripple includes over 50 contributors who are actively improving the functionality of the network.[3] Software updates are added on Github on a regular basis.

Transaction Volume and Market Capitalization

XRP has a market cap of about $30B and a transaction volume of over $1B per day.[4] However, while 100 billion XRP tokens have been created over 60% are owned by Ripple.[5] This means the majority of the tokens are not being circulated and if Ripple cashes out, the market could crash.

Industry Participation

Several banks have indicated an interest in the Ripple network with some beginning to experiment with the protocol. For example, Moneygram, American Express, CIBC, UBS, Banco Santander, Bank of America, YES Bank, RBC, National Bank of Australia, Unicredit, and more have agreed to test Ripple’s distributed ledger.[6]

Security

Operating in essentially a client-server system, Ripple has many of the vulnerabilities of legacy systems. If a validator node gets hacked the entire system may be compromised.

Usability

As mentioned earlier, the Ripple token XRP has two main functions: (1) as a bridging currency between two parties transacting in different currencies and (2) as a form of payment for transaction fees.[7] Unfortunately, the bridging currency doesn’t have to be XRP, and banks will likely prefer a global reserve currency having higher liquidity, such as bitcoin or ether.[8] Additionally, the transaction fees on the network are extremely small (~10 XRP per million transactions).[9] Even though this will encourage banks to use the Ripple protocol, each bank only needs a few hundred XRP to transact for years.

On the other hand, measures have been taken to encourage users to select XRP as the bridging currency in the network. CEO Brad Garlinghouse suggested that XRP removes the need for currency exchanges to maintain local currency accounts in remote locations.[10]

Technical Features

The Ripple network includes a decentralized ledger operated by a network of servers (trusted nodes).[11] The decentralized ledger follows the Interledger Protocol (ILP), where a sender sends one form of payment (e.g., Mexican pesos) to a first gateway via a first ledger. A second gateway releases a second form of payment (e.g., Japanese yen) to a receiver via a second ledger. Then the first gateway sends a third form of payment as a bridging currency (e.g., XRP tokens) to the second gateway to settle the transaction.[12]

Because the Ripple network is not fully decentralized, it scales much better than competitors like Bitcoin and Ethereum. While Bitcoin and Ethereum can handle about 10 transactions per second, Ripple blows them out of the water in terms of scalability and delivers 1500 transactions per second! The transaction speed of Ripple is also significantly better as it takes only a few seconds to settle a transaction.[13]

Growth/Legal Risks

XRP’s potential for growth is curbed by the fact that Ripple owns over 60% of the tokens and only 10 XRP are destroyed in fees for every million transactions! Although destroying XRP over time should make the currency scarcer, the amount of XRP is only expected to decline by 0.29% over the next 100 hundred years at the current destruction rate.[14]

Additionally, even though XRP is only valued at about $1 per coin, because Ripple has issued an extremely large number of tokens, XRP’s market cap is on par with Bitcoin and Ether. Despite all of this, XRP may continue to grow as more banks and currency exchanges continue to experiment with and adopt the technology.

Estimated Time of Arrival

Ripple is mainly in the testing phase. While further along than many other cryptocurrencies, it is yet to be seen whether banks will use the distributed ledger protocol for foreign exchanges.

ETA: 2019

Conclusion

Although many in the cryptocurrency community seem to think XRP is overvalued, because it’s not necessary as a bridging currency in the Ripple network and banks only need a marginal amount of XRP to transact via the Ripple network, there are arguments in its favor. For example, XRP is part of a protocol that has captured significant interest in the banking industry. However, the downside risk does not seem to outweigh the benefits at this point, and it’s hard to justify a $30B market cap for a token that may not be utilized in the Ripple network.

[1] https://ripple.com/insights/xrp-ledger-decentralizes-expansion-55-validator-nodes/

[2] https://ripple.com/company/leadership/

[3] https://github.com/ripple/rippled

[4] https://coinmarketcap.com/currencies/ripple/

[5] https://www.coindesk.com/counterargument-value-proposition-ripples-xrp-token/

[6] https://www.fool.com/investing/2017/12/17/5-big-banks-currently-testing-ripples-blockchain-t.aspx, http://fortune.com/2018/01/11/ripple-moneygram-xrp-cryptocurrency-bank-transfers/, https://www.influencive.com/amex-ripple-partner/

[7] https://www.coindesk.com/ripple-medieval-banking-digital-twist/

[8] https://www.forbes.com/sites/ksamani/2017/12/20/the-bear-case-for-xrp-bitcoin-futures-edition/#6810ec1d14e6

[9] https://steemit.com/cryptocurrency/@primeer/why-ripple-token-xrp-is-terribly-overvalued

[10] http://fortune.com/2018/01/11/ripple-moneygram-xrp-cryptocurrency-bank-transfers/

[11] https://ripple.com/build/fees-disambiguation/

[12] https://interledger.org/rfcs/0001-interledger-architecture/

[13] http://www.valuewalk.com/2018/01/bitcoin-vs-ethereum-vs-ripple-comparison/

[14] https://steemit.com/cryptocurrency/@primeer/why-ripple-token-xrp-is-terribly-overvalued