XRP has recently overtaken ETH as the #2 digital currency by market cap. But is XRP a good investment? What will the future hold and where will the demand come from?

Ripple was one of the first digital money platforms besides Bitcoin. Like Bitcoin, the Ripple protocol comes with its own token, XRP. But unlike Bitcoin – and most other cryptos – you don’t have to use XRP in order to use Ripple.

Wait. What?!

Over the past couple of years, XRP has soared in value. While there has been a narrative around Ripple being used by banks for inter-bank and cross-border payments, few people understand how XRP is used in that process, and why XRP might – or might not – be a good investment.

Company vs digital asset

In short, Ripple is the company behind the Ripple network, which is based on an open source distributed ledger (the code was closed source until 2013, which occasioned much suspicion from the crypto faithful). XRP, meanwhile, is that network’s native digital asset. However, it’s not like Bitcoin and BTC, because XRP isn’t always required to send value on the Ripple network.

That might be a cause of some dismay to anyone who bought XRP thinking that a flood of new banking partners might drive the price higher.

Taking on Swift

Ripple was conceived less as a peer-to-peer payments system, like Bitcoin, and more as a replacement for the outdated and inefficient banking infrastructure. There are two key elements to Ripple for this use case, one of which does not use XRP at all.

xCurrent enables banks to conduct instant cross-border payments:

xCurrent is Ripple’s enterprise software solution that enables banks to instantly settle cross-border payments with end-to-end tracking. Using xCurrent, banks message each other in real-time to confirm payment details prior to initiating the transaction and to confirm delivery once it settles. It includes a Rulebook developed in partnership with the RippleNet Committee that ensures operational consistency and legal clarity for every transaction.

XRP is not required for this at all, only fiat currencies. A number of banks are now using this system or actively exploring it.

Then there is xRapid, which is designed for emerging markets and does use XRP:

xRapid is for payment providers and other financial institutions who want to minimize liquidity costs while improving their customer experience. Because payments into emerging markets often require pre-funded local currency accounts around the world, liquidity costs are high. xRapid dramatically lowers the capital requirements for liquidity… xRapid uniquely uses a digital asset, XRP, to offer on-demand liquidity, which dramatically lowers costs while enabling real-time payments in emerging markets. Built for enterprise use, XRP offers banks and payment providers a highly efficient, scalable, reliable liquidity option to service cross-border payments.

So the demand for XRP will be dependent on demand for that xRapid system, from emerging economies. Put simply, big-name partnerships with European and US banks aren’t going to make much of an organic difference to your XRP holdings (though they might spike the price thanks to confusion from speculators).

(De)centralisation

There are one or two other issues that have made the crypto community wary about Ripple, both of which amount to a lack of decentralisation. This criticism might be a little unfair; Ripple is a company, and it’s serving the legacy banking system, so it’s not the same as claiming to be digital cash for the people. Nonetheless, it may factor into questions about value and risk.

Firstly, Ripple the company runs almost half of the validator nodes on the network – something that would be unacceptable for a peer-to-peer currency. The proportion is slowly decreasing. The other factor is that Ripple also holds the majority of XRP – over 50 billion of the total supply of 100 billion. That’s quite a pre-mine.

Ripple – and probably XRP – likely have a bright future. But it’s not like traditional crypto, for several reasons. For more information, take a look at Brave New Coin’s rundown of Ripple and XRP.

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