I’d like to start this article off with a thought experiment. Imagine you receive a phone call from your email service provider, and they tell you that delivering an email from now on will take 3 to 5 business days. From this day onward, an email sent on Monday will arrive in the recipient’s inbox by Wednesday at the earliest.
If all email service providers did this, the world of business would come to a grinding, shuddering stop. The way millions of people work would have to fundamentally change, and the global economy could conceivably collapse.
It’s a ridiculous notion of course because people would simply not stand for it. We expect instant communication and we’re not about to settle for less.
In the world of banking however, waiting for 3 to 5 business days for a money transfer is considered normal. We’ve never known anything else and think of Banks as timeless institutions devoid of innovation or change.
Only with institutions like this, could SWIFT – the Society for Worldwide Interbank Financial Telecommunications – survive for nearly 50 years. This group of banks was founded in the 1970’s with the mission of standardizing international money transfers.
It did this quite successfully at first, but unfortunately failed to keep up with the times. The result is an extremely inefficient international financial network, which fails to utilize modern advances in technology. In order for the system to work for example, $27 trillion dollars need to be parked in the international banking system in order to settle payments between banks. It seems ironic, that in an age concerned primarily with the control, creation and distribution of money, making a simple money transfer is still such a huge pain.
Ripple may be about to change that.
What is Ripple?
Importantly, Ripple is actually two things:
Ripple Labs was founded in 2012 by Chris Larson and Jed McCaleb and was originally called OpenCoin. The San Francisco-based corporation has grown significantly since then, completing 9 funding rounds, and raising over $90 million dollars. With this money, Ripple CEO Brad Garlinghouse has managed to attract some of the industry’s top talent as well as grown his team to 150 employees.
The reason I’m drawing your attention to this rather old-school corporate entity is because while Ripple was not the original creator of XRP, a cryptocurrency which – at the time of writing – has a market cap of $20 billion dollars, they were gifted a significant amount of XRP from the original creators.
Indeed, Ripple has an evolutionary mission, rather than a revolutionary one. Where most cryptocurrencies see fiat as the enemy, Ripple embraces banking institutions, hoping to solve the $1.6 trillion-dollar payment problem in the process.
To help them do this, they created the eponymous payment protocol Ripple.This protocol is a ledger of transactions for its native cryptocurrency XRP. The purpose of XRP is to provide liquidity and facilitate instant and secure international transactions with almost negligible fees.
Importantly the payment protocol can run independently of Ripple (the company), although CEO Brad Garlinghouse has made it clear that they will continue to fund and support the project. His reasons for doing so are clear.
The Ripple protocol plays a crucial role in the Ripple ecosystem. It holds all the information required to build a sophisticated international payments infrastructure. You can think of users balances, transactional information as well as offers to buy and sell currencies as just a few examples.
But most importantly, the protocol provides interoperability. Without it, Ripple would have to build customized solutions for each proprietary banking system around the world. By using the protocol and its native currency XRP, Ripple can establish a global network of institutions which can efficiently communicate and transfer funds. In short, Ripple is doing for payments what SMTP did for email.
What does Ripple (the company) do?
Ripple does a lot of things, but we should start with RippleNet. This is an international network of payment providers, banks and other financial institutions, which use Ripple’s software. Ripple’s software is called Ripple Connect and it’s responsible for giving users the ability to make transactions with each other.
Institutions which are members of RippleNet use the software and can therefore access three innovative solutions (as of January 14th 2018):
- xCurrent – allows banks to instantly settle cross-border payments with end-to-end tracking. Check out their informational video for a visual explanation.
- xRapid – uses XRP to provide liquidity to payment providers who want to minimize liquidity costs while improving their customer experience, especially in emerging markets.
- xVia – is an API which enables the transfer of funds throughout various networks using a standard interface.
To understand why these three solutions are such a big upgrade, we need to take a brief look at what Ripple stands to replace: the SWIFT network.
In its essence the SWIFT network is a communication service, handling over 5 billion messages a year for over 9,000 banks. When an international payment is initiated, it spurs the following sequence into action:
- Fraud checks
- Anti-money laundering checks
- Clearing funds into the payment service
- Currency exchange
- Receipt of payment from the receiving bank
- Crediting the funds to the recipients account
These six steps are the reason why payments can often take several days to arrive and cost roughly $45 to complete. Banks using Ripple’s software can do all this in an automated, technologically savvy way. The result is a much quicker and cheaper way to transfer money across borders.
How does Ripple’s blockchain work?
By this point you may be asking yourself exactly how Ripple manages to run such software and how it ties into the world of cryptocurrencies. The answer is Ripple’s open-source, semi-permissioned blockchain, which has three key features. These are:
- Gateways – these allow for maximum interoperability, such as transferring non-native assets onto a particular blockchain. Using Gateways banks could hold, sell and buy BTC or Litecoin for example on the Ripple Network.
- Issuance – this term describes the ability of parties to open channels between each other to hold and transfer non-native assets like Gold at very low fees.
- Trust lines – these are Ripple’s way of providing security for an issuance. An issuance can only be done between parties which trust each other. XRP on the other hand can be bought and sold from anyone, and does not require trust lines.
With these three features, the Ripple blockchain enables cheap transactions across many different asset classes. This provides a powerful network for banks and financial institutions to participate in the world of cryptocurrency and reduce costs in the process.
What role does XRP play in the Ripple ecosystem?
If you’re not deeply involved in the world of financial services, you may never have heard about liquidity. Liquidy in its simplest definition describes the degree to which something can be bought or sold quickly.
For banks liquidity is a very important topic. In order to provide their customers with the ability to perform international transactions, they need to open and maintain accounts with each institution for each currency. Doing so is capital intensive and stops banks from generating revenue by having to hoard cash rather than lending it out.
Additionally, more exotic transactions, from Mexico to South Korea for example, may well include additional trading partners which add more costs. Banks find it impossible to price competitively in such conditions, and this results in high fees for customers.
This is where Ripple comes in. By using its protocol and its native currency XRP, Ripple manages to bridge any two currencies and institutions directly. No need for a lengthy settlement process, no need to open up and manage accounts with other banks, and no need for additional trading partners.
Thus, XRP stands to significantly reduce the operational costs for liquidity providers. This, in turn, should translate into much lower fees and much shorter transaction times for normal bank customers like you and me.
(Be sure to check out Ripples full vision for XRP here.)
What does the future hold for Ripple
According to Ripple CEO Brad Garlinghouse: “we are in the earliest stages of a transformative change in how transactions are managed.” Whether or not you believe this statement, will determine how you choose to predict Ripple’s future.
Last year, roughly $180 trillion worth of cross-border payments were made, at a cost of $1.7 trillion dollars. Ripple’s solution almost eradicates these costs. The team, the technology and the execution all seem to be on point and there is no doubt that SWIFT will have to be replaced soon.
Additionally, I don’t see any serious competition for Ripple (just yet). Most cross-border services offering payments are closed systems. AliPay for examples offers almost instant international payments. The catch is that payments are only possible between parties that are on the AliPay network. Ripple on the other hand offers interoperability, meaning it manages to create an “internet of value”, where funds can be transferred as easily as Emails between different providers.
That hasn’t stopped luminaries like Nathaniel Hopper criticising XRP and casting doubt over its utility. Indeed, there are questions over how useful XRP is, considering Ripple’s ability to interoperate with so many non-native assets.
These questions may soon be answered however, as Ripple announced a trial partnership with MoneyGram. The exciting part here, is that the partnership will involve XRP and use Ripple’s xRapid solution to provide international liquidity to MoneyGram. Of course, it’s just a trial partnership as of now, but it’s still a very positive step for Ripple.
Disclaimer: The content published on thecoinoffering.com should not be taken as investment advice. Please do your own due diligence before making any investment in any asset.