There is so much hype and confusion in the blockchain, distributed ledger and cryptocurrency world and one name that keeps increasignly coming up in that space is Ripple. I often get asked about the difference between Bitcoin (still the best known cryptocurrency based on blockchain) and Ripple. So in this post I try to explain what exactly Ripple is and what makes it different from Bitcoin.
Before I go into any more detail, always, remember that investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.
Ripple v Bitcoin
While Bitcoin is a digital currency intended as a means of payment for goods and services, Ripple is a payment settling, currency exchange and remittance system intended for banks and payment networks. The idea is to provide a system for direct transfer of assets (e.g. money, gold, etc.) that settles in almost real-time, and is a cheaper, more transparent and secure alternative to transfer systems used by banks today, such as the SWIFT payment system.
Bitcoin is based on blockchain technology, while Ripple doesn’t use blockchain but uses a distributed consensus ledger using a network of validating servers and crypto tokens called XRP (sometimes referred to as Ripples).
XRP – which is the actual cryptocurrency – is a token which is used on the Ripple network to facilitate transfers of money between different currencies. Existing settlement systems generally use US dollars as a common currency for converting between other currencies. This incurs currency exchange fees and takes time – which is why bank transfers between accounts in different countries often take up to three days to process.
By first converting the value of the transfer into XRP, rather than USD, exchange fees are eliminated and processing of payments is reduced to seconds.
Banks including Fidor Bank, Santander, the Commonwealth Bank of Australia and a consortium of 61 Japanese banks have all said that they are trialing or implementing applications utilising the Ripple Network payment system.
XRP is a token used for representing transfer of value across the Ripple Network. Different to bitcoin, where new coins are created (up the a capped level) as rewards for participants offering computing power to maintain the blockchain network, Ripple created 100 billion XRP coins at its inception.
Ripple recently added a new feature whereby, through a smart contract system (escrows), the company releases 1billion of its XRP holding to themselves each month to help fund business operations, incentivise customers, and sell to accredited investors. Any unused tokens will be placed back into escrow. According to internal sources, last month (which was the first month of escrow) Ripple only used approximately 100 million and put 900 million back into escrow.
Where can I spend Ripple’s XRP?
Ripple was never designed to be a currency or a method of payment. However, there is a small list of merchants which accept payment in XRP tokens online. For example, you can buy honey, hot sauces and jewellery. You can find a list of vendors that are supposedly willing to accept Ripple’s XRP, but things are changing constantly and some that are listed there do not or no longer accept it. The primary use case for XRP is intended to be for transfer of other currencies (or indeed commodities such as gold or oil) over the Ripple network.” Each time a money (or asset) transferring organisation such as a bank uses the network to conduct a transfer and settlement, the cost is deducted in a small amount of XRP. This is what gives XRP themselves their value – in some ways they can be considered “fuel” for the machines which conduct these transfers.
How can I invest in Ripple? And should I?
Ripple has certainly gained a lot of momentum and the list of organisations which are using it indicates that the tokens themselves will become valued commodities in their own right. In fact, last year, the increase in value of one XRP token outperformed Bitcoin or any other cryptocurrency. At the start of 2017 one XRP was valued $0.006. They peaked, at the start of this year, at £3.87, before quickly crashing down to their current value of around $1 per XRP.
XRP are traded on cryptocurrency exchanges such as Binance and Poloniex. Usually, it isn’t possible to buy them with existing government-issued (fiat) currencies – you will have to buy Bitcoin or Ethereum first, then transfer them to an exchange to trade them for XRP.
As to the question of “should you?” – well, as I am not a financial advisor I wouldn’t give investment advice but it is fair to say that the uptake of Ripple by major financial institutions is generally considered to be a strong indicator of XRP’s future value. However, before investing in any crypocurrency you should thoroughly research it first, and make up your own mind about whether or not it is likely to be a valuable asset in the future. As we have seen, the value of all cryptocurrencies is highly volatile, and can go down just as quickly as it goes up. A solid piece of advice is never to invest more than you can comfortably afford to lose.