What is Ripple? A Look Inside Crypto 2.0

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As the altcoin industry continues to expand, there’s a palpable desire among those in the community to weed out the failures and focus on the successes. Everybody wants to be involved with the next Bitcoin, but the truth is that the next “big thing” will probably be nothing like Bitcoin — and it may not even be a cryptocurrency at all.

Enter Ripple, a relatively new system of value transfer that has been dubbed by some as “Crypto 2.0” because it builds another layer on top of existing financial systems, including both crypto and fiat. Let’s take a look at how everything works, and whether Ripple might be an emerging success story.

Ripple’s Decentralized Exchange

Ripple is an open-source, decentralized exchange that enables users to trade practically anything of value with each other — bitcoin, litecoin, dollars, euros, gold bars, you name it. Assuming two users trust each other and agree on the terms of the transaction, anything can be traded with anything else.

Ripple was originally created by Jed McCaleb

Ripple was originally created by Jed McCaleb, who eventually left the project in early 2014

For example, if Bob wants to trade 450 USD for Mary’s 1 BTC, that can be done directly if both users agree and trust each other. But what if Mary wants euros instead of dollars? Then the Ripple network will automatically search for a euro-trading intermediary between Bob and Mary. Bob’s 450 USD can be converted to 320 EUR, which is then given to Mary for her 1 BTC. This process can include as many intermediaries and different currencies as necessary to complete the trade, and it all happens under the hood according to the Ripple protocol.

These trades are recorded on a public ledger shared across the entire network, similar to how Bitcoin’s blockchain works. However, while the blockchain takes up to 10 minutes to completely verify a transaction, the Ripple network only takes 2-5 seconds. This short waiting time is achieved through a consensus process, and doesn’t rely on miners to verify the transactions, as is the case with Bitcoin.

Gateways into the Ripple Network

One slide from a Ripple presentation made by reddit user ThePiachu.

One slide from a Ripple presentation made by reddit user ThePiachu

While the Ripple protocol itself is decentralized, it’s dependent on entities known as “gateways” that act as the entry and exit points for users and their money. Gateways essentially act as an intermediary between a user’s bank and the Ripple network, similar to how Coinbase is an intermediary for Bitcoin. This is where know-your-customer and anti-money-laundering laws come into play, as potential Ripple users must provide identity and proof-of-residence documents before getting approved by a gateway. Once that happens, the user can insert funds to the Ripple network and start trading. The gateway will be necessary again when the user wants to withdraw funds into their bank.

Right now there are only a few Ripple gateways up and running, limiting the options that a potential user has for entering the network. The most well-known and trusted gateway at this time is Bitstamp, which will allow transfer of USD, BTC, EUR, GBP, JPY, AUD, and CHF to Ripple.

Ripple’s Native Currency: XRP

Although the Ripple network is merely a protocol, it does have its own native currency called XRP, or alternatively, ripples. These can be traded on the exchange just like any other unit of value, but for most situations they are not needed. Let’s go back to the example with Bob and Mary — assume that there is nobody who is offering euros for Mary’s bitcoin, and there is nobody offering bitcoin for Bob’s dollars. The Ripple network is unable to complete the trade because there is not a chain of compatible traders. This is where XRP comes in — it acts like a lubricant for the entire system, providing liquidity where otherwise there would be none. In those few cases where there aren’t enough people to complete the chain of a trade, XRP is used to fill in the holes.

Ripple Labs CEO Chris Larsen and CTO Stefan Thomas

Ripple Labs CEO Chris Larsen and CTO Stefan Thomas – Photo via Peter DaSilva, New York Times

While this is an innovative addition to a project like Ripple, it has caused some controversy for the parent organization. Ripple Labs still controls the majority of XRP, despite having released a significant amount for free to early adopters of Ripple. In this way, XRP is like a pre-mined altcoin, and buying into the Ripple network means having faith that the creators will not ruin the project by releasing too much XRP at once or releasing too little and depriving the network of liquidity. Just enough is needed to lubricate the transactions efficiently and keep Ripple running smoothly.

Is Ripple a Success in the Making?

While not without its flaws — including a paltry number of gateways and a native currency that is pre-mined — Ripple holds significant promise as a decentralized exchange that can quickly and efficiently exchange various different currencies between each other. In that sense, Ripple is like an umbrella network that can encompass bitcoin, altcoins, fiat currencies and even physical assets like gold and silver. If the project succeeds — and success depends entirely upon integrity of gateways and Ripple Labs’ management of XRP — then Ripple could very well revolutionize the global financial network.

Update: On May 22, Ripple co-founder Jed McCaleb announced that he would be liquidating his 9 billion XRP stake in the Ripple network, sending the price of XRP plummeting. Furthermore, Ripple board member Jesse Powell resigned from his position over a lack of confidence in the company’s direction. His opinions about the company were met with a cease-and-desist letter from Ripple Labs which accused Powell of trying to sabotage the company by timing his resignation alongside McCaleb’s XRP selloff. Powell defied the cease-and-desist order, saying that his original statements were factual and that he had not colluded with McCaleb. Powell insists that the Ripple Labs allocation of XRP, especially by CEO Chris Larsen, has been fundamentally unfair.

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3 Comments

  1. The price of ripple tanked after one of the creators said he was going to sell what he had. RIP ripple.

  2. A chain is as strong as it’s weakest link, and I think the Gateways will be the weakest link in Ripple. People will find ways to corrupt or fake trust at the gateways.

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