Ripple

Ripple is Far from Your Ordinary Digital Currency

Even though Ripple trades like a currency, where it is bought and sold just like other cybercurrencies, it is primarily a means of exchanging other currencies. Ripple is unique and has the potential to be a real game changer, especially with improving international transactions.

Although Ripple’s currency has grown to become the third largest cryptocurrency in the world by market capitalization, Ripple is not primarily a currency, it is a payment system, and its currency only plays a minor role in its use.

RippleRipple’s goal is to allow payments to be submitted from one institution to another, and in a way that completely changes the landscape of international payments. In spite of all of the advances in technology that we have seen lately, the world banking system has not been very well integrated, lacking a common ledger to settle payments between institutions in different countries.

When you send money from one bank or one institution to another, money doesn’t actually change hands, because this would be absurdly inefficient. Imagine paying $100 to someone and then requiring the cash to be taken from one bank and physically sent to another.

If we had to rely on such means of payment, transaction costs would be ridiculously high, and many transactions would not even be possible due to their smaller amounts. It could cost several times the amount of a transaction to process it for instance.

Most money is not backed by physical currency anyway, and paper currency is only used and useful for cash transactions.

Instead, banks keep common accounts, as well as accounts with the central bank of the country, to manage debits and credits between them. In our case, your bank would credit the destination bank $100, and over time, the debits and credits would all be tracked to realize net positions between banks over time.

Even though it takes a couple of business days for these payments to clear, these common accounts allow for payments to be credited and debited from the accounts of clients immediately, because the means exists to settle them and there is no real concern or effort involved.

If the institutions do not share a common ledger, as is the case usually with international transactions, then the money must be wired. The term wire here refers to a telegraph wire, 19th Century technology in other words, which gives us an idea of how dated this system is.

There’s a lot more involved in a wire than just the transmission of information though, and these days information can be transmitted very quickly over the wires we have these days. It is the lack of a ledger that causes the delays we usually see with many international payments, bringing in third parties and involving a process which takes several days at best.

The real issue is that, for the same reasons as cash isn’t sent between banks, it isn’t sent between international banks either, and without a common way to credit and debit these payments easily, we have to rely on an outdated intermediary bank system.

Enter Ripple

Surely, in the internet era, there must be a better way to send and receive money internationally than this. The people who created Ripple certainly thought so, and offered a much better solution, allowing institutions to reduce the processing time with these transactions from days to mere seconds.

The way that Ripple processes transactions is actually pretty complex, but in a nutshell, they provide virtually instant means to institutions looking to transfer money between each other without the need of a much slower network of intermediaries.

The banking industry still moves very slowly, and there is much that can be done to improve their efficiency generally, but this is especially the case across borders. What Ripple really does is allow institutions to connect with each other directly, through a means that is both very fast and very reliable, and it’s no wonder that many banks now are so enthusiastic about the Ripple payment process.

Credit card processors such as Visa and MasterCard have been using payment processing to manage international transactions quite effectively for years, so the technology for Ripple has existed for quite some time, it’s just no one expanded this into non credit card payments.

If you buy something in another country, your credit card will use a domestic bank and the merchant will use a foreign one, yet you can make a payment to them in seconds, the same amount of time that it would take to pay a merchant in your own country.

Ripple brings the same functionality to any transaction, in any currency, between parties anywhere, and also offer the added benefit of a distributed ledger, where the validity of payments are confirmed by the network itself, similar to exchanges of cybercurrency being confirmed by the blockchain.

Blockchain confirmations are quite limited in efficiency, and aren’t really scalable either. Bitcoin transactions for instance can take as long as an hour or two to confirm, which is very often not practical either. Even Ethereum, which is much faster, takes several minutes to confirm transactions.

If we ever managed to get most of the world’s payments on blockchains, this would simply overwhelm the system and the bottleneck would simply be unmanageable, taking a very long time to verify transactions.

Ripple uses a different model though, one based upon consensus, and also does not rely on data mining either, which dramatically speeds up verification. Ripple confirmations usually occur within 5 seconds, on par with major credit card processors, and Ripple is also on par with industry leading Visa as far as how many transactions it can process per second.

Finally, A Practical Means of Using Cyber Payments

This makes Ripple extremely practical and functional, in a way that allows Ripple to compete head to head with cash payment processors. While many have dreamed of cybercurrencies replacing fiat currencies, their current lack of efficiency, by design actually, will keep at least current forms of cybercurrency on the periphery.

Ripple is also designed to accommodate anti money laundering standards and other regulatory requirements, which is not the case with cybercurrencies generally. This makes Ripple very regulation friendly, and given that national governments are very keen on regulation, this actually is pretty important when it comes to the potential expansion of a cyber payment solution.

Governments look far less favorable upon other cyber payment means because they allow for users to circumvent regulation, and these payments are untraceable by design, making them ideal for use by criminals. This is not a risk that is involved with Ripple.

Ripple as a currency is actually only used as a currency of last resort within the Ripple payment system, when there either is lack of trust between the transacting parties or when no other alternative payment method can be arrived at.

Other than that, one can move money in many different forms, paying in one currency and having the payment made in another, paying or receiving in several popular cybercurrencies, or even making payments or receiving them with air miles. There are no limitations to what can be paid with or paid out other than the means of the parties involved and their preferences.

Ripple is just a counterparty to all these transactions, the backbone of a payment system which parties can subscribe to, and one must utilize the Ripple system, or one of their systems that is, as they have three different networks, through intermediaries such as banks.

How Ripple Has Come to Be Speculated On

Users can buy Ripple the currency through currency exchanges though and sell it back through these exchanges as desired, and a lot of people have done that lately, sending the currency on a run up where it increased 10 fold in a single month, in December 2017.

Ripple has therefore not been immune to the cybercurrency speculation craze, and there certainly have been people who have made money on it during this time, even though it quickly gave back half of its gains over a period of only a week.

Such is the ebbs and flows of the world of cybercurrency, although the ebbs and flows with this type of asset are much more dramatic than with anything else that has ever appeared in the world to date.

One must of course be very careful with speculating on cybercurrencies, and as we can see, Ripple the currency is no exception. Even though Ripple’s role as a currency is fairly insignificant, this does not matter as far as what people are willing to pay for it, and the mere fact that this is considered a cybercurrency is enough to get people very excited about it it seems.

The usual warnings that are given out about speculating on cybercurrencies apply to Ripple as well, especially the risk of falling for the mistaken idea that losses are only realized when an asset is liquidated, when a trade ends in other words.

This is what has people hanging on to assets far longer than they should, and while the time frame for some investments, stocks for instance that are being invested in, might be long term, allowing for at least the idea of riding out waves to make at least some sense, we cannot say that about Ripple or any cybercurrency.

We really do not know what will happen longer term to the price of Ripple other than its ability to maintain the huge rises in price that we have seen being dependent on the mania that drove this continuing.

Mania cannot continue forever though, as there is point that we reach where at least most of the people who are looking to ride the wave are already riding it, and as this momentum decreases, the sellers start to take over more, and the party ends, at least for now anyway.

Therefore, there are reasonable limits that exist with the value of Ripple and other cybercurrencies, and we may have already seen it, at least for the present time. Their going down though doesn’t really have such limits, other than the limit that it cannot go down below being completely worthless.

That really won’t happen, seeing Ripple for instance go to zero, as it does serve to provide at least some intrinsic value, as a component of the Ripple payment system, which is definitely growing.

Those who choose to continue to speculate on the price of Ripple will certainly have to be more selective now, and won’t just be able to buy it and expect to make a lot of money.

Ripple in general is a pretty exciting concept, especially for those who look to move money internationally, or exchange one currency or asset for another. Ripple is changing banking itself, changes that have been a long time coming really.

Ripple FAQs

  • Is ripple and XRP the same?
    XRP is often referred to as Ripple although it technically isn’t, as Ripple refers to the company that is behind XRP currency, Ripple Labs. Ripple Labs offers solutions that XRP is used with a payment method with, similar to Ethereum offering Ether as its digital currency and payment method.
  • How does ripple work?
    Ripple is actually a payment processing platform that uses digital currency to transmit payments from one party to another. We could compare this with Visa which is a payment processor as well, although Visa transmits payments in hard currencies where Ripple uses their cryptocurrency XRP as the currency transmitted.
  • What is the purpose of ripple?
    The main purpose of Ripple is to offer a platform that can send money between parties in a quick and efficient manner. This is an area that cryptocurrencies have struggled with mightily due to the time it takes to transmit payments using a blockchain. Ripple uses a consensus model that allows for almost instant transactions.
  • What is the difference between ripple and Bitcoin?
    While both Bitcoin and Ripple are used to make payments, Bitcoin relies on decentralized blockchain technology which is very slow and cumbersome. Ripple uses a different method of verification called a distributive consensus ledger which is much faster. Bitcoin is mostly an investment vehicle where Ripple actually can be used more practically to make payments.
  • Does ripple use Blockchain?
    Ripple does not use an ordinary blockchain, which may be effective at maintaining a ledger and validating payments but these blocks have a limited capacity to process transactions efficiently as they are way too slow. Ripple uses a different sort of ledger based not upon full verification but on consensus, and the needed consensus can be reached far more quickly.
  • What does XRP stand for?
    Currencies are designated by three letter codes, such as USD or EUR, or BTC for Bitcoin, and Ripple has chosen XRP as theirs, which stands for xRapid. This gives people an idea of what Ripple’s intention is with this currency, which is to offer very rapid transaction times through its novel payment platform.
  • What is a ripple Gateway?
    A Ripple gateway is a means to connect Ripple’s currency XRP with other currencies, where XRP can be exchanged with hard currencies or other cybercurrencies. Since the vast majority of money is held in fiat currencies such as USD, people need a means to exchange these currencies to XRP and back, which a Ripple gateway allows them to do.
  • What is ripple payment system?
    The Ripple payment system allows users to exchange amounts of their cybercurrency, XRP, to settle payments between parties. Ripple has the means to be much more ambitious with their payment system than other popular digital currencies, and are seeking to take on not just the peer-to-peer payment market but commercial payment markets as well.
  • How do I invest in ripple coins?
    Ripple, like all cybercurrencies, can function as both a means of payment like a credit card or bank account can, as well as for a means of storing wealth, like gold. Ripple’s currency XRP can therefore be used as a speculative investment, similar to forex trading, where you seek to see its price rise and sell at a higher price later.
  • Is ripple a private Blockchain?
    Ripple currently uses a consortium approach to maintaining its ledger, meaning that it is a private network. This approach falls in between the private and centralized approach that traditional payment processors use and the public and decentralized means that cybercurrencies employ, which validates with multiple sources without becoming cumbersome.
Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.