Throughout this series of articles, we\u2019re looking at the top blockchains in cryptocurrency to help you make sense of the alphabet soup of so-called \u201caltcoins\u201d that exists beyond that of bitcoin\u2019s BTC and Ethereum\u2019s ETH.<\/p>\n
We will look at what they are, how they work, what they do, and their pros and cons.<\/p>\n
You\u2019ll come out of this series not only with a better sense of what cryptocurrency is all about, but you\u2019ll also understand why the way a token works \u2014 the way its blockchain processes transactions \u2014 is key to its success or failure as a digital asset.<\/p>\n
See also: PYMNTS Blockchain Series: What Is Bitcoin Cash? The No. 2 Payments-Focused Crypto Goes Its Own Way<\/a><\/p>\n So, what is XRP?<\/p>\n First off, it\u2019s arguably the cryptocurrency most deeply involved in the payments industry.<\/p>\n Secondly, the cryptocurrency not properly called \u201cripple.\u201d<\/p>\n Thirdly, capital-R Ripple is a company that uses XRP to power a network of banks and money transmitters that use it to bypass financial messaging service SWIFT and transfer funds internationally for pennies and in seconds.<\/p>\n It is also effectively the only user of the XRP Ledger, which is an open-source, distributed blockchain on which all 100 billion XRP tokens were pre-mined in one transaction. Which is actually important to know, for reasons we\u2019ll get to later.<\/p>\n Finally, XRP is the subject of a lawsuit by the Securities and Exchange Commission that \u2014 if Congress doesn\u2019t act first \u2014 will determine if the SEC is right in calling nearly all cryptocurrencies securities under its regulatory umbrella. Again, more on that later.<\/p>\n Crossing Borders<\/strong><\/p>\n Ripple is one of, if not the, oldest companies using cryptocurrency to power cross-border transactions. Created in 2011, two years after Bitcoin, the company launched in 2012. It now has more than 300 partner banks and money transmitters in its payments networks.<\/p>\n There are three parts to this network. The largest is RippleNet, which is used by companies including Standard Chartered, Azimo and Santander.<\/p>\n RippleNet customers can use its private network to transfer funds outside of SWIFT, but requires parking funds in those banks. It does not, however, require the use of XRP.<\/p>\n RippleNet customers can also use its two other products, On-Demand Liquidity (ODL) and Line of Credit.<\/p>\n Counterparty Risk<\/strong><\/p>\n ODL uses the XRP blockchain to eliminate the need to prefund transactions. The payer buys XRP and sends it to the destination institution via blockchain payment \u2014 in real time and for tiny transaction fees.<\/p>\n While XRP prices can be every bit as volatile as bitcoin \u2014 it has a large and fervent investor base nicknamed the XRP Army \u2014 the ODL system involves buying XRP on the market when needed and selling it when received, effectively eliminating volatility by completing both transactions within seconds.<\/p>\n What this requires is a great deal of liquidity within the XRP market. Currently, XRP is the sixth-largest cryptocurrency by market capitalization, with $35.7 billion in circulation. As of March 3, it had a 24-hour trade volume of $2.1 billion.<\/p>\n Being publicly traded as an investment \u2014 and that\u2019s important to that SEC lawsuit we mentioned \u2014 XRP tends to follow the broader crypto market. Although it lagged behind in 2019 and 2020, remaining more or less flat, last year it broke out, spiking with the crypto bull markets and sinking with the bears.<\/p>\n The final way Ripple uses XRP is with its Line of Credit product, which allows RippleNet members to lock in an XRP price and fund payments by borrowing and repaying Ripple rather than buying XRP on the market. That not only eliminated more volatility, it let members continue business as usual when the SEC pursued its lawsuit against Ripple.<\/p>\n The Prehistory of XRP<\/strong><\/p>\n Ripple executive are at pains to say that the company did not create XRP.<\/p>\n Which is technically true but splitting hairs pretty finely.<\/p>\n The creators of the Ripple blockchain pre-mined all 100 million XRP with the blockchain\u2019s genesis block, kept 20%, and then \u201cgifted<\/a>\u201d the remainder to the company (the names changed several times).<\/p>\n The three, David Schwartz, Jed McCaleb, and Arthur Britto, were soon joined by Chris Larsen. Larsen is Ripple\u2019s executive chairman and Schwartz its chief technical officer. McCaleb left the company to found a competitor in the crypto payments space, the Stellar blockchain.<\/p>\n More to the point, Ripple still controls a huge amount of the market. Aside from being its only real users, Ripple has about 46.5 billion XRP in escrow accounts \u2014 something that was necessary as XRP investors felt the company was selling too much of its treasury, keeping the price of XRP artificially low.<\/p>\n Beyond controlling that huge stash of XRP \u2014 and its executives and founders also have large kitties \u2014 Ripple is the only company that uses XRP for anything other than an investment.<\/p>\n To Ripple, XRP is, in crypto lingo, a utility token. And like any cryptocurrency other than bitcoin and some payments-only blockchains like Litecoin, the investment relies (in theory) on the idea that as more projects are built on a blockchain, the demand for its capped number of tokens will go up, raising prices.<\/p>\n See here:<\/strong> PYMNTS Blockchain Series: Litecoin Is the \u2018Silver\u2019 to Bitcoin\u2019s \u2018Gold\u2019<\/a><\/p>\n Insecurity<\/strong><\/p>\n This is where that SEC lawsuit comes into play.<\/p>\n The SEC says that Ripple\u2019s public sales of XRP amount to a 9-year-long, ongoing unregistered sale of securities \u2014 something Ripple both denies and calls ludicrously unfair after all that time.<\/p>\n The importance is that if XRP is a utility token, buying and selling it to power cross-border payments is fairly simple. If it is a security, buying and selling it become a lot more complex and time-consuming. Making a lot less useful for cross-border payments.<\/p>\n
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