What is Ripple?

Although Bitcoin is still the king of the cryptocurrency hill, there are many pretenders to its throne, and some of them are quite different. One of the most intriguing in its diversion from several crypto-norms is Ripple, a much more centralized cryptocurrency in a very decentralized space.

Ripple explained

Ripple is the catchall name for the cryptocurrency platform, the transactional protocol for which is XRP. This is much in the same fashion as Ethereum is the name for the platform that facilitates trades in Ether. Like other cryptocurrencies, Ripple is built atop the idea of a distributed ledger network which requires various parties to participate in validating transactions, rather than any single centralized authority.

That facilitates transactions all over the world, and transfer fees are far cheaper than the likes of Bitcoin. Unlike other cryptocurrencies, XRP transfers are effectively immediate, requiring no typical confirmation time.

Initially founded by a single company, Ripple Labs, Ripple continues to be backed by it, rather than the more extensive network of developers that continue Bitcoin’s development. It also doesn’t have a fluctuating amount of its currency in existence.

Bitcoin has a continually growing pool with an eventual maximum, and Ethereum theoretically has no limit. On the other hand, Ripple launched with all of its 100 billion XRP tokens right out of the gate. That number maintains with no mining, and most of the tokens are owned and held by Ripple Labs itself — around 60 billion at the latest count.

Even at the recently reduced value of around 20 cents per XRP, that means Ripple Labs is currently sitting on approximately $12 billion worth of the cryptocurrency. It holds 55 billion XRP in an escrow account, which allows it to sell up to a billion per month if it so chooses to fund new projects and acquisitions. Selling such an amount would likely have a drastic effect on the cryptocurrency’s value, and isn’t something Ripple Labs plans to do anytime soon.

In actuality, Ripple Labs is looking to leverage the technology behind XRP to allow for faster banking transactions around the world. While Bitcoin and other cryptocurrencies are built on the idea of separating financial transactions from the commercial organizations of traditional currencies, Ripple is almost the opposite in every sense.

Backed by banks

You may have heard a lot of cryptocurrency investors and financial commentators discussing the idea of regulation. While we don’t think that’s of any significant concern, many worry about banks cracking down on Bitcoin and the like.

That’s even less likely to happen with Ripple, as it’s backed by some of the world’s major financial institutions. Santander, UBS, American Express, RBC, Westpac, and more, all have a hand in its operation and proliferation. They can even charge their specified fees for completing transactions. That control is the most significant differentiating factor for Ripple.

In many ways, this isn’t wholly surprising, as blockchain technology holds a vast number of benefits for companies that can employ it effectively. However, backing a cryptocurrency like Ripple is undoubtedly an outlier. It is something that needs to be understood by potential buyers and sellers because it gives those financial institutions a much higher level of control over Ripple than most other cryptocurrencies out there.

Bitcoin, Ethereum, and similar are entirely decentralized, backed by thousands if not millions of global miners, meaning that nobody has any real control over the network. In contrast, these financial institutions and Ripple Labs itself manage Ripple’s nodes.

Those independent servers don’t have to provide proof-of-work calculations like Bitcoin. The nodes simply validate transactions themselves – much like traditional banks do.

When that’s combined with the fact that no new XRP will be created and existing numbers’ circulation is strictly controlled, it leads many to have concerns about Ripple’s future.

Cold snap

All of that control of the Ripple network that’s held by particular entities means that they have some abilities which are unique to this sort of cryptocurrency. The one that has detractors concerned the most is the “freeze.”

“The XRP Ledger gives addresses the ability to freeze non-XRP balances, which can be useful to meet regulatory requirements, or while investigating suspicious activity,” the Ripple guide to the feature reads. While that is commonplace in traditional banking, many would argue it is the complete opposite of the real purpose of cryptocurrencies: to remove that regulation and oversight.

Effectively, Ripple nodes can severely limit XRP wallets on an individual basis, or all wallets associated with a particular node. This ability was demonstrated in 2015 when original Ripple Labs founder Jed McCaleb attempted to sell more than a million dollars worth of Ripple. Ripple Labs purportedly persuaded a Ripple node, Bitstamp, to reverse the transaction.

There are elements to the story which suggest McCaleb breached a contract with the sale. Regardless, the fact that the freeze was possible at all – with centralized authorities controlling the currency’s owner’s ability to transact with it as he wishes – has others concerned for Ripple’s future. If the founding company, exchanges, and banks can control XRP to that extent, is it worth trading in Ripple at all?

At the very least, it’s essential to be aware that where other cryptocurrencies give the owners near-complete control over their coins — as long as you use the right wallet-type — Ripple has much more significant oversight and middle-man control.

At present time McCaleb is estimated to have sold off at least a billion XRP between 2014 and 2019. He also retains almost five percent of the overall token supply (4.7 billion), and sold over $4,000,000 worth of XRP in January of 2020. Given that the financial decisions of Ripple’s founder can have such a profound impact, let alone those of Ripple Labs itself, investors may be understandably skittish.