Ripple (XRP)–the crypto standard for banks
August 12, 2022
4 min read
The broad idea behind cryptocurrencies like Bitcoin (BTC) was to give ordinary people greater freedom from financial institutions—in effect, becoming “one’s own bank”. But that didn’t mean that the banks themselves couldn't see the advantages of integrating blockchain technology for improving their own services and making their transactions more efficient and secure.
This is the principle behind Ripple (XRP), a payment network built on top of a blockchain ledger that uses its own cryptocurrency to facilitate money transfers from anywhere in the world.
Ripple is a San Francisco-based company that envisioned its blockchain network to function similarly to the SWIFT system. SWIFT stands for “Society for Worldwide Interbank Financial Telecommunication” and is the primary network that the financial world heavily relies on for connecting banks worldwide.
But with blockchain integration, Ripple is able to provide a number of significant advantages to the banks who use it, as well as address many concurrent issues with traditional bank transfers:
- Faster and cheaper - Traditional international money wire transfers often take at least a few hours to a few days and can incur fees as funds usually go through more than one financial institution. Ripple transactions, on the other hand, take an average of four to five seconds to process and cost only a fraction of a cent.
- All-day access - Blockchain services are available 24 hours a day, seven days a week, as compared to traditional banking services, which follow regular business hours and are often not available on weekends or holidays.
- Better liquidity - The Ripple network and the XRP token was designed to be a “fiat bridge” and does not discriminate against any fiat currency. It can also pay out in the preferred currency of the parties involved in the transaction. In fact, this is the reason for its name–as the network allows for payments “to ripple” across multiple currencies.
How does XRP work?
Ripple is able to process transactions faster than Proof-of-Work (PoW) blockchains like Bitcoin as its network uses its own consensus protocol (Ripple Protocol consensus algorithm or RPCA) which does not require any “mining”.
Instead, Ripple is structured in a way that uses a limited set of trusted node subnetworks for validating each block to greatly reduce network latency. This is in contrast with how Bitcoin or Ethereum (ETH) requires all of its nodes to participate in block validation which produces a lot of computational throughput. As such, Ripple can process up to 1500 transactions per second.
With regard to fiat conversion, Ripple is able to provide on-demand liquidity by having participating institutions convert fiat payments into XRP, which in turn is converted into the destination currency for the receiving party. This system is supposed to be more efficient as banks do not need to hold large reserves of foreign currencies in various denominations, which is often the cause of delays when reserves get depleted.
Is Ripple the same as Stellar (XLM)?
Ripple and Stellar (XLM) are often compared as they are both cryptocurrency platforms that were designed for international cross-border transactions. Both networks in fact, share the same founder, Jed McCaleb. Ripple was founded in 2012, and Stellar in 2014.
The main difference, however, is with the target users for each platform. Ripple was intended specifically for use by banks, and thus its protocol was kept closed-sourced for greater control and security. Accordingly, Ripple’s main vision is to improve the banking system–and not replace it entirely.
Stellar, on the other hand, was designed more for the convenience of the average user, and its protocol was kept open-source to allow greater community participation in its implementation.
XRP has a maximum supply of 100 billion tokens, all of which were already “pre-mined” upon launch. Its supply, however, is mostly held in reserve in escrow, and only 1 billion tokens are added to circulation each month. Furthermore, excess tokens are sent back into escrow at the end of the month to limit the supply and keep the token price more manageable and predictable. XRP is also burned with each transaction, making the supply deflationary.
XRP has a circulating supply of 43 billion tokens as of July 2022.
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