Crypto Academy Week 9 - Homework Post for @yohan2on

The post was created as a homework for lesson "Looking beyond the Bitcoin" by professor @yohan2on in Steem Crypto Academy

What is Ripple(XRP)

XRP or most commonly known as Ripple is one of the most controversial altcoins. While having an incredible market capitalization that allows XRP to always stay in top 10 on CoinMarketCap, XRP has many haters in crypto community. The most common argument is high centralization of this asset. Let’s take a close look at XRP.

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Historical reference

Unlike some of others early altcoins, Ripple wasn’t created and launched by a group of individuals. Ripple ledger [was created]( https://en.wikipedia.org/wiki/Ripple_(payment_protocol) under a corporation known as “OpenCoin” in 2012. The company later changed the name to “Ripple labs” and then to “Ripple”. The list of “fathers” of XRP includes: Jed McCaleb, Arthur Britto, David Schwartz and Ryan Fugger.

Technology and token economics

Ripple ledger is based on a technology very similar to blockchain that is called distributed consensus ledger. Similar to blockchains like Bitcoin Ripple ledger store all information publically in a distributed registry. It has a concept of records working similar to blocks in Bitcoin. Ripple doesn’t use Proof of Work mechanism to sign transactions. It uses its own Ripple Protocol Consensus Algorithm (RPCA)Source. Similar to Bitcoin all transactions are verified by network nodes, however nods don’t get reward for verification in the same way. In other words there is no way to “mine” XRP.

Unlike Bitcoin, XRP didn’t had a fair launch. 80% of initial supply (100 billion XRP) were allocated to owning company and the rest 20% were split between the three founders. To this date Ripple still owns more than a half of token supply. To protect potential investors from the fear of possible dump, Ripple introduces escrow mechanism in December 2017 Source. 55% of tokens were locked on escrow. Every month Ripple gets 1% (or 1 billion XRP) back. A portion of these funds is sent to Jeb McCaleb that has left the company. Some tokens are sold to fund Ripple operation and the biggest chunk is usually put back to another escrow. Ripple didn’t put the most of XRP back to escrow only once.

XRP use cases

The primary goal of XRP is to reduce the friction between foreign exchange transactions. Ripple aims to replace SWIFT network for banks. The two main competitive advantages of Ripple are speed and cost of transaction. A cross-border payment through SWIFT can take from a few hours to 2-3 days, while Ripple ledger can verify transaction in a few seconds. The cost of transaction in Ripple ledger is significantly lower than any legacy transaction method. Ripple has released product xRapid for this purpose. However, most of Ripple clients still use another product xCurrent for cross-border payments. Unlike xRapid it doesn’t use XRP token.

Another use case for XRP is payments. XRP can be used as a currency to purchase goods and service on internet. It is safe, fast, has low transaction fees. However, XRP is not in the list of most used payment methods.

Currently Ripple is working on a brand new use case. In March 2021 Ripple published an article describing pilot project to create private ledger for Central Banks launching CBDCs. The aim of this project is to compete with Stellar project, an old open source fork of XRP ledger, that already has a pilot project with Ukraine. As almost all world governments are currently investigating the possibility to move fiat currencies to network in a form of CBDC, this new use case seems promising.

Is XRP ledger truly decentralized?

Ripple network has more than 1000 nodes. Ripple protocol was designed to fully support network decentralization. At the same time, a group of 33 nodes (known as “Unique Node List” or UNL) are selected by the whole group to finalize transactions. For a transaction to come through, 80% of UNL nodes need to agree. The issue is that Ripple company selects the default Unique Node List. According to some sources, Ripple directly controls 6 nodes and indirectly 4 more. We can conclude that in addition to holding more than a half of token supply Ripple also has a good amount of control on the network itself. It is hard to consider XRP as decentralized as Ripple claims.

XRP perspectives

A new use case for XRP ledger is a truly positive signal. There is also a possibility more banks will switch to xRapid in future. At the same time XRP has several concerning factors:

• XRP is highly decentralized and Ripple company can manipulate it
• SEC agency is trying to define XRP as security in US court
• Ripple wasn’t really successful at selling xRapid product
• XRP co-founder Jeb McCaleb has lost faith in XRP and is selling his holdings on daily basis.

Conclusion

XRP is very interesting altcoin with a long history and incredible potential. However it has many negative factors holding back the progress. The main fact is high centralization of Ripple network.

Disclaimer

I’m not a financial of any kind. I encourage you to check all information yourself and make decision only based on your own opinion. All articles are created for solely entertainment purpose.

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