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Ripple is a real-time gross settlement system
(RTGS), currency exchange and remittance network by Ripple. Also called the Ripple Transaction
Protocol (RTXP) or Ripple protocol, it is built upon a distributed open source Internet protocol, consensus ledger and native cryptocurrency called XRP (ripples). Released in 2012,
Ripple purports to enable "secure, instantly and nearly free global
financial transactions of any size with no chargebacks." It supports
tokens representing fiat currency, cryptocurrency, commodity or any other unit of value such as frequent flier
miles or mobile minutes. At its core, Ripple is based around a shared,
public database or ledger, which uses a consensus process that allows for
payments, exchanges and remittance in a distributed process.
The network can
operate without the Ripple company. Among validators are companies,
internet service providers, and the Massachusetts
Institute of Technology.
Used by companies such
as UniCredit, UBS and Santander,
Ripple has been increasingly adopted by banks and payment networks as settlement infrastructure
technology, with American Banker explaining that "from banks' perspective, distributed
ledgers like the Ripple system have a number of advantages over
cryptocurrencies like bitcoin."
As of January 26,
2018, XRP is the third largest coin by market capitalization.
Concept
Ripple's website describes the open-source protocol as
"basic infrastructure technology for interbank transactions – a neutral
utility for financial institutions and systems." The protocol allows banks
and non-bank financial services companies to incorporate the Ripple protocol
into their own systems, and therefore allow their customers to use the service.
Currently, Ripple requires two parties for a transaction to occur: first, a
regulated financial institution "holds funds and issues
balances on behalf of customers." Second, "market makers" such
as hedge funds or currency trading desks
provide liquidity in the currency they want to trade in. At its core, Ripple
is based around a shared, public database or ledger that has its contents
decided on by consensus. In addition to balances, the ledger holds
information about offers to buy or sell currencies and assets, creating the
first distributed exchange. The consensus process allows for payments,
exchanges and remittance in a
distributed process. According to the CGAP in 2015,
"Ripple does for payments what SMTP did for
email, which is enable the systems of different financial institutions to
communicate directly."
In Ripple, users make payments between each other by using
cryptographically signed transactions denominated in either fiat currencies or
Ripple's internal currency (XRP). For XRP-denominated transactions Ripple can
make use of its internal ledger, while for payments denominated in other
assets, the Ripple ledger only records the amounts owed, with assets
represented as debt obligations. As originally Ripple only kept records in
its ledger and has no real-world enforcement power, trust was required. However,
Ripple is now integrated with various user verification protocols and bank
services. Users have to specify which other users they trust and to
what amount. When a non-XRP payment is made between two users that trust
each other, the balance of the mutual credit line is adjusted, subject to
limits set by each user. In order to send assets between users that have not
directly established a trust relationship, the system tries to find a path
between the two users such that each link of the path is between two users that
do have a trust relationship. All balances along the path are then adjusted
simultaneously and atomically. This
mechanism of making payments through a network of trusted associates is named
'rippling'. It has similarities to the age-old hawala system.
Design features
Gateways
A gateway is any person or organization that enables users to
put money into and take money out of Ripple's liquidity pool.[2] A gateway
accepts currency deposits from users and issues balances into Ripple's
distributed ledger. Furthermore, gateways redeem ledger balances against the
deposits they hold when currency is withdrawn. In practice, gateways are
similar to banks, yet they share one global ledger known as the Ripple
protocol. Depending on the type and degree of interaction a user has with a
gateway, the gateway may have anti-money laundering (AML)
or know your customer (KYC) policies requiring
verification of identification, address, nationality, etc. to prevent criminal
activity. Popular gateways as of 2017 included Bitstamp, Gatehub, Ripple
Fox, Tokyo JPY, Mr. Ripple, RippleChina and The Rock Trading.[84]
Trustlines and rippling
Users must ‘extend trust’ to the Ripple gateway that holds their
deposit. This manual creation of a trustline indicates to the Ripple network
that the user is comfortable with the gateway’s counterparty risk. Furthermore, the
user must put a quantitative limit on this trust and create a similar limit for
each currency on deposit at that gateway. For example, if a user deposits US$50
and BTC2.00 at The Rock Trading, the user will have to grant trust of at least
that much in both currencies to the gateway for the monies to be available in
the Ripple network. When a user has allowed multiple gateways in the same
currency, there is an advanced option to allow "rippling," which
subjects the user’s balance of that currency to switch (or ripple) between
gateways. Though their total balance doesn't alter, users earn a small transit
fee for providing inter-gateway liquidity.
Creditworthiness
Similar to reasons during the Free Banking Era in the United
States, the value of a currency can vary significantly depending on a gateway's
creditworthiness. A non-profit trade association, the International
Ripple Business Association (IRBA), provides unified procedures and disclosure
standards for gateways. As of June 2015, fifteen businesses had met
or exceeded the IRBA standards.
Consensus ledger
Ripple relies on a common shared ledger, which is a distributed
database storing information about all Ripple accounts. The network is
"managed by a network of independent validating servers that constantly
compare their transaction records." Servers could belong to anyone,
including banks or market makers. Though the Ripple protocol is freeware, Ripple
Labs continues to develop and promote the Ripple protocol, which confirms
financial transactions via a network of distributed servers. Ripple Labs is
currently assisting banks in integrating with the Ripple network. A new
ledger is created every few seconds, and the last closed ledger is a
perfect record of all Ripple accounts as determined by the network of servers.
A transaction is any proposed change to the ledger and can be introduced by any
server to the network. The servers attempt to come to consensus about a set of
transactions to apply to the ledger, creating a new ‘last closed ledger’.
The consensus process is distributed, and the goal of
consensus is for each server to apply the same set of transactions to the
current ledger. Servers continually receive transactions from other
servers on the network, and the server determines which transactions to
apply based on if a transaction came from a specified node in the ‘unique node
list’ (UNL). Transactions that are agreed upon by a "supermajority"
of peers are considered validated. If the supermajority isn't in
consensus, "this implies that transaction volume was too high or network
latency too great for the consensus process to produce consistent
proposals," then the consensus process is again attempted by the nodes.
Each round of consensus reduces disagreement, until the supermajority is
reached. The intended outcome of this process is that disputed
transactions are discarded from proposals while widely accepted transactions
are included. While users may assemble their own UNL nodes and have full
control over which nodes they trust, Ripple Labs acknowledges that most people
will use the default UNL supplied by their client.
Ledger security
In early 2014, a rival company called the Stellar Foundation\ experienced a
network crash. The company brought in David Mazieres, Stellar's chief
scientist and head of Stanford University's secure computing
group, to conduct a review of the Stellar consensus system, which was similar
to Ripple's. Mazieres declared the Stellar system unlikely to be safe when
operating with "more than one validating node," arguing that
when consensus is not reached, a ledger fork occurs with parts of the network
disagreeing over accepted transactions.[95] The Stellar
Foundation afterwards claimed that there was an "innate weaknesses"
in the consensus process, a claim which according to Finance
Magnates,"Ripple vehemently denied." Ripple Labs chief
cryptographer David Schwartz disputed Mazieres' findings and declared that
Stellar had incorrectly implemented the consensus system, as "the protocol
provides safety and fault tolerance assuming the validators are configured
correctly." The company further wrote that after examining Stellar's
information, they had concluded "that there is no threat to the continued
operation of the Ripple network."
Use as a payment/forex system
Ripple allows users or businesses to conduct cross-currency
transactions in 3 to 5 seconds. All accounts and transactions are
cryptographically secure and algorithmically verified. Payments can only be
authorized by the account holder and all payments are processed automatically
without any third parties or intermediaries. Ripple validates accounts and
balances instantly for payment transmission and delivers payment notification
with very little latency (within a few seconds). Payments are
irreversible, and there are no chargebacks. XRP cannot be frozen or
seized. While as of 2014 anyone could open an account on Ripple, by
2015 identity verification procedures had been
implemented. Ripple's Path-finding Algorithm searches for the fastest,
cheapest path between two currencies. In the case of a user who wants to
send a payment from USD to EUR, this could be a "one-hop" path
directly from USD to EUR, or it could be a multi-hop path, perhaps from USD to
CAD to XRP to EUR. Path finding is designed to seek out the cheapest
conversion cost for the user. As of May 14, 2014, Ripple's gateways allow
deposits in a limited number of fiat currencies (USD, EUR, MXN, NZD, GBP, NOK,
JPY, CAD, CHF, CNY, AUD), a handful of crypto currencies (BTC, XRP, LTC, NMC,
NXT, PPC, XVN, SLL) and a few commodities (gold, silver, platinum).
The Bitcoin Bridge
The bitcoin bridge is a link between the Ripple and bitcoin
ecosystems. The bridge makes it possible to pay any bitcoin user straight from
a Ripple account without ever needing to hold any of the digital currency.
Additionally, any merchant accepting bitcoins has the potential to accept any
currency in the world. For example, a Ripple user may prefer to keep money in
USD and not own bitcoins. A merchant, however, may desire payment in bitcoin.
The bitcoin bridge allows any Ripple user to send bitcoins without having to
use a central exchange such as BTC-e to acquire
them. Bitstamp acts as a gateway for the
Ripple payment protocol, among other exchanges.
Privacy
While transaction information on the ledger is public, payment
information is not. It’s thus difficult for anyone to associate transaction
information with any specific user or corporation.
Market makers
Any user on Ripple can act as a market maker by offering
an arbitrage service such as providing market liquidity,
intra-gateway currency conversion, rippling, etc.
Market makers can also be hedge funds or currency trading desks. According to
the Ripple website, "by holding balances in multiple currencies and
connecting to multiple gateways, market makers facilitate payments between
users where no direct trust exists, enabling exchanges across
gateways." With a sufficient number of market makers, the path finding
algorithm creates a near frictionless market and enables
users to seamlessly pay each other via the network in different currencies,
without assuming any undesired foreign exchange risk.
Ripple can be used to trade or convert currencies, to send money
in one currency and the recipient to receive it in another currency. For
example, a user can pay with USD and the recipient can choose to receive the
money in another currency, including bitcoins and XRP.
Open API
Ripple Labs built the protocol to be friendly to the developer
community, and resulting features include an API for its
payment network, based on the popular REST API standard. One
of the earliest extensions by third-party developers was a Ripple extension to
e-commerce platform Magento, which enables
Magento to read the Ripple public ledger and create an invoice. There has been
a Ripple Wallet payment option developed for retail situations as well.
XRP
XRP is the native currency of the Ripple network. XRP are
currently divisible to 6 decimal places, and the smallest unit is called a drop
with 1 million drops equaling 1 XRP. There were 100 billion XRP created at
Ripple's inception, with no more allowed to be created according to the
protocol's rules. As such, the system was designed so XRP is a scarce
asset with decreasing available supply. Not dependent on any third party
for redemption, XRP is the only currency in the Ripple network that does not
entail counterparty risk, and it is the only native digital
asset. The other currencies in the Ripple network are debt instruments (i.e.
liabilities), and exist in the form of balances. Users of the Ripple
network are not required to use XRP as a store of value or a medium of
exchange. Each Ripple account is required, however, to have a small reserve of
20 XRP (US$19.80 as of December 26, 2017). The purpose for this
requirement is discussed in the anti-spam section.
Distribution
Cryptocurrency market capitalizationsbas of
27 January 2018, in billions of US dollars, with Ripple at
top right.
Of the 100 billion created, 20 billion XRP were retained by the
creators, who were also the founders of Ripple Labs. The creators gave the
remaining 80% of the total to Ripple Labs, with the XRP intended "to
incentivize market maker activity to increase XRP liquidity and strengthen the
overall health of XRP markets." Ripple Labs also had a short-lived
2013 giveaway of under 200 million XRP (0.2% of all XRP) with some of the
amount given to charities such as the Computing for Good initiative, which
began offering XRP in exchange for time volunteered on research
projects. As of March 2015, 67% of Ripple Labs's original 80% was still
retained by the company,with Ripple Labs stating that "we will engage in
distribution strategies that we expect will result in a stable or strengthening
XRP exchange rate against other currencies." In May 2017, to
alleviate concerns surrounding XRP supply, Ripple committed to place 55 billion
XRP (88% of its XRP holdings) into a cryptographically-secured escrow. The
escrow will allow them to use up to 1 billion monthly and return whatever is
unused at the end of each month to the back of the escrow queue in the form of
an additional month-long contract, starting the process all over. The
amount of XRP distributed and their movement can be tracked through the Ripple
Charts website.
As a bridge currency
One of the specific functions of XRP is as a bridge
currency, which can be necessary if no direct exchange is available
between two currencies at a specific time, for example when transacting between
two rarely traded currency pairs. Within the network’s currency exchange,
XRP are traded freely against other currencies, and its market price fluctuates
against dollars, euros, yen, bitcoin, etc. Ripple's design focus is as a
currency exchange and a distributed-RTGS, as opposed to emphasizing XRP as
an alternative currency.[110] In April
2015, Ripple Labs announced that a new feature called autobridging had been
added to Ripple, with the intent of making it easier for market makers to
transact between rarely traded currency pairs. The feature is also intended to
expose more of the network to liquidity and better FX rates.
As an anti-spam measure
When a user conducts a financial transaction in a non-native
currency, Ripple charges a transaction fee. The purpose of the fees is to
protect against network flooding by making the
attacks too expensive for hackers. If Ripple were completely free to access,
adversaries could broadcast large amounts of "ledger spam" (i.e. fake
accounts) and "transaction spam" (i.e. fake transactions) in an
attempt to overload the network. This could cause the size of the ledger to
become unmanageable and interfere with the network’s ability to quickly settle
legitimate transactions. Thus, to engage in trade, each Ripple account is
required to have a small reserve of 20 XRP, (US$4.96 as of December 5, 2017),
and a transaction fee starting at .00001 XRP (US$0.000002 as of December 5,
2017) must be spent for each trade.
This transaction fee is not collected by anyone; the XRP is destroyed and
ceases to exist. The transaction fee rises if the user posts trades at an
enormous rate (many thousands per minute), and resettles after a period of
inactivity.
Reception
Since its debut the Ripple protocol has received a fair amount
of attention in both the financial and mainstream press. Ripple has recently
been mentioned in industry articles by The Nielsen Company, the Bank of England
Quarterly Bulletin, NACHA, and KPMG, with many of the
articles examining Ripple's effect on internationalizing the banking
industry. In April 2015, American Banker asserted that
"from banks' perspective, distributed ledgers like the Ripple system have
a number of advantages over cryptocurrencies like Bitcoin." Wrote
the Federal Reserve Bank of Boston, "the adoption
of distributed networks, such as Ripple, may help the [banking] industry
realize faster processing, as well as greater efficiencies for global payments
and correspondent banking." Writing for Esquire about Ripple
as a payment network in 2013, Ken Kurson said that
"the big financial-service brands ought to feel about Ripple the way the
record labels felt about Napster." The New York Times website Dealbook points out in
2014 that “[Ripple] is winning something that has proved elusive for virtual
currencies: involvement from more mainstream players in the financial
system.” In August 2015, Ripple has been awarded as Technology Pioneer
by World Economic Forum.
Comparisons with competition
Though XRP is third in market capitalization to bitcoin as a
digital currency, many members of the press have described Ripple as an
up-and-coming rival to bitcoin. In late 2014, Bloomberg called
bitcoin a "failing" digital currency, after bitcoin's currency fell
54 percent in value in one year. Ripple was described as a significant
competitor, in part because of its real-time international money
transfers. Bill Gates supported this outlook and
mentioned the Ripple system when asked about bitcoin in 2014, stating
"there’s a lot that bitcoin or Ripple and variants can do to make moving
money between countries easier and getting fees down pretty dramatically. But
bitcoin won’t be the dominant system.” About Ripple's allowance of any
electronic value holder, the Vice President of the St. Louis Federal
Reserve and professor at Simon Fraser
University, David Andolfatto, stated in 2014 that "Ripple is a
currency-agnostic protocol. Ripple is the winner. It processes
anything." For its creation and development of the Ripple protocol
(RTXP) and the Ripple payment/exchange network, the Massachusetts
Institute of Technology (MIT) recognized Ripple Labs as
one of 2014's 50 Smartest Companies in the February 2014 edition of MIT Technology Review.
Reactions to XRP
The reaction to XRP is polarized in the crypto-currency
community. Proponents of bitcoin have
criticized XRP for being "pre-mined," as XRP is built directly into
the Ripple protocol and requires no mining. Also, Ripple Labs' distribution of
the original limited amount of XRP currency has met with a fair amount of
controversy, and in particular the founders' retainment of 20% is seen as
a high percentage. However, Esquire countered in
2013 that "if that is devious, then so is every company that's ever gone
public while retaining the great bulk of its shares." Much of the
controversy was settled after the announcement that the founders Jed
McCaleb and Arthur Britto would be selling their XRP at a mediated
rate over several years, "a move that should add stability and restore
confidence to the XRP market." CEO Chris Larsen in turn donated
7 billion XRP to the Ripple Foundation for Financial Innovation, with the XRP
to be "locked up" and donated over time. In 2016, of the 20%
allocated initially to the founders, nearly half had been donated to
non-profits and charities.
Ripple has also been criticized to be not truly decentralized,
or for using only a few core validation nodes for transaction consensus,
compared to Bitcoin and Ethereum in the five
digits. Bitcoin developer Peter Todd notes, "..Ripple's technical
documentation doesn't make any of these risks clear – nowhere do they describe
in detail how nodes can fall out of consensus with one another if their UNLs
(Unique Node List) don't match."
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