Ripple is an exchange platform with a decentralized ledger and its own cryptocurrency.
The platform is called RippleNet, and the cryptocurrency is called XRP.
RippleNet is an open source, peer-to-peer network that allows users to exchange any type of value, whether it’s cryptocurrency, fiat currency, or something else.
So, the parties to a RippleNet transaction might exchange XRP for Bitcoin, Ether, or US Dollars, for instance. They could exchange British Pounds for Ripple’s own cryptocurrency XRP. In theory, they could even exchange things like airline miles for currency or something else they consider valuable.
RippleNet makes these exchanges happen through a system of gateways.
Let’s say Party A wants to offload some Bitcoin and acquire Canadian Dollars.
Party B has Canadian Dollars they want to sell and wants some Ether.
Party C has Ether and wants Bitcoin.
All three would submit their bids and offers on specific RippleNet gateways. RippleNet would then find the fastest, most cost-effective way to make the exchange happen so all three get what they want.
The network verifies the transactions, after which they’re recorded on Ripple’s ledger. But unlike other decentralized platforms, RippleNet doesn’t use proof of work or proof of stake for verification. Instead, the platform uses a network of independent nodes.
These nodes constantly compare transaction data among each other until they all agree on the current state of the ledger.
XRP, Ripple’s cryptocurrency, represents the transfers of value that take place on RippleNet. Think of it as a bridge between one unit of value and another.
Let’s go back to the previous example.
C wants A’s Bitcoin. But they have Ether while A wants Canadian Dollars, so they can’t transact directly with each other.
Similarly, B can’t transact directly with A or C.
In a traditional scenario, it simply isn’t possible for such an exchange to happen. But RippleNet gets around this by converting A’s Bitcoin, B’s Canadian Dollars, and C’s Ether to XRP.
When the XRP reaches the other party, it’s converted back into the unit of value that party wants. So, Canadian Dollars for A, Ether for B, and Bitcoin for C.
RippleNet gateways are typically owned by banks who guarantee the exchange. So, in a way, XRP works like IOUs or promissory notes.
Ripple was launched as OpenCoin in 2013 by programmer Jed McCaleb and angel investor Chris Larsen, who is considered the richest man in cryptocurrency. But the protocol dates back to 2004, when Ryan Fugger created the prototype for a decentralized digital monetary system he called RipplePay.
Because Ripple doesn’t use proof of work or proof of stake, no mining takes place. XRP is pre-mined: Ripple owns it and controls how many coins are in circulation, which means Ripple effectively acts as a central authority.
Ripple has recently made headlines for all the wrong reasons. The US’s Securities and Exchange Commission has sued the company, Chris Larsen, and current CEO Bradley Garlinghouse, arguing that because of the way it works, issuing XRP amounts to an unregistered and, so, illegal securities offering. As a result of the lawsuit, XRP was delisted from Coinbase and several other exchanges and plunged in value.
Want to know more?
The Securities and Exchange Commission has published their full complaint against Ripple here. Interestingly, their central argument is that XRP isn’t a currency, but an asset that compensates the holder for assuming a risk.
Legal Briefs analyze the issues in more depth and speculate on the lawsuit’s likely outcome in this YouTube video.
The METACO view
“The SEC’s lawsuit may be bad news for Ripple, but it shines a spotlight on just how far crypto assets have come. If this had happened a few years back, the whole market would have probably crashed. But the total market cap has continued rising — a clear sign the market is maturing.”