Given the recent meteoric rise in the price of Ripple I thought it was time to publish an explanatory article for anyone wishing to learn the basics. The price has risen almost tenfold in the past couple of months. As such, Ripple is the number two cryptocurrency in terms of market capitalisation.
In the tumultuous ocean world of cryptocurrency, waves of progress start with a Ripple. Similar to Bitcoin, Ripple is a set of payment protocols. The cryptocurrency was created in 2012 by Arthur Britto, David Schwartz and Ryan Fugger.
Ripple, not Bitcoin
The key difference is that unlike Bitcoin, Ripple appears to be the cryptocurrency that is most accepted by the banks. UBS and Santander are just some of the banks who have begun to harness the power of cryptocurrency via Ripple. The banks use the distributed ledger in order to perform intra-bank settlements.
A brief interlude on intra-bank settlements
“What on earth are intra-bank settlements?”, you might be asking! Often banks will set up networks of shared protocols and rules to make the transfer of funds between different banks easier. In order for banks to accurately reflect their net positions they must settle up. This could be a costly and time-consuming process.
As an example, let’s say that at the end of one day UBS has ten customers that have requested that their bank pays customers’ accounts held with Santander. Similarly, Santander has ten different customers requesting funds to be transferred to customers’ accounts held at UBS.
It would be inefficient for the banks to make each individual transfer one at a time. Instead, a more efficient process is for the banks to agree on the overall position.
The total of the ten transactions from UBS to Santander were $11,000,000. Whereas, the total from Santander to UBS was $10,000,000. Overall Santander owes UBS $1,000,000. As such, Santander transfers $1,000,000, that is, the net position in order to settle the days’ transactions. As for the individual customers, each bank ensures that its own customers receive the correct amount.
Cash transfers settles any net positions. Alternatively, a letter of credit can be issued stating the amount that the net paying bank owes. However, a more innovate solution is Ripple.
Ripple is a cryptocurrency that is making the banking system more efficient. What is more is that the system works just as well for international banking relationships. This is challenging the needs for international escrow services as it generally makes transactions extremely cost effective.
Shock, horror, Ripple is a cryptocurrency that does not rely on a mining process or on blockchain. Instead, the cryptocurrency relies on the contents of a shared ledger of accounts and transaction history. This contents of the ledger is verified by a “network of independent validating servers that constantly compare transaction records”.
Payments are signed cryptographically between trusted parties and the net position is settled. The transaction history is then updated. Where there are two parties who haven’t built up any trust Ripple will attempt to make the transaction occur indirectly by linking the parties together through other trusted relationships. Atomic swaps settle any outstanding balances.
Transactions are constantly verified by the independent servers and as such there is no need for mining as in Bitcoin. Scrapping the need for mining and miners has made Ripple lighting fast relative to Bitcoin.
Furthermore, without mining the supply of Ripple cannot change. The creators released 80 billion Ripple (XRP) into the market, keeping 20 billion for themselves. Each coin is further divisible by up to six decimal places.
Watch out for this cryptocurrency. Ripple is currently achieving the very goal for which it was developed!