What is Ripple and XRP?

Ripple is a distributed real-time protocol for many types of payments of all kinds. We explain the role of the project, which calls itself “Internet of Value”, for payment service providers, banks and end customers.

Ripple: No further bitcoin
First of all, Ripple can be clearly classified as an enterprise project and thus be clearly distinguished from Bitcoin. While the latter currency is used by the end customers themselves for payment transfer, Ripple is a technology that runs in the background – users themselves do not necessarily notice that they are using Ripple indirectly. Instead, the project is aimed at large institutions such as payment service providers, financial institutions and banks.

Any kind of values can be transmitted over the network. The log also contains a component that allows the exchange of different currencies. The universality of the protocol even allows you to exchange airline bonus miles for bitcoin, i.e. much more than just crypto currencies per se. Each network participant can submit bids or offers; Ripple then routes these requests in the network in such a way that the exchange takes place as cost-effectively as possible.

Payment processing in the enterprise context
Ripple has a special infrastructure that allows 1,500 transactions per second. This means that the transaction capacity that can be processed by the network is significantly higher than that of Bitcoin and many other known blockchain projects, for example.

The technology behind Ripple
As already mentioned, it is possible to exchange currencies of different types in the Ripple network. This function is built in by default.

However, such a transaction requires trust between the parties. If Bob wants to send Bitcoin to Alice, he does not necessarily need to own Bitcoin, but can also carry out the transaction in US dollars. In addition, another party comes into play, the Gateway, which takes over this role of trust between Alice and Bob.

To understand how such a gateway works, we look at the following simple transactions on a Euro basis. The gateway can also be imagined as a person who is an intermediary between sender and receiver.

  • A common transaction
    We assume that Bob wants to send 100€ to Jonas. The transaction looks like “usual” from the outside, i.e. Bob sends the 100€ directly to Jonas.

  • Transaction with intermediaries
    We now assume that both the receiver and the sender have an agent. The latter takes over the transfer. This means that Bob does not send the money directly to Jonas, but gives it to his agent Kate, who is responsible for the transfer, and Jonas does not receive his money directly from Bob’s agent, but also through his agent Alice.

This means that liabilities also arise between the agents. Because it’s not Bob, it’s Kate who owes Alice the money. Alice releases the money for Jonas and at the end of the transaction a liability arises, so that Kate owes Alice €100.

  • Multiple transactions in the network
    Let us now go one step further and to the last extension of our example. We assume that there are two transactions in the network:

First, the €100 transaction from Bob to Jonas. This transaction takes place using the agents Kate -> Alice (see transaction 1 on the screen).

Second, the transaction in the amount of 100€ from Ela to Anna (graphically seen in the opposite direction of the first transaction). This transaction takes place using the agents Alice -> Kate (see transaction 1 on the screen).

Ultimately, this means that the debt balance between the individual gateways balances out again.

The example used here is of course very simplified and the technical process behind a ripple transaction is much more complicated, yet it shows the interaction of the individual gateways.

If a transaction is carried out that requires a currency change, several gateways can simply be connected in series, as here, which take over the exchange and connect the sender and receiver with each other. This allows Alice to send US dollars, even if he wishes Alice Bitcoin to receive them. The task of the Ripple network is to route these requests through the network as cheaply as possible. Users pay a fee for carrying out the transactions, but no one collects this fee. Instead, the XRP tokens are destroyed – these costs for each type of transaction are designed to prevent network spam.

The Ripple Governance
XRP is regarded as the token of the project, which also takes on the role of currency exchange. The project itself is also decentralised and uses decentralised technologies to carry out the transactions.

Nevertheless, there is harsh criticism of the Ripple model, as most of the tokens are in the hands of the Ripple team. There are 100 billion tokens in total, 61.4 billion of which belong to the team. In fact, it even has the absolute majority of tokens – a reason for many block chain experts not to name Ripple as a truly decentralized project.

It is noticeable that the team is trying to find a solution to the centralization problem. A decentralisation strategy was published in May 2017. In July 2017, the number of validators for the XRP ledgers was increased (to a total of 55). The number of nodes operated by Ripple itself is to be reduced at the same time.

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