Ripple is a payment protocol that uses blockchain technology to process international money transfers. It offers low transaction fees and extremely fast processing times, and it has partnered with hundreds of financial institutions that use its technology.
There's a common misconception that Ripple is a cryptocurrency. Ripple itself is not a cryptocurrency, but it does have a native cryptocurrency called XRP (CRYPTO:XRP). Those who like Ripple and want to invest in it can buy XRP.
Although Ripple has potential, it also has had some high-profile issues. Most notably, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against it at the end of 2020. If this crypto project caught your eye, here's a complete look at its story so far and how it works.
Image source: Getty Images
History of Ripple
Software developer Ryan Fugger came up with the first version of Ripple when he founded RipplePay in 2004. The site allowed people to extend credit to others in their community. This makes Ripple the rare crypto project that was around in some form before Bitcoin (CRYPTO:BTC), although it wasn't a cryptocurrency at the time. Bitcoin's anonymous creator, who used the pseudonym Satoshi Nakamoto, even mentioned Ripple once in an email.
Programmer Jed McCaleb started developing the XRP cryptocurrency and blockchain in 2011. He recruited a team, found investors, and approached Fugger about using his RipplePay network in 2012. Fugger agreed to hand over control of RipplePay.
They launched their company and the XRP cryptocurrency in 2012. The company was originally called NewCoin before changing the name to OpenCoin and then later to Ripple.
Ripple would go on to establish partnerships with financial institutions. In 2019, it announced that more than 300 financial institutions in more than 45 countries were using its RippleNet payment network. If you're debating whether this cryptocurrency is a good investment, Ripple's success so far is one point in its favor.
On Dec. 22, 2020, the SEC filed a lawsuit against Ripple for selling $1.3 billion in unregistered securities through its XRP cryptocurrency. Ripple has denied the allegation, claiming that XRP isn't a security.
How Ripple works
The purpose of RippleNet is to provide fast, cheap, and convenient cross-border transactions for banks. That makes it an alternative to SWIFT, the current international payments system that most banks use. There are several advantages Ripple offers for international transactions:
- The average transaction processes in five seconds.
- The transaction fee is 0.00001 XRP, which was much less than a fraction of a cent even at the token's all-time high in price.
- The XRP cryptocurrency can be used as a bridge currency. This gives financial institutions a cheaper way to trade currencies. They can hold XRP instead of various types of fiat money.
The XRP cryptocurrency uses a consensus protocol to verify transactions. Validators compare proposed transactions to the most recent version of the XRP ledger and accept legitimate transactions. For a transaction to be verified, the majority of the validators must accept it.
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Bitcoin vs. Ripple XRP
There are several major differences between Bitcoin and Ripple's XRP token. Here's what separates these two types of cryptocurrency:
1. They use different systems to verify transactions
Bitcoin uses mining to verify transactions and distribute new coins. Participants set up mining devices to solve complex mathematical equations, and the first to solve the equation gets to add a block of transactions to Bitcoin's blockchain. In exchange for Bitcoin mining, participants receive Bitcoin rewards with each block they add.
XRP verifies transactions through its consensus protocol. A majority of the validators who review a transaction must accept it for that transaction to be approved.
2. XRP is faster, cheaper, and more energy-efficient
Because of its consensus protocol, XRP is able to process transactions in seconds at a low cost and with minimal energy. This makes it one of the more environmentally friendly cryptocurrencies.
Bitcoin transactions, on the other hand, aren't efficient. They take an average of 10 minutes and have much higher fees than using XRP. Bitcoin mining also requires quite a bit of energy and has faced criticism for its environmental impact.
3. Bitcoin has a much smaller supply
Bitcoin has a maximum supply of 21 million coins, and XRP has a maximum supply of 100 billion tokens. That's one reason the price of one Bitcoin is so much higher than the price of one XRP.
4. They have different distribution methods
Bitcoin is distributed through the Bitcoin mining process. New coins are added to the supply as participants mine them until the maximum supply of 21 million is reached.
XRP was premined, meaning all 100 billion tokens were minted before it launched. Ripple locked 55 billion XRP into escrow and set up smart contracts to release one billion XRP from escrow on a monthly basis. When tokens are released, Ripple can sell as much as it wants to raise funds and put unsold tokens into a new escrow.
5. Ripple is a private company
Although the XRP cryptocurrency is decentralized, it's still tied to a private company in Ripple. That's in stark contrast to Bitcoin, which is completely decentralized. While the connection between Ripple and XRP doesn't matter to many investors, some crypto enthusiasts view it as a negative.
Pros and cons of Ripple's XRP cryptocurrency
Here are the biggest pros and cons of Ripple and its XRP cryptocurrency:
| Pros | Cons | |
|---|---|---|
| XRP transactions are fast and cheap. | Ripple's consensus protocol is arguably less secure than other methods of processing crypto transactions. | |
| Ripple's payment network is already being used by financial institutions. | Many of Ripple's banking partners only use RippleNet and not its XRP cryptocurrency. | |
| XRP can be used by small business owners and consumers for secure money transfers. | Ripple has attracted controversy because it's run by a private company and because of the SEC lawsuit. | |
| XRP can be used as a bridge currency for international currency transfers. | XRP is difficult to purchase in the U.S. |
How to buy Ripple's XRP cryptocurrency
To buy Ripple's XRP cryptocurrency, sign up for an account on an exchange that offers it. Then purchase it by using any of the exchange's accepted payment methods.
Due to Ripple's issues with the SEC, many major U.S. cryptocurrency exchanges have suspended XRP trading. Here are a few options that offer XRP:
- KuCoin
- Uphold
- Coinmama
Should you consider investing in Ripple XRP?
Ripple's XRP token is a risky play, and that's even in relation to other cryptocurrencies and cryptocurrency stocks. The SEC lawsuit led several popular exchanges to drop XRP, and it has also received criticism in the crypto community because a private company is in charge of it.
At the same time, it's easy to see the potential of Ripple. It could replace an inefficient and outdated system for international money transfers. The fact that it has partnerships with banks is promising. And any positive developments in its legal status could lead to an increase in price.
Cryptocurrencies in general are volatile, and XRP is in an even more complicated position. If you think Ripple could continue to grow, then a small investment in XRP may be worth considering. It's not nearly as safe as investing in stocks, but if Ripple succeeds, you could make a sizable return.
Lyle Daly has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
