On the contrary…

On the contrary…

In light of yesterday’s piece explaining the ‘apparent’ flaws of XRP and Ripple, I’d like to provide a friendly rebuttal to my colleague Sean’s opinion on the matter.

Just to clarify, RippleLabs is the company that has created bank software to be able to enhance the speed at which fiat transactions are paid and settled on the XRP Ledger.

XRP is the token that is able to process up to 1500 transactions per second, with the capability to extend to 70,000. Each transaction can be settled in 3 seconds, costing $0.0004 per transaction.

Now, I’m going to address Sean’s points one by one…

Ripple is centrally controlled by Ripple, a company. Transactions go through the company.’

I’d say this is partially correct. Currently, Ripple controls the majority of the validators required to make transactions decentralised.

However, in October, their chief cryptographer David Schwartz released this in the Ripple blog:

‘As Ripple progresses towards further decentralizing the XRP Ledger, we want to make server operators and members of the XRP Ledger community aware of a few upcoming changes to help ensure the reliability and stability of the network as it transitions to a distributed architecture with fully decentralized validators…

Ripple chose deliberately to be the most trusted validator operator in the network during the initial stages of development of the XRP Ledger. This decision involved trade-offs to prioritize security and scalability ahead of decentralization.

Since inception, the XRP Ledger has closed over 33 million ledgers, processed over 600 million transactions amounting to more than $15 billion in transaction volume, with no major issues or network forks.

At present, the XRP Ledger can natively scale to 1,500 transactions per second. With Payment Channels, XRP can theoretically scale to tens of thousands of transactions per second—throughput levels comparable to VISA.

With the security, stability, and throughput of the XRP Ledger thoroughly proven, Ripple feels that now is the time for a crucial next step in decentralization, while continuing to improve all aspects of the XRP Ledger software.’

You can read further to see exactly how they’ll decentralise the ledger, but essentially, if Ripple went bust tomorrow, XRP would still exist and work the same.

More familiarly, Bitcoiners will argue that BTC is decentralised, but they will complain about exchanges washing trades and readily forget about the 1000 Bitcoin whales that own 40% of the market.

The next ‘logical’ argument that is followed by Bitcoiners (and by the way, this term is external to Sean’s argument, it’s simply what I’ve seen on Twitter) is that Ripple own a lot of XRP so they can dump if needs be (obviously ignoring the fact that there are bitcoin whales).

This would make sense if Ripple were only providing a coin. But the fact that they are providing a service to banks – who rely heavily on trust and have a lot more firepower than Ripple do – makes this against Ripple’s self interest as a business.

However, the overriding fact here is that Ripple put 55 billion of their own XRP holdings into escrow, all to prevent any possibility that they can dump on the market. They will release a maximum of one billion per month to ensure supply predictability.

‘“The Ripple system doesn’t have a clear need for XRP. Simple as that.” That’s the verdict of Peter Todd, a Bitcoin core developer and crypto expert who was hired to scrutinise Ripple.’

This is partly true. There is no required need. RippleLabs has in fact developed three different software programs for banks and payment providers to smooth their business processes.

But let’s step back. Let’s ask ourselves what issue Ripple is trying to solve here.

The SWIFT messaging system requires the use of accounts called vostro/nostro (two way accounts where funds must be held in different countries for payments to be settled).

Firstly, this takes days to settle.

Secondly, it’s expensive and subject to exchange rates changing.

Thirdly, it requires roughly $30 trillion just sitting in accounts globally to be used as liquidity.

This third point is really where XRP comes in…

If you have something that can fix the first two points and can get rid of the requirement of vostro/nostro accounts, you can see why banks might want to use the software alongside XRP, especially in their more illiquid payment corridors.

For good reference, this video gives a quick look at how existing payment networks operate and how Ripple looks to improve them. And if you want to know how much banks can save with XRP usage, then here is the relevant data. In all honesty, it’s a no brainer.

‘Transactions in XRP can be undone, just like a Visa transaction (and unlike a real cryptocurrency transaction). And Ripple the company is free to print as many XRP as it wants.’

Sorry Sean, this isn’t true unfortunately!

Transactions in XRP cannot be undone, unless all validators went rogue (which has a 0.0000000000000001% chance of happening).

Transactions are either validated or not – validators which fail are removed from the RippleNet so only trusted validators are retained. As I mentioned at the beginning with decentralisation, this makes collusion almost impossible – why would 500 banks collude to allow a transaction when they’re all competing?

Ripple are unable to ‘print’ more XRP…

There is something known as the burn rate – at every transaction, a tiny portion of each XRP is destroyed (done to prevent ‘spamming’ of the network – that is one transaction being conducted more than once).

If Ripple tried to ‘print’ more, this would destabilise the protocol and basically stop it from working right there and then – the blockchain XRP is based on physically can’t allow more to be printed.

Anyway, what advantage would Ripple have from devaluing their ‘own’ currency (even though they make money from the software)?

‘Ripple the company says XRP are used to collect payments for transactions on the Ripple network. But that doesn’t make a whole lot of sense to me. Why create a new token just for collecting payments? Why not just accept payment in dollars or Bitcoin?’

Well, just take a look at the table below…

Source: Ripple official site

Note that USD are not included because the settlement is so slow.

‘Then there are the questions over Ripple’s co-founder, Jed McCaleb. McCaleb was the original founder of Mt Gox, the first Bitcoin exchange.’

Jed now runs Stellar, a Ripple and XRP competitor.

‘Ripple fans say banks are going to use it to send assets around the world. But the thing is, no banks are actually doing this. Ripple has touted “partnerships” with important banks. But they’re not actually using it for real transactions. The only deal announced so far? A Mexican money transfer company.’

The Japan Bank Consortium are currently trialling X-Border payments using xCurrent – one of three products offered by Ripple to financial institutions.

I believe this to be the natural progression – xCurrent replaces SWIFT, then the next solution xRapid, replaces the liquidity requirements. But you can’t expect huge firms with legacy issues to run before they can walk!

xRapid is a simple overlay on top of xCurrent, removing market makers that substantially raise the fees on FX transfers. That is stage two.

Put into perspective, xCurrent provides a cost saving of an initial 30% on average, while xRapid provides a further 30%.

In terms of current partners of Ripple, there are many. These include the likes of American Express, Standard Chartered and Westpac. Ripple are also likely to announce two more household names as partners following the upcoming Q4 2017 Report in the coming weeks.

If you need validation for the scope of what Ripple is trying to do, you just need to see the amount of business those banks do, and the sheer size of them.

You may ask why I feel so strongly about Ripple? Well, there are two reasons.

Firstly, I’ve looked at the people running the firm and their credentials are hugely impressive.

Secondly, they’re solving a problem of illiquidity. Bank charges on payments are huge, and they affect those on the most illiquid channels. Many people from Africa, Asia and South America remit money home, but use Western Union, who charge them exorbitant fees due to currency risk between the date of payment and settlement.

Ripple are trying to solve this problem, and there are rumours that even Western Union are partnered with them.

Personally, I just think it’s a good idea and I’m all for it.

P.S. We want to know what you think. Are you a Ripple advocate like me? Or can you see the flaws that Sean sees? Or maybe you have your own take…

Whatever your position, be sure to let us know at feedback@agora.co.uk