The trouble with Ripple

The trouble with Ripple

A guy called Chris Larsen was, briefly, the fifth-richest person in the world this week. His net worth hit $59bn, putting him ahead of Mark Zuckerberg, Michael Bloomberg and each of the Koch Brothers.

Larsen is the co-founder of a cryptocurrency called Ripple. In the last few months Ripple has gone absolutely nuts, even by crypto standards. It’s up 1,547% in the last month and over 30,000% over the last year. Larsen owns more Ripple tokens (XRP) than anyone else.

30,000% in a year. That’s some going. What’s so special about Ripple?

Ripple fans say it’s like Bitcoin, but faster and better…because it can process transactions quicker than other cryptos, and because it’s flexible enough to transfer any kind of asset – Ripple is soon going to be used by the banks to zoom billions of dollars around the world.

That’s the claim.

Here’s why I think it’s bunk.

Not a crypto!

Ripple is an oddity among cryptocurrencies.

To explain why: a quick digression on centralised versus decentralised ledgers…

The defining characteristic of cryptocurrencies is that they’re decentralised. No one group controls them. Instead, the entire network governs itself. So when I send a bitcoin to you, the entire rest of the bitcoin network checks and confirms the transaction.

The advantage of a decentralised network is that it’s very difficult to control. It’s hard to shut bitcoin down or regulate it, because no one person or group is in charge.

The disadvantage of a decentralised network is that it’s inefficient. Validating transactions with the rest of the network takes time. As a result, it’s slow and expensive to transact on a normal crypto network.

Ripple isn’t like that. It’s lightning fast. A transaction takes a couple of seconds, compared to around forty minutes for bitcoin. How does it do it?

Ripple pulls it off by…not being a proper cryptocurrency!

Ripple is centrally controlled by Ripple, a company. Transactions go through the company. That’s why transactions are so fast and cheap — because they’re centralised. Centralised transactions are always going to be faster and cheaper than decentralised ones. So a good comparator for Ripple would be Visa or Mastercard, not Bitcoin or Ethereum.

So what’s with this Ripple token, XRP? That’s the thing that’s going mad on the crypto exchanges; the thing that’s made Chris Larsen nominally one of the richest people on Earth; the thing that values Ripple the company at hundreds of billions of dollars.

It’s a funny one…

The Ripple token you can buy on the exchanges isn’t strictly necessary for the functioning of the Ripple network. XRP was grafted onto Ripple’s existing platform in 2012, eight years after the original centralised system was developed. “The Ripple system doesn’t have a clear need for XRP. Simple as that.” That’sthe verdict of Peter Todd, a Bitcoin core developer and crypto expert who was hired to scrutinise Ripple.

XRP tokens were just printed up by Ripple the company. They’re not mineable. 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.

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?

XRP aren’t strictly necessary for the functioning of the network and they’re not a very efficient way of collecting tolls. A cynical explanation for their existence is that by grafting a token onto Ripple’s existing money transfer technology, “printing” 100bn of them, and flogging the tokens on the market, Ripple got a lot of money.

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

He sold Mt Gox on the cheap in February 2011; by April 2011 it was discovered that 80k bitcoins were missing from the exchange. Then in June of that year, his old administrators account was used to hack it, causing a Bitcoin “flash crash”. He went on to found Ripple later that year.

Not a crypto, nor a business

So in summary: Ripple is not a real crypto. That’s why it’s so much faster than the likes of Bitcoin.

The XRP token has been grafted onto its existing technology, without serving a particular purpose.

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.

As Matt Levine put it,

“That’s the kind of value-add that creates the fifth-largest fortune in the world these days. As long as it’s [perceived to be] on the blockchain.”