In this episode of Be[In]Crypto’s Video News Show host Juliet Lima dives deep into Ripple and the XRP cryptocurrency.
In this video, Juliet explains the distinction between Ripple and XRP, and how the underlying technology works. It also details the advantages of using XRP, as well as some of the disadvantages. Finally, Juliet summarizes Ripple’s ongoing lawsuit with the Securities and Exchange Commission.
What is XRP?
First of all, although intrinsically linked, Ripple and XRP are two separate things. Ripple is a blockchain network for payments, while XRP is the cryptocurrency that runs the network. Both are operated by a private company called Ripple Labs.
The company and its blockchain derive their name from the fact that the technology allows payments to Ripple via multiple currencies. And while RP in XRP naturally stands for Ripple, the X used is a prefix for non-national currencies in the ISO-4217 standard.
How it works?
The ultimate goal of the blockchain network and cryptocurrency is to improve the asset transfer process. The easiest way to use this currency is to transfer XRP from one wallet to another and exchange the value directly.
What differentiates XRP from other types of cryptocurrencies is how it works. While transactions for many cryptocurrencies are confirmed by either the energy-intensive proof-of-work consensus mechanism or the increasingly popular proof-of-stake, XRP instead relies on a proof-of-consensus model.
XRP was also designed to act as a nexus between different currencies. Someone wishing to send $100 worth to Japan could convert the currency to XRP, which the recipient could then withdraw in the Japanese yen equivalent.
XRP also has effective advantages over traditional bank transfers. Instead of taking days or up to more than a week and costing between $25 and $50 in transaction fees, as is currently the case with traditional banks, XRP can settle the same transactions for generally less of a penny, in 3 to 5 seconds.
Advantages and disadvantages
One thing that sets XRP apart from other cryptocurrencies is its convenience. Rather than moving to an entirely new financial system, as many envision with Bitcoin, XRP instead works within the current infrastructure to improve it. This could allow it to serve as the next step in the evolution of modern banking.
Another unique aspect of XRP is that all transaction fees are actually burned, which means they are ultimately eliminated from the Ripple network. This makes XRP a deflationary currency, as the initial supply of 100 billion coins slowly decreases, which will theoretically make it more valuable over time. Another attractive feature of XRP, given its longer-term potential, is its current price. Currently, XRP is trading for less than a dollar, which makes many investors feel like they got in early.
Despite these features contributing to the general hype, there are still many concerns about XRP. The first is its upside potential. Considering the disproportionate amount of total coins, 100 billion compared to Bitcoin’s total of 21 million, it is perhaps unlikely that its value will reach a scale similar to that of Bitcoin.
Ripple centralization issues
The second concern is that XRP is actually very centralized, contrary to the core spirit of decentralization in crypto. Of the total 100 billion XRP, only around 48 billion are in circulation, of which the rest is mostly controlled by Ripple and has been placed in escrow. According to the escrow agreement, Ripple is currently able to release 1 billion XRP every month.
Although they have so far been cautious in distributing XRP, this poses a serious risk for XRP holders. If a significant amount were to come into circulation, the overall supply of XRP would increase significantly, potentially driving the price down.
Transactions per second
Although XRP may be faster in terms of individual transactions, economies of scale mean that banks and major payment companies still have the upper hand in terms of overall transactions. Currently, a major credit card company, such as Visa, can process up to 24,000 transactions per second. For XRP, that figure now stands at just 1,500 transactions per second. Unfortunately, this point of competition between the old payment platforms and XRP will probably prevent the former from integrating the latter.
Similar to other cryptocurrencies, XRP also has issues with extreme volatility, but this is particularly detrimental to its ambitions to facilitate transfers of value between banks.
Over the past year, the price of XRP has moved between $0.40 and $1.90, but much of this can be related to Ripple’s tribulations with the SEC.
The SEC and XRP
In December 2020, the SEC, the US federal securities regulator, filed a lawsuit against Ripple for issuing and selling $1.3 billion worth of XRP to the public, claiming the assets constituted unregistered securities. However, Ripple argues that XRP is not a security and had not been considered such since its initial release in 2013 until the indictment.
The initial indictment took a heavy toll on Ripple’s reputation, causing XRP to be delisted from many exchanges, which subsequently led to a price bottom. Since then, the SEC and Ripple have been embroiled in a legal battle that will likely end up setting precedent for crypto regulation in the future.
So far, it looks like the lawsuit will likely end up favoring Ripple, given some of the presiding judge’s comments. It concluded that Ripple had not necessarily done anything wrong, denying the SEC’s motion to overrule its “fair notice” defense, in which Ripple’s claims that there was no “fair notice” that cryptocurrencies were considered securities. In turn, the court pointed to the scant guidance provided by the SEC to help cryptocurrency companies comply with regulations.
The argument that cryptocurrencies are securities is central to SEC Chairman Gary Gensler’s approach to regulating the industry, which is hotly contested by crypto proponents.
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