What Is ripple?

Ripple is a settlement and remittance network for cross-border payments.

Ripple is built upon an open source protocol and supports various tokens. The goal of Ripple is to provide secure, instant and almost-free global financial transactions of any size.

Ripple can be confusing because the name "Ripple" actually refers to several different things:

• XRP (the Ripple cryptocurrency token)
• Ripple Labs (the company developing XRP)
• The Ripple Network/Protocol

To avoid confusion I'll use the terms Ripple Labs, XRP and Ripple Network for the remainder of these notes.

The Ripple Network was designed by Ripple labs to operate as a distributed ledger (i.e. a blockchain) and validated based on consensus, rather than mining. The native token on the Ripple Network is the Ripple token -  XRP - and is used as a bridge currency, meaning it is the "middleman" when exchanging currencies. 

The interesting thing about XRP is that it's marketed mostly towards banks, as XRP is generally used to facilitate transactions between banks and institutions. This is in contrast to cryptocurrencies like Bitcoin, which are generally intended for end users.

The Team

Ripple Labs is a global company that has offices in many countries - India, Singapore, Australia, USA and Luxembourg.

Here are quick notes on some of their leadership team:

Chris Larsen - Chairman, former CEO, co-founder of Ripple / formerly with Prosper and E-LOAN. Larsen was one of the original developers of the Ripple idea back in 2012.
Brad Garlinghouse - CEO and director of Ripple / former executive at Yahoo and AOL.
David Schwartz - CTO of Ripple / former developer for CNN and NSA. David Schwartz is one of the original architects of the current Ripple protocol.
Jed McCaleb - McCaleb was the founder of Mt Gox and co-founded Ripple with Chris Larsen. He's mentioned here because it's notable that McCaleb left Ripple in 2013 in order to found Stellar.

Ripple actually has a very large team, just like any large corporation. You can read bios on all Ripple executives here.

However, Ripple has been open source since 2013, meaning it is "technically" being developed outside of Ripple Labs.

Therefore my question is, who is actually developing XRP? I wasn't about to find any information on this.

The Product

The Ripple protocol is based around a shared public ledger known as the XRP Ledger. The ledger uses a consensus protocol, operated by validators on the network. 

How this works is a transaction is proposed to the ledger by someone using the Ripple Network, maybe a bank. Validators then aim to verify the transactions are valid. If a supermajority agree the transaction is valid, it gets adopted into the ledger. If not, the transaction is proposed again until a supermajority is reached. If a supermajority is not reached, the transaction is discarded as invalid. The current requirement for a supermajority is 80%. Read more about the consensus protocol here.

Validators can be anything from companies to banks to universities. A full list of their validators can be found on their XRP Charts page. The Ripple network has been criticised for being too centralised, as almost half of the validators are run by Ripple Labs themselves as of 2018. Ripple vs non-Ripple validators can be viewed here (unconfirmed by Ripple).

By Ripple Lab's own admission, XRP is marketed toward banks and is specifically for inter-bank transactions. While it may be possible to use XRP as a peer-to-peer currency, that is not its intended purpose. Instead, Ripple Labs wants banks and financial institutions to integrate the Ripple protocol into their own services, and then offer it to customers.

How this works - banks will use the Ripple protocol as a middleman for cross-border payments. Therefore instead of banks using rates such as NZD/AUD, NZD/USD, NZD/EUR and so on, they will only operate on one rate: NZD/XRP. The idea is that all banks will now communicate with the XRP ledger, giving them a global point of exchange and vastly speeding up transactions.

A good analogy would be email - nowadays it doesn't matter which email client you use, you can send emails to anyone, even between Gmail and Outlook and Yahoo Mail, as they all operate on the same protocol (SMTP). This is in comparison to something like Whatsapp, which only allows you to send messages to other Whatsapp accounts - similar to how banks currently operate.

The fact that XRP is aiming to integrate with the banking industry makes it unique, as most cryptocurrencies see themselves as a replacement to banking. The philosophy is quite different.

To explain, XRP is aiming to be used by banks as a bridge currency:

NZD -> XRP (bank 1) -> XRP (bank 2) -> AUD.

Therefore, banks no longer need to worry about exchange rates such as NZD to USD, NZD to EUR, NZD to AUD etc. They only need to worry about one exchange rate - NZD/XRP.

Bitcoin is aiming to replace currencies and exchanges rates altogether and operate as a single global currency:

BTC -> BTC.

Ripple currently claims to be able to complete any cross-currency transaction on the network within 3-5 seconds. The Ripple protocol allows deposits in a limited number of fiat currencies (USD, EUR, MXN, NZD, GBP, NOK, JPY, CAD, CHF, CNY, AUD) and also some cryptocurrencies (BTC, XRP, LTC, NMC, NXT, PPC, XVN, SLL).

Token (Utility and Metrics)

Utility

XRP is built for use on the XRP network. It is divisible into units called drops. One million drops makes up 1 XRP.

The intended utility of the XRP token is as a bridge currency for institutions. While it can be used by end users as a peer-to-peer currency, that does not appear to be the intention. 

Other tokens can also exist on the Ripple network. You do not require XRP to use the network. However, XRP is the only native token, meaning other tokens are issued by other parties and will carry counterparty risk. For example, ASB could issue ASB tokens, however their value would be dependent on the solvency of ASB.

Token metrics

The token metrics for XRP are as follows:

100 billion XRP were created when the protocol was built. The hard cap is also 100 billion and no more XRP tokens will ever be created.

20 billion XRP were retained by the founders of Ripple Labs.

The remaining 80 billion XRP was put under the control of Ripple Labs.

In May 2017, Ripple Labs committed to a lockup of 55 billion XRP tokens. The lockup deal allows them to use a maximum of 1 billion tokens per month, with the unused amount returning to lockup at the end of the month.

So here's what the current XRP distribution looks like, based on the best information I can find:

Within that 20~30 billion distributed XRP, it is unclear how much it is held by The Ripple Foundation, Ripple staff, validators such as banks, institutions, companies and so on. For example, The Ripple Foundation was gifted 7 billion XRP in 2014, but it is unsure how much they have left.

It is estimated that about 3-10 billion XRP in total (3-10% of total supply) is held by regular investors. 

The Community

Ripple Labs has formed an impressive list of partnerships with banks and financial institutions around the world.

Many of them are either already using or are in the testing stage of integrating Ripple software into their systems. Some of the more notable names are Bank of Santander, Standard Chartered, American Express, Westpac, Moneygram. You can see the full listing on their website.

Ripple calls this global network of partners and solutions Ripplenet.

Here's an important thing to learn about Ripple's community though - much of it is not centred around XRP or even involved with XRP at all. 

Currently Ripple Labs has a product suite of three flagship products: xCurrent, xRapid and xVia.

Of those three, only xRapid utilises XRP. The other two function on the Ripple protocol but XRP is unrelated to both.

Therefore while the community appears strong on the surface with many strong investors and partnerships, it is unclear how much benefit the community provides to XRP, if at all. 

XRP does have a very vocal and supportive investor community, both on Twitter, reddit, and the crypto community in general.

B Money Verdict:

The Ripple protocol is a great product. It is fast, cheap (basically free) and solves a problem.

Ripple Labs seems to be well governed, well connected and doing a great job of driving adoption of the Ripple network, and will probably be a very profitable company.

If it were possible to buy shares in Ripple Labs, I would probably do it.

However, XRP tokens are not shares in Ripple Labs. That's the important distinction to make here. Nor does XRP seem to be that important to Ripple Labs' success.

First of all, only one of Ripple Labs' products actually uses XRP. And there is nothing unique about XRP that makes any product reliant on it. Ripple Labs could create a new token called XXX tomorrow and use that as a bridge currency instead. Because the entire XRP supply was pre-mined and is not based on any proof-of-work, it is entirely replaceable. 

In fact, as we noted earlier, other entities are already doing this. They are able to create their own tokens and use that instead of XRP on the network, so in most cases XRP utility is limited.

Secondly, the XRP network is highly centralised, with around half of the validators being run by Ripple Labs.

Lastly, the XRP token metrics are poor, with around 70% of all tokens being held by Ripple or its founders, and around 3-10% being held by the public. As far as token metrics go, it's among the most inequitable distribution I've seen.

Why is this important? 

Because decentralisation is the cornerstone of cryptocurrency. With XRP, the token distribution is not decentralised, the network is not decentralised and the governance is not decentralised. 

In fact in 2015, Ripple was fined $700,000 by the government for breaching the Bank Secrecy Act. This only proves this point - a decentralised currency such as Bitcoin cannot be fined, because there is no central entity to issue the fine to. 

How does this affect investors?

First of all, the scarcity of XRP is manufactured. 70% of the tokens are held by Ripple and its creators, so while investors are buying XRP and driving up the price, the creators are simply getting exponentially richer for doing nothing.

This is similar to how a company founder launches an IPO. He sells 30% of his shares to the public, and holds onto the remaining 70%. As the price of shares rise on the market, he gets rich. This is how people like Bill Gates (Microsoft) and Phil Knight (Nike) got rich. However, this is a fair outcome because the founder has created a company of value and therefore deserves to benefit.

This is not the same situation here with XRP. The XRP token is not equity and does not give you any stake in the profit of Ripple Labs. It is just a token, which has no proof-of-work behind it and was simply created with the push of a button. Its only value comes from being used as a middleman token on the xRapid product.

I would go so far to say that XRP isn't even really a cryptocurrency, it's an internally issued token, of which the public has managed to get a very small share.

Like I said, if the XRP token held equity in Ripple Labs, I would happily invest, but it does not.

Overall I think investor hype may drive price strongly in short-medium term, however upside will be very limited over the long-term. Dilution will be huge if/when full supply goes into circulation.

The Good Stuff

• Fast transactions
• Almost free to use
• Strong community and partnerships behind Ripple Labs

The Bad Stuff

• Centralised network
• Centralised token distribution
• Poor token metrics
• Limited token utility

Scorecard:

Useful Links

REFERENCES

1. Ripple Consensus Protocol: https://developers.ripple.com/consensus.html
2. Ripple stats and partnerships: http://rppl.info/
3. Ripple Labs Wikipedia: https://en.wikipedia.org/wiki/Ripple_Labs
4. Ripple protocol Wikipedia: https://en.wikipedia.org/wiki/Ripple_(payment_protocol)
5. XRP metrics: https://ripple.com/xrp/market-performance/
6. Jed McCaleb agreement: https://pando.com/2014/08/15/ripple-settles-with-estranged-founder-jed-mccaleb-outlining-a-metered-sale-of-his-xrp-holdings/
7. Jed McCaleb and Chris Larsen holdings: https://www.reddit.com/r/Ripple/comments/7rgdmz/update_19012018_923_of_xrp_tracked_jed_mccaleb/
8. What is the Ripplenet? https://steemit.com/cryptocurrency/@investoranalysis/what-is-the-ripplenet
9. Ripple Labs' product suite: https://ripple.com/insights/ripples-product-suite-growing/