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What is XRP?

Turner Wright by Turner Wright
February 11, 2021
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Article about Ripple XRP

Not quite a standard cryptocurrency because Ripple uses a consensus algorithm to verify transactions instead of a blockchain, XRP is still a popular token among crypto users and remains in the top five digital assets by market capitalization. The protocol allows users to exchange different types of different assets with XRP as “fuel,” while RippleNet, the firm’s network of payment providers, provides a reportedly fast and cheap way for users to conduct transactions.

Overview for Fast-Readers

  • XRP is a digital currency originally issued by Ripple Labs, though the company has taken steps to distance itself from managing the token
  • Based in San Francisco, Ripple maintains that the XRP token is not a security falling under the regulatory umbrella of the United States Securities and Exchanges Commission, or SEC
  • The token, a medium of exchange for payments used by many in the crypto space, represents the transfer of value across the Ripple Network

What is XRP used for?

The token can be purchased, sold, and traded almost like any other cryptocurrency and is in the top five crypto assets by market capitalization. In addition, Ripple’s payment protocol is a ledger of transactions for XRP, intended to provide liquidity for transactions. The firm works with banks, financial institutions, and payment providers through its RippleNet network.

Why do people buy XRP?

Nearly every cryptocurrency has its fervent supporters. For this token, it’s the XRP Army, a community of crypto users active on social media that sometimes mobilizes to defend Ripple from negative press coverage. 

XRP offers a great deal of functionality for a digital asset in transferring funds and receiving payments. Powering the Ripple protocol, XRP allows users to exchange funds across a number of banks and financial institutions.

Unlike other cryptocurrencies, the token is not mined. Ripple originally minted 100 billion XRP and periodically releases tokens from escrow to sell. As a result, the “initial coin offering” has been seemingly ongoing for years.

How does XRP work?

Until recently — see below — crypto users could purchase, sell, and trade XRP on any number of exchanges. Though the number of platforms handling the token has been reduced recently, XRP’s functionality has not at the time of publication.

The token essentially acts as a mediator between exchanges, offering a means for individuals and businesses to send value (or information) in a unit of value of their choosing across the Ripple Network to a recipient. These units of value can be fiat currency, cryptocurrency, commodities, or another medium of exchange. 

Unlike nearly every other digital asset including Bitcoin and Ethereum, Ripple doesn’t use blockchain. Ripple is based on blockchain technology but instead uses its protocol consensus algorithm to verify transactions. Essentially, nodes on the network must agree with each other to reach the same “consensus” and process the transaction.

What banks use XRP?

Many banks use XRP and the Ripple network as a method of money transfers because the protocol is seemingly cheaper than many traditional methods of sending fiat, like wire transfers. According to the Ripple website, more than 200 financial institutions in 40 countries have joined the firm’s cross-border payment system RippleNet. This list includes Siam Commercial Bank, Santander Bank, MUFG, and others.

Ripple and MUFG

Advantages of XRP

Ripple’s payment processor powered by XRP has advantages for both individuals and businesses by providing a secure and efficient means to send funds quickly. For example, fees are generally low for the network, with Ripple only taking a commission of $0.00001 for each transaction.

Ripple has been touted by many for its solutions to the scalability problems other projects face. The digital asset can reportedly handle tens of thousands of transactions per second with payments settled in just a few seconds, seemingly making it more useful as a transfer of value.

Disadvantages of XRP

Many of the challenges XRP faces are regulatory in nature. Ripple’s headquarters is based in the United States, meaning the token falls under the regulatory umbrella of the Securities and Exchange Commission. Crypto firms based in the U.S. which issue their own tokens often have to abide by the SEC’s regulatory framework, which classifies securities as assets dependent on the work of a third party to gain profit. 

Until recently, Ripple has avoided direct legal conflict with the SEC in regards to its XRP sales. However, the firm has faced a class-action lawsuit from investors alleging XRP is an unregistered security.

Ripple and RippleNet

Though the XRP token was (and still is by some) referred to as “Ripple,” there are some differences in the different features of the project.

Ripple refers to both the company Ripple Labs founded in 2012 by Chris Larsen and Jed McCaleb and the Ripple Transaction Protocol, or RTXP. McCaleb left the firm in 2014 holding almost 10 billion XRP tokens. The Ripple co-founder agreed to limit the amount of tokens he can sell on a weekly basis and still holds millions of XRP years later.

RippleNet refers to the network of payment providers that use solutions developed by Ripple to transfer funds. The On-Demand Liquidity service is the only feature of RippleNet that requires XRP.

What does the future of Ripple look like?

In December 2020, the U.S. Securities and Exchange Commission filed charges against Ripple, Chief Executive Office Brad Garlinghouse and co-founder Christian Larsen. The commission is alleging that the XRP token is classified as a security, falling under the regulatory framework of the SEC, which requires such an asset to be registered.

Ripple in Court

In the weeks following the SEC announcement, the price of the token was exceptionally volatile as small and large cryptocurrency exchanges announced they would delist XRP or suspend trading of the token. The list includes Coinbase, Blockchain.com, Voyager, OKCoin, Bittrex, Bitstamp, OSL, Beaxy, and CrossTower. Grayscale Investments, a major crypto fund manager which offers investors the means to buy trusts in Bitcoin and other tokens, has also suspended XRP in the firm’s Digital Large Cap Fund.

As a result of the SEC lawsuit and other civil suits, the future of Ripple in the United States is uncertain. In interviews and on social media, both Garlinghouse and Larsen have expressed their apparent frustration with United States authorities’ policy on “regulation through enforcement” and the lack of regulatory clarity in the country. Both figures have alluded to the firm relocating its San-Francisco based headquarters to another country in the near future.

Summary

Many crypto users rely on XRP and Ripple for a transfer of value from one individual or business to another due to the protocol’s speed, security, and scalability. Despite this, Ripple does not run on a blockchain like Bitcoin, but rather its own protocol consensus algorithm to verify transactions.

Following more than one class-action lawsuit filed by investors and charges from the SEC in December 2020, the future of Ripple remains uncertain. Top executives at the firm have said they are investigating relocating Ripple’s headquarters outside the United States.

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Turner Wright

Turner Wright

Turner Wright did not buy Bitcoin before 2013, and has been making up his potential losses with freelance writing work for various crypto publications. He gets his inspiration from a combination of green tea, dark chocolate, and pressure.

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