What is XRP?
in XRP (XRP)
XRP is one of the most popular cryptocurrencies by market cap. The project’s less known detail is that it’s been around a lot longer than most people think. For example, take this historical snapshot from November of 2014, where XRP is in the number two spot by market cap.
This historical data shows that whatever people say about XRP, it’s been robust and has remained popular for years.
In this article, we’ll explain the difference between Ripple and XRP, go over XRP’s use case and real world examples of how XRP is being implemented.
Ripple the Company
Ripple is a fintech company headquartered in San Francisco. For lack of a better word, Ripple is the guardian of XRP. Ripple owns billions of dollars’ worth of XRP, has a business plan that calls for the use of XRP and has invested hundreds of millions of dollars into furthering XRP adoption.
However, while Ripple is the steward of XRP, their most popular product doesn’t use the cryptocurrency. RippleNet is a financial product that banks and corporations can adopt to speed up cross-border money transfers. RippleNet works within the existing financial system’s confines and has become quite popular in the last couple of years, with hundreds of banks joining the network.
Although RippleNet does not require XRP, once a bank joins the network, it becomes much simpler for them to start using XRP to transfer money at a lower cost and with higher speeds.
XRP the Coin
XRP’s primary use case is as a bridge currency to enable fast and cheap transfers between different countries. Here’s how that can work in practice.
- A bank in the Philippines converts their PHP into XRP
- The Fillipino bank sends the XRP to a bank in Mexico
- The Mexican bank converts the XRP into MXN
Traditionally sending money from the Philippines to Mexico has been expensive and the transfer can take up to a week. That’s because PHP to MXN is a low liquidity corridor, meaning there isn’t a lot of money flowing between the two countries. Like airplane ticket prices for a flight between two cities without a lot of traffic, low volume means high prices. However, those prices can be reduced significantly by using XRP.
By using XRP as a bridge currency, the transaction can happen in minutes instead of days and the fee can be slashed in half or more. Furthermore, the more countries that use XRP, the cheaper and easier transfers will become. If there are banks in every country that accept XRP, it will revolutionize the global financial system. Fees would be exponentially cheaper and transactions would happen almost instantly.
That’s all fine and good, but we have to ask: are banks all around the world going to build out the infrastructure to accept XRP payments? Many people say that this will never happen and a few of their arguments why it won’t happen are presented in the next two sections.
The Centralization Argument
XRP is fast because it’s arguably centralized and uses a BFT consensus mechanism. Instead of mining or Proof of Stake, dozens of validators in the XRP network vote to approve transactions. So long as enough validators vote to approve a transaction, it will go through.
While Ripple initially controlled the validator pool when XRP was released, they’ve since moved to a more decentralized model where anyone can become a validator. When a validator is added to the Unique Node List it becomes a trusted validator and can help to confirm transactions on the network. More information is available on XRPL.org.
Even with these moves toward decentralization, the entire network reaches consensus based on the input of less than 150 validators, some percentage of which are controlled either directly by Ripple or by a Ripple affiliate. I.e., university or financial institution.
Is XRP a Security? The Dark Cloud of Regulation Hovers Overhead
Another argument against XRP is that people are worried it could be classified as a security. Currently, XRP is in a sort of a legal gray area, where United States regulators have not made any comment about whether it’s a security or not.
The problem is that if regulators were to classify XRP as a security, Ripple could be fined (or worse) for selling an unregistered security. If XRP were a security, it would limit who could trade it. Furthermore, XRP could even be kicked off of American based exchanges, further decreasing liquidity.
So until there is regulatory clarity on XRP, there’s probably going to be less adoption than there otherwise would be, given that the primary customer is banks who are generally quite careful about not breaking laws. Generally.
If it was clarified that XRP is not a security, there would probably be a big spike in its price and subsequent adoption. If XRP were to be classified as a security, the price would probably drop significantly.
Creating Demand for XRP
For XRP to work, there has to be liquidity. That means that large banks or organizations must be able to buy and sell tens of millions of dollars’ worth of XRP on short notice without moving the price.
In an effort to create more demand for XRP (increasing liquidity), Ripple has spent hundreds of millions of dollars. They’ve given XRP to banks and they’ve funded dozens of projects with the stipulation that the teams integrate XRP into their product.
Public Sentiment for XRP
Out of all of the major cryptocurrencies, XRP tends to be viewed the most negatively. There are several reasons why.
- As discussed earlier, XRP is centralized and within the cryptocurrency community that’s viewed as a bad thing
- Ripple the company owns billions of XRP and they sell them on the open market to fund their operations. This selling pressure is believed to have a negative effect on XRP’s price
- XRP is designed to help banks. Many people who get into Bitcoin have a less than a favorable opinion of banks and they’re not inclined to promote any cryptocurrency which supports the existing financial system
For these reasons and more, XRP is typically disparaged in the crypto community. It’s good to know this in advance so that if you invest in XRP you’re not surprised by the animosity. One of the best resources for positive sentiment is the XRP Subreddit, where tens of thousands of XRP investors come together to share news and encouragement.
Flare Spark Airdrop
Ethereum and DeFi are the hot topics in crypto right now. We’ve already seen an explosion of tokenized Bitcoin and so it makes sense that the next phase will be merging Ethereum with XRP. That’s the goal of Flare Networks, which is hoping to create a trustless bridge between the two cryptocurrencies.
One of the main goals of this integration is to bring advanced smart contract capabilities to XRP. Additionally, the integration would bring the Flare Token (FXRP) to Ethereum. This token would be similar to WBTC, where the token price would track the price of XRP.
Naturally, this integration will include an airdrop. Flare Network will airdrop their Spark token to XRP holders who register for the airdrop. More information is available here. The airdrop snapshot will be taken on December 12th and the Spark tokens will be distributed after that.
XRP the Standard?
There are two sides of the story when it comes to investing in XRP. On the one hand, XRP is backed by Ripple. Ripple is a large, established company that’s working closely with regulators and governments. They have a profitable product that’s already been widely adopted by banks around the world.
In an ecosystem where scams are not uncommon, Ripple is a legitimate company that’s pushing for XRP to be used in constructive ways.
On the other hand, for XRP to succeed it needs to be widely adopted and this is far from guaranteed. A bank might ask, why not just use Bitcoin as a settlement layer? Even if Bitcoin transactions take an hour to clear, instead of a few seconds like XRP, that’s still significantly better than waiting four or five days.
Another reason XRP might fail to gain adoption is that countries will roll out their own digital currencies. If there is a Dollar coin and a Euro coin, countries could quickly and cheaply transact with these, reducing the need for XRP as a bridge currency.
So there is a lot of uncertainty surrounding XRP. The price growth in the coin so far has been tremendous but that’s no guarantee that the future gains will be as lucrative. As always, do your own research and only invest an amount that you feel comfortable losing.
If you’re looking for somewhere safe to keep your XRP look no further than Exodus. With Exodus you can access your XRP from the desktop wallet or using the Android or Apple iPhone wallet. You can even use Exodus to quickly swap between different cryptocurrencies without registering on an exchange or to register for the Flare airdrop.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.