XRP: The Basics

Hodor

Hodor

I blog about Ripple & XRP. FULL DISCLOSURE: All views are my own. I do not work for Ripple; I am not a professional financial analyst, and the majority of my crypto holdings are XRP.

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This year and last, an enormous number of people started to become aware that 'cryptocurrency' was not just 'Bitcoin.'

When they looked deeper and started to compare the characteristics of each individual cryptocurrency, it became apparent to many that one stand-out seemed to take center stage: XRP.

These new XRP-curious individuals were hungry for any information they could get their hands on.  I wrote several blogs to help educate people that were new to XRP about the basics of its characteristics, technical features, and market statistics.  These blogs did a couple things in combination, and it's wise to publish a refreshed version of that blog now, since it appears that the crypto market is accelerating as the second SWELL Conference approaches.

Here are the important points:

What is XRP & How is it Different from Bitcoin?

Both XRP and Bitcoin are cryptocurrencies.

A cryptocurrency is a digital or virtual currency designed to work as a medium of exchange.  It uses cryptography to secure and verify transactions.  The history of all cryptocurrency transactions should be available either on a chain of blocks (blockchain), or a ledger history.  Bitcoin's history is contained in a blockchain, while XRP's history is contained in a history of all closed ledgers.

Both XRP and Bitcoin are no-counter-party assets.

This means that nobody guarantees their value.   For example, if the market suddenly decided that Bitcoin was worth $5,000, and you had purchased it for $10,000, nobody is available to compensate you for that difference;  the price of Bitcoin or XRP is purely determined by market dynamics.

But that's where most of the similarities end between the two cryptocurrencies.  Here is what sets XRP apart from others:

Differentiating Features of XRP

While both Bitcoin and XRP are both similar in their no-counter-party aspects, there is a wide gulf between the two in almost every other respect.  The first one is that XRP has a decentralized exchange on the XRP Ledger.  1

DEX - XRP's Decentralized Exchange

It's possible for you to create your own customize-able tokens.   For example, I could create a "HODR" coin if I wanted to.   While you can also create tokens on other networks such as Ethereum, the tokens on the XRP Ledger settle at the speed of the XRP Ledger, not at the speed of these other, much slower networks.

This ability to create counter-party tokens on XRP facilitates their trading on the decentralized exchange that is part of XRP.   This issuing of tokens is normally done by those exchanges or individuals that choose to run Gateways on the XRP Ledger.   For example, Gatehub and Bitstamp both issue their own redeemable tokens that can be exchanged for actual real-world versions of those same representations.  In the case of GateHub, the exchange issues "Bitcoin" tokens on the XRP Ledger, which can be freely traded around the world and redeemed by Gatehub for actual Bitcoins.

Tokens can also be created by those looking to conduct ICOs, or Initial Coin Offerings, on the XRP Ledger.   There have been a number of these in the past year.

Escrow

Escrow is another popular feature on the XRP Ledger.   Using the escrow function, any user can 'lock away' XRP for a specified amount of time until a future date or other condition is met.  2  The XRP locked away in this fashion becomes inaccessible to the user until said future date.

As an example, Ripple has locked away its treasury supply of XRP in 55 separate escrow contracts that expire each month for the next 55 months.   Every time one of these contracts is released by the XRP Ledger, the associated XRP is made available to Ripple.   Ripple decides how to utilize this released XRP in its business each month:  It then places each unused portion of the released XRP back into a new escrow for another 55 months.  3

Payment Channel Transactions

The XRP Ledger's native speed can process 1,500 transactions per second (TPS) if each transaction is conducted 'on-ledger.'   While this metric is orders of magnitude better than Bitcoin's 6 TPS, XRP's creators planned for it to scale horizontally as well, with no upper limit in the number of transactions it can process.

To accomplish horizontal scaling, a feature known as "payment channels" was created.

This feature allows a user to set aside some XRP to open a channel.   Later, users of that channel can submit claims against the channel owner;  these can be verified by the recipient without interacting with the XRP Ledger.  This is known as asynchronous processing of transactions because it happens outside of any limitations of consensus on the XRP Ledger.  These individual claims can then be settled by the user, submitting the transaction(s) in bulk on the XRP Ledger.  4

Because of this feature, a large payment processor such as VISA can process any number of transactions, limited only by the hardware they're running, along with how fast they can create and verify cryptographic signatures.

ILP Transactions

The CEO of Coil recently stated that his team would be able to scale much further: 5

"With the technologies we’ve helped build at Ripple — XRP and Interledger — we can process trillions of transactions per second without any central authority."

It's this global level of potential throughput that has caught the attention of many in the financial world.  While other cryptocurrencies do not possess inherent capabilities to scale unless a secondary 'helper' application is layered on it, XRP's abilities are baked into the protocol itself, supporting high reliability of processing and settlement certainty.

How XRP Protects The XRP Ledger

In addition to its use case for transforming one currency to another, XRP serves another purpose:  Network Spam Prevention.

In an open network, a common tactic for hackers is to flood a system with many millions of minuscule transactions, thereby overloading the network and degrading performance.  XRP's creators knew that to serve as a global currency, XRP would need to have some way to protect itself from this tactic, commonly known as a 'distributed denial of service," or DDOS attack.

This is why XRP charges a very small, normally undetectable amount for each transaction.   This minimum cost is currently set to 10 drops. Each 'drop' is one millionth of one XRP, which may seem small individually, but the ledger also adds a dynamically-scaling amount to this minimum cost, especially during times of very high network usage.

This means that if a malicious actor tries to flood the network with transactions, they will be greeted by escalating costs that will make it an unprofitable endeavor.  Thus far, there have been no successful DDOS attacks against XRP.

XRP Ledger Performance Metrics

XRP's settlement speed is legendary in cryptocurrency.

The XRP Ledger uses a consensus model of transaction validation that is orders of magnitude better than proof-of-work models, resulting in a settlement speed of less than four seconds:  6

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In addition to its blazing speed, the network has been highly reliable as well:  Since its inception in 2012, approximately 42 million ledgers have been settled without incident.  7

When cryptocurrency trading was in its early years, traders had little choice but to use Bitcoin to transfer value into - and out of - exchanges, meaning that they were forced to wait an hour or more for a Bitcoin transaction to be confirmed.

New exchanges are opting to use XRP as their base currency precisely because it allows quick movement of value during times of heavy trading, thereby increasing their exchange volume.

Other Interesting Statistics

Energy Usage:  Proof-of-work cryptocurrency networks rely on massive (and increasing) amounts of electricity to secure their networks.   A recent study compared Bitcoin, XRP and other networks against each other, and found that the most efficient network was XRP:  8

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This is a stark difference that is growing more important by the day as the world faces challenges with global warming.   Most people would prefer to support a 'greener' cryptocurrency like XRP.

Decentralization statistics have also revealed important differences between XRP and Bitcoin or Ethereum, two popular 'proof-of-work' cryptocurrencies.   Although individuals heavily invested in proof-of-work tokens would rather not publicize it, the promise of decentralization has now faded in dramatic fashion for both Bitcoin and other similar networks, as individuals have learned how to game the reward structures put in place for validation.

Now, only a small handful of large miners control most of the transaction validation, making Bitcoin and others like it dependent on these organizations.

By contrast, the company that operates the most validators on the XRP Ledger, Ripple, controls only 7% of network validators, and is no longer in control of the majority of nodes on the recommended, default UNL (unique node list):

Network Centralization Levels:

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Default UNL Decentralization:

Decentralization Levels

While XRP's model will lead to further decentralization levels over time, proof-of-work systems like Bitcoin and Ethereum are leading to ever-more-centralized control of transaction validation:

Decentralization Levels

Sometimes when incentives are put into place at the beginning of a cryptocurrency's, existence, they end up leading to the very result that it was attempting to avoid.

Ownership Statistics:  Another important statistic for any cryptocurrency network is the number of user-created wallets.   XRP is remarkable in this respect, because each active wallet must be funded with a 'reserve' amount of 20 XRP.   Because of this requirement, the number of wallets on the network is probably more indicative of unique users.   Currently, there are over 1.3 million active wallets on the XRP ledger. 9

The Ledger Exposed is a website created by one of the most prolific community developers for XRP:  WietseWind.

He created the Ledger Exposed to make current statistics freely available to anybody curious enough to do research.   The site contains several dynamic reports that provide up-to-the-second information about XRP ownership, wallet size distribution, and escrow usage.   Here is the current breakdown for the 'top 1%' of XRP holders:

Decentralization Levels

This means that to be in the 'top 1%', an XRP investor must hold 72,132 XRP or more.   To be considered in the 'top 10%' of holders, an XRP investor must hold over 2,857 XRP.  Although a point of curiosity to most, some traders have targeted these levels for themselves as they actively play the market.

The site also has a link for users to watch the dynamic transaction flow on the XRP Ledger.  WietseWind occasionally adds to the site, so this is definitely a resource to bookmark.

XRP Wallets

There are a number of popular XRP wallets on the market, but they are not created equal, and XRP owners tend to prefer some over others by wide margins.   The careful choice of a wallet to interact with the XRP Ledger is an important choice for anybody looking manage their own XRP over a long period of time.

While your XRP always exists 'on the ledger,' a wallet application allows you to access that XRP in a secure fashion, and there is an element of trust involved, even if you choose to use offline transactions.   You should always carefully research a wallet before using it to access your XRP.

Recently, I took a short, two-day poll of XRP owners to determine some of the most popular choices for wallets.  These wallets are ones in which full control over the XRP is used to access the features of the wallet.

The results of the poll indicate a clear preference for hardware wallets such as the Ledger Nano.   In addition to the Ledger Nano, several more hardware wallet options are in the works for XRP owners.   The most popular non-hardware wallet was the Toast Wallet.

Who's Who?

If you're new to XRP and wondering where to start, it's also a good idea to familiarize yourself with the personalities and people that have been either following XRP, or that have been actively participating in its development.   It's also wise to research the companies that are building applications on the XRP Ledger.

And this is not restricted to traditional business enterprises;  many independent developers, authors, artists, researchers, and vloggers comprise one of the largest cryptocurrency communities that exists in the market today.  According to one site, the number of XRP Twitter followers is close to one million, although it's not clear how it measures 'followers' in the case of a decentralized cryptocurrency.  10

If you're looking for a quick history of Ripple, the largest company building applications that use XRP, I recommend a recent article by Forbes magazine as a good starting point:  11

Decentralization Levels

It's an independent history of not only one of XRP's creators, David Schwartz, but also the company that he helped build.

What is XRP Used For?

Every cryptocurrency must have a real-world use case if it's going to survive and thrive, and XRP has three massive use cases:

  • Payments (cross-border & domestic)
  • Web Monetization (used for Coil micropayment settlement)
  • Derivatives (via Codius smart contracts)

While the payments use case does have some current statistics to examine to estimate its future potential size, it's estimated that the use of more modern technology could grow this market by a large amount.   XRP can be used as an international bridge asset when transitioning currencies from one to another.

Web monetization is a trend whereby Internet content providers can modify their site to automatically accept micropayments in place of invasive advertising.   It's a model of revenue that is quickly gaining popularity, just based on the initial reaction to Coil's product.  XRP is used as a method of settlement for Coil.

The third one - derivatives - is an unknown.   Some experts believe that there are entire classes of derivative products that are not in place today because the administration of their contracts with today's technology is not feasible.   However, the Codius platform could automate these at a low cost, potentially creating new derivative products.   Overall, the derivative market today is the largest asset class on the planet.   Codius supports XRP by default.

I explore each of these use cases in other blogs, but felt it was important to touch on them here in an introductory fashion.

Further Research

One of the sayings that I make sure to repeat to new cryptocurrency investors is to "always DYOR."   The acronym stands for "do your own research," because, unfortunately, some of the largest investors in cryptocurrency also use their very own news organizations to spread information - and disinformation - that serves to protect their own financial interests.

And unlike more established markets like those on Wall Street, the regulations governing the crypto market are still developing.   This means that the space is more dangerous for new investors that are struggling to understand the facts and technology beneath the choices.   At every turn are individuals who are willing to guide you to what they believe is the best choice; but it is up to you as an individual to determine and discern among the available options.

My own confidence in XRP is unwavering, but keep in mind that I've invested in XRP:  I urge readers to validate what I've said, get others' opinions, and then check back with those in the XRP Community if you have any doubts.   I am certain that, based on what I know, the majority of crypto investors will arrive at the same conclusions as my own.

For those wanting to hunt through material about XRP, here are some sites and resources I recommend:

  • Reddit
  • Twitter
  • Quora
  • XRPCHat
  • YouTube
  • FUD Bingo
  • Ripple

Reddit has multiple sub-reddits that contain a variety of helpful material and introductory posts that are 'pinned' to the side-navigation.   Although I've included the link to the r/Ripple sub-reddit, there are many others that also cover topics related to XRP.

Twitter is an interesting resource that takes time to develop for each individual.   Each Twitter user will have their own preferences for which Twitter accounts to follow and include in their feed.  It takes time to customize a good Twitter feed, but once you've taken the time to do it, it can yield valuable information about developments within the XRP Ecosystem.

Quora contains many questions and answers from XRP icons, such as its creator, David Schwartz, and from the CEO of Ripple, Brad Garlinghouse.   My sample link is to a 2017 Quora session by Brad Garlinghouse.

XRPChat has been around for years, and contains a treasure trove of historical posts and information, along with a great assortment of categorized links and resources for readers.  It also boasts features that facilitate in-depth discussions about current topics, and is frequented by thousands of members.

More recently, YouTube has seen a wide variety of new power players in social media focusing on XRP and its developments in cryptocurrency.   I included a link to a fun interview of WietseWind.  Some YouTube channels are now quite large, boasting subscribers in the tens of thousands.   I have my own favorites, but I don't want to point you in any specific direction.

FUD Bingo is another site created by WietseWind to serve as a centralized location that helps to easily debunk common misconceptions about XRP. If you're having a vexing doubt about XRP, it may be worth a glance at this site to see if somebody else has had the same question.

And lastly, the Ripple corporate website has great basic information about XRP, organized with eye-catching graphics and intuitive navigation.   This should probably be the starting point for most people new to XRP.

Welcome To The Future

If you're new to XRP, it's worth taking time to understand aspects of how the network operates.   This will help you communicate some of these points to others that may ask.  Crypto is a complex topic.

When other technological innovations have happened through history, their adoption was helped by the communication from person-to-person.   But cryptocurrency is more challenging, and if an ordinary person is asked to explain XRP in five mintues, some are much better than others at getting these points across in an understandable manner.

As a community, each of us can talk to people that we know or come in contact with, and help spread accurate information to others;   XRP will change global commerce, but we must work to help those new to the market understand its potential.
xrp symbol
Sources and Credits:
Cover Art: Thank you to Thomas Kolnowski

  1. https://developers.ripple.com/decentralized-exchange.html
  2. https://developers.ripple.com/escrow.html
  3. https://ripple.com/insights/ripple-to-place-55-billion-xrp-in-escrow-to-ensure-certainty-into-total-xrp-supply/
  4. https://developers.ripple.com/payment-channels.html
  5. https://medium.com/coil/coil-building-a-new-business-model-for-the-web-d33124358b6
  6. https://ripple.com/xrp/
  7. https://xrpcharts.ripple.com/#/
  8. http://papers.netrogenic.com/sid/eco-friendly-money.pdf
  9. https://ledger.exposed/rich-stats#range
  10. https://coinsocialstory.com/
  11. https://www.forbes.com/sites/michaeldelcastillo/2018/09/04/ripples-trillion-dollar-man/

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Hodor

Hodor

I blog about Ripple & XRP. FULL DISCLOSURE: All views are my own. I do not work for Ripple; I am not a professional financial analyst, and the majority of my crypto holdings are XRP.

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