I love roller coasters! I rode my first coaster at the age of 5 and still remember it to this day. The Orient Express at World's of Fun in Kansas City, MO, opened my eyes to a world of thrills and excitement that I continue to enjoy. That first ride led me to parks and coasters from the East Coast to the West Coast of the United States. What makes roller coasters fun to me?
To answer this question I have to give you a little personal information. I am 6'6" tall...and afraid of heights! I jokingly tell people that I get vertigo when I stand up. When I walk up to a roller coaster my knees get shaky, my palms start sweating, and my heart feels like it is going to jump out of my chest. I have to convince myself to get on this "machine of fear" even though I know I am going to enjoy the ride.
The pumping of my heart becomes stronger and stronger as I lock myself into the seat. I usually find myself saying, "Why did I do this?" as we begin the ascent up the lift hill. And then it happens...the track falls away and all I hear is my voice, screaming and laughing like a little five-year old boy on his first coaster, as the sky and world around me zoom past, up and down. Sheer exhilaration, that ends with laughs and smiles!
What is good for my inner child, though, is not good for digital assets. The ups are fun to watch and everyone speaks of "moons and lambos" (I am a "cabins and Jeeps" kind of guy, but to each their own). When the price falls, Chicken Little comes running out declaring the end of XRP and the "fact" that "Banks will NEVER use XRP!" These extremes can take place in a matter of hours. Volatility is spoken of as a major stumbling block to the adoption of XRP by major financial institutions (FI's).
What is Volatility?
According to Investopedia, volatility is "a statistical measure of the dispersion of returns for a given security or market index." Got it? For most, that is clear as mud. They also provide an easier definition to understand:
In other words, volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.
The digital asset markets are very volatile. In a few hours a digital asset can rise by double digit percentages only to fall back to where it was before the rise, or go lower. XRP is not exempt from these swings. The price of XRP reached an all time high (ATH) of $3.30 on January 4, 2018, according to Trading View. The price dropped to $.57290 on February 6, 2018. Between the ATH, the low on Feb. 6, another "high" of $1.22760 on Feb. 10, and the current price of $.95, the price has fluctuated wildly. This is volatility. In the span of a short period of time, one month, if an individual or an FI had purchased XRP at the ATH of $3.30 they would have seen a loss in value of 82.63%. XRP, like or not, is a highly volatile asset. This type of roller coaster ride causes digital asset users to rethink their implementation of digital assets due to the holding costs associated with volatility.
The Impact of High Volatility
2017 ended and 2018 began with businesses and other entities stating they would no longer accept Bitcoin (BTC) for a variety of reasons, including high volatility during the time of transfer. Steam, the gaming community site, posted a blog on December 6, 2017, stating they would "no longer support Bitcoin as a payment method on our platform due to the high fees and volatility in the value of Bitcoin" (emphasis added). They added, "Historically, the value of Bitcoin has been volatile, but the degree of volatility has become extreme in the last few months, losing as much as 25% in value over a period of days." This statement was made before the market fall in January of 2018.
In an extreme case of irony, the North American Bitcoin Conference (NABC) announced they were no longer accepting BTC for payment just days before their conference because of "network fees and congestion." At the time of that announcement, users were reporting transaction times for BTC in hours, if not longer. The day after this announcement, on January 11, 2018, BTC dropped from a high of $15,000 per BTC to a low of $13,000 within a matter of four hours, with another fall from $14,356 to $9,362 just a few days later. Evidently, the roller coaster of volatility the NABC was on was too much to handle, even though it is a "ride" they encourage others to take. The money lost due to volatility during transaction processing cannot be overlooked.
Does Ripple Address Volatility?
Ripple has not released a lot of information regarding how xRapid, the protocol that requires exclusive XRP use, works. However, they have released information regarding how xCurrent works and we can make the assumption that a transaction on xRapid will work in similar fashion to a transaction on xCurrent, possibly even better since XRP is native to the XRPL(edger) on which xRapid runs.
Ripple has released a video explaining how a transaction is settled between two banks using xCurrent. I need you to please stop reading and watch the video. Please come back once you have finished watching it.
Let me summarize what is said in the video:
A. xCurrent is made up of two components, a messenger layer for identification and the InterLedger Protocol (ILP) for funds settlement.
B. A transaction executes as follows:
- The translation layer parses the message and collects account information to initiate the payment, messaging with the Corresponding Bank and Beneficiary Bank for total fees and costs.
- Pre-transaction validation occurs. Compliance screening is conducted (KYC requirements), account verification checks completed, and payments are pre-validated to ensure availability, before funds are locked and moved.
- Cryptographic hold of all sourced funds (liquidity) across each ILP.
- Simultaneous settlement occurs across the ILP, insuring no settlement risk.
- A confirmation message is sent with showing the transaction is complete.
All of this happens in a matter of seconds. Need a real-time visual for how fast all this happens? Here is Gatehub's Ripple Live Network Transactions page. Notice the Ledger Index on the left-hand side of the page. Approximately every 3 seconds a new ledger is created with the number of transactions on that ledger listed below. You can see the transactions execute, from start to finish, in the center of the page. If you look (quickly!) you can also see what is being settled: XRP/USD, JPY/XRP, etc., and whether the transaction is a trade or payment (those have been the two I have seen).
The "Secret Sauce" - It's Atomic!
Putting this together, do you see the "secret sauce" Ripple has built into the RippleNet? Can you see how Ripple has solved the issue of volatility for XRP? Using xCurrent, and presumably xRapid, to settle transactions, Ripple has built in a process to mitigate volatility no matter if the price is going up or down instead of staying steady.
Look again at numbers 2, 3, and 4 above. Before any value is committed to the transaction, the sourced liquidity is verifiable on both ends of the transaction (#2) using Ripple's built-in decentralized exchange. If the liquidity is not available, the transaction fails. Unlike in correspondent banking, with Ripple a partially completed transaction cannot be "stuck" because it fails at some other point-of-process. If #2 is completed, here is the key, all the liquidity is cryptographically held at a specific value (#3) until it is released at that same value (#4) on both ends of the transaction, simultaneously, and within mere seconds. It's called an "atomic" transaction. Let me give an example:
Say I am an FI in the U.S. and I need to send $1 million USD to China (which, as of this writing would be 6.34 million CNY) and I want to use XRP. Using xCurrent, I can set up the transaction, the USD/XRP on my end sourced, the XRP/CNY sourced on the receiving end (#2) (this happens through the built-in exchange mentioned above). Once the liquidity is sourced and available, all the funds are cryptographically escrowed (#3), and then settled (#4) simultaneously. Combined, numbers 2, 3, and 4, constitute what is called the "atomic" transaction, and the effect is truly explosive! Ripple states it this way: "A single Payment transaction in the XRP Ledger can use multiple paths, combining liquidity from different sources to deliver the desired amount. "
USD to CNY, settled using XRP in the middle, in seconds, at the value assigned to the transaction before the funds transfer. The takeaway: I send $1 million, they get 6.34 million CNY no matter what the price of the assets being exchanged is doing.
The volatility roller coaster, the "machine of fear," has become a merry-go-round.
In my previous post I showed how every xCurrent partnership opens a new corridor where liquidity can be built, leading to XRP adoption. We now see how Ripple was prepared to tame the "machine of fear" the markets call volatility. Instead of screaming like a little five-year old boy, FIs can laugh all the way to the bank knowing the values in their transactions are safe from the volatility in the markets.