Table of Contents

🤔 What is Ripple, XRP, and XRP leadger?

  • Ripple: Ripple is the private company that developed XRP project. Ripple is an old company: founded in 2004. It was founded to simplify and make international payments more efficient. They took inspiration from Bitcoin and launched XRP ie use blockchain for international payments.
  • XRP leadger: XRP ledger is the blockchain developed by Ripple to record payment transactions. All the payments are conducted in XRP which is the native cryptocurrency of XRP ledger.
  • XRP: Just as Bitcoin is the native currency of Bitcoin network. XRP is the native currency of the XRP network. Transactions are performed in XRP in XRP network.

📝 Origin

  • 2004: Ryan Fugger founded RipplePay, a financial technology company aiming to create a peer-to-peer payments network.
  • 2011: Separately, in 2011, Jed McCaleb began the development of a new consensus network called Opencoin for digital currencies that would ultimately become the XRP Ledger.
  • 2012: Ryan handed over Ripplepay project to McCaleb and Larsen, and in September 2012.
  • 2013:
    • Ripple released XRP, a native token on the Ripple Consensus Ledger. At launch, they created 100 billion XRP tokens of which 80 billion tokens were allocated to the company and 20 billion were given to the three founders.
    • Ripple raised over $7.5 million from some of the most prestigious venture firms in the United States.
    • Jed McCaleb left the company over internal disputes around the company’s vision and founded Stellar.
  • 2015: FinCEN fined Ripple Inc for violating the bank secrecy act.
  • 2020: SEC filed a lawsuit against Ripple Labs and two founders claiming that they sold $1.3 billion worth XRP as security without registering it with the SEC.

😌 What problems does it solve ?

Most banks use society for worldwide interbank financial telecommunication(SWIFT) created in 1973. SWIFT still uses wire transfers via a network of intermediary banks to send value from one place to another.

The sender has to incur heavy fees and receiver has to wait for a long time to receive payments using the SWIFT network.

The existing system has other drawbacks like:

  • Lack of transparency results in money laundering.
  • High chances of fraud.

Ripple aims to solve these issues by replacing the current system by XRP network. XRP network fee costs less than a penny and takes less than a second for the transaction settlement.

🤖 How does it work ?

XRP network uses XRP as bridge currency.  Imagine a sender from one country wants to send value to another country:

  • Sender will inform the bank that he wishes to transfer value to a receiver in another country.
  • Sender’s bank will convert the local currency to XRP and send it to the receiver’s bank.
  • Receivers bank will convert the received XRP to the local currency and deposit it in the receiver’s bank account.

Types fo payments

XRP Ledger supports following payment types:

  • Direct XRP Payments: Direct XRP payments are the simplest way to send value in the XRP Ledger.
  • Cross-Currency Payments: Cross-currency payments atomically deliver a different currency than they send by converting through paths and order books.
  • Checks: Checks let users create deferred payments that can be canceled or cashed by the intended recipients.
  • Escrow: Escrows set aside XRP and deliver it later when certain conditions are met. Escrows can depend on time limits, cryptographic conditions, or both.
  • Partial Payments: Partial payments subtract fees from the amount sent, delivering a flexible amount. Partial payments are useful for returning unwanted payments without incurring additional costs.
  • Payment Channels: Payment Channels enable fast, asynchronous XRP payments that can be divided into very small increments and settled later.

XRP ledger consensus mechanism

Ripple company decides who will run validator nodes for adding and verifying new blocks to the XRP ledger. Currently, there are around 150 nodes in running the XRP ledger. There are no rewards for running a validator node.

The XRP Ledger processes transactions in blocks called “ledger versions”, or “ledgers” for short. Each ledger version contains three pieces:

  • The current state of all balances and objects stored in the ledger(Unlike other blockchain technologies, each new “block” in the XRP Ledger contains the entirety of the current state.).
  • The set of transactions that have been applied to the previous ledger to result in this one.
  • Metadata about the current ledger version, such as its ledger index, a cryptographic hash that uniquely identifies its contents, and information about the parent ledger that was used as a basis for building this one.

Each ledger version is numbered with a ledger index and builds on a previous ledger version whose index is one less, going all the way back to a starting point called the genesis ledger with ledger index 1. Like Bitcoin and other blockchain technologies, this forms a public history of all transactions and their results.

The main job of the XRP Ledger Consensus Protocol is to agree on a set of transactions to apply to the previous ledger, apply them in a well-defined order, then confirm that everyone got the same results.

When this happens successfully, a ledger version is considered validated, and final. From there, the process continues by building the next ledger version.

🏛️ Governance model

Ripple company maintains and updates the code for XRP nodes. The nodes run the code provided by Ripple company.

In simple words, XRP is a centralized project being maintained and updated by Ripple company.

🤑 How much money does the project have for future development ?

  • The project raised over 1.1 billion dollars by selling XRP tokens.
  • Ripple company holds 77.8% of the total XRP supply.

Controversies and hacks

Class action by SEC

  • A class action was filed against Ripple in May 2018 “alleging that it led a scheme to raise hundreds of millions of dollars through unregistered sales of its XRP tokens”.
  • The U.S. Securities and Exchange Commission (SEC) initiated legal proceedings against Ripple Labs, CEO Brad Garlinghouse, and co-founder Chris Larsen on December 21, 2020, for allegedly selling unregistered securities.
  • The SEC stated that Ripple executives sold 14.6 billion units of XRP for more than $1.38 billion to fund the company’s operations and enrich themselves.
  • As a result, most of the major exchanges have delisted XRP.

McCaleb, founder of Ripple left

  • McCaleb(also the founder of Mt. Gox exchange) left Ripple in 2014 because of differences among the team.
  • McCaleb founded a competing project Stellar(XML).
  • He also holds a sizable amount of XRP tokens: over $2 billion in net worth. He is believed to have sold 1.2 billion XRP since 2014 and holds about 2.5 billion tokens currently.

😨 Risks and challenges

  • Centralization:
    • There are limited number of validator nodes that are selected by Ripple company.
    • Ripple company maintains and updates the codebase for XRP.
  • It is possible that people directly use cryptocurrencies to transact with each other instead of going through their traditional banks.
  • XRP is not a stable coin, banks using XRP as bridge currency expose themselves to price volatility of XRP for the duration of the transaction. Although this duration is small but the risk becomes significant in case of large transactions.

💰 Tokenomics

XRP tokens have fix max supply of 100 billion tokens. They have been distributed as follows:

  • 20% was retained by the founders of XRP. Chris Larsen and Jed McCaleb each received 9.5 billion XRP. Arthur Britto received 1 billion XRP.
  • 77.8% was allocated to Ripple company.
  • 0.2% was airdropped as an experiment to try and expand usage as part of the launch.

Supply schedule

  • In December 2017, Ripple placed 55 billion XRP into escrow in order to alleviate concerns that a massive amount of XRP could hit the market all at once with a substantial negative price impact.
  • 1 billion is being released monthly to support Ripple’s ongoing operation of Ripplenet. Any unused funds are returned to escrow at the end of the month. On average Ripple re-escrows, 700 million and 300 million XRP become liquid each month.
  • Ripple generated revenue from ongoing XRP sales, which account for well over 90% of the company’s revenue. There are two types of XRP sales that the company discloses:

    • Programmatic sales: These come from the company’s XRP reserve, and can be sold at a rate of no more than 0.25% of the average daily volume on defined exchanges.

    • Direct sales from XRP: These come from direct bespoke deals with institutional clients, and include (per Ripple’s 2016-2017 disclosures) reselling restrictions to ensure its partners do not purchase XRP at a discount from the company and then immediately flood the market with sales.


XRP token will become slightly deflationary once complete XRP supply is in circulation:

  • Transaction fees are burned.
  • Some users might lose access to their funds.

Demand pressure

Token’s price increases due to demand pressure.

Demand pressure on XRP will come from:

  • Bridge currency: Banks using XRP network will have to buy XRP to send value to the other bank. However, the receiver bank will sell the received XRP for the local currency. Hence it is possible that the demand and supply are equal and do not have any significant effect on price.
  • Transaction fees: Users will acquire and pay XRP tokens to include their transactions in the XRP ledger. This amount is very less(in pennies) but is burned and goes out of circulation.

Supply pressure

Supply pressure on a token decreases its price.

Supply pressure on XRP will come from:

  • Ripple company has publically declared that it will be selling XRP over the coming years. In fact, selling XRP is their business model for generating revenue.

🧐 Indicators to watch out for

  • Transaction volume is growing:
  • Number of new accounts being created is growing:
  • Ripple YouTube channel is growing:
  • Ripple Twitter account is growing:

👋Final remarks

The current SWIFT system used by banks for international transfer is vintage, expensive and slow. Ripple company is trying to solve a real market problem.

Most blockchain maximalists would think that XRP project is too centralized with just a handful of selected nodes validating and building new blocks. However, I feel that it is sufficient decentralization till the time most banks that are using the XRP network are running the nodes instead of Ripple. There is no need for thousands of users who do not transact in XRP running XRP nodes.

However, I will not be investing in XRP because:

  • Only 44% of tokens are in circulation. There will be major inflation in the coming years.
  • Ripple company’s main business model is selling their XRP holding. This means that they are reducing their exposure to the success of the project as the project grows old and retail investors are increasing their exposure to the success of the project. This arrangement does not align the incentives of the company with that of long-term holders.
  • Once the Ripple company has sold all their XRP holding, what incentive will they have for supporting and further developing the XRP project?
  • Ideally, Ripple should have a different profit model like:
    • Charging a transaction fee
    • Selling support to banks etc

instead of holding a large portion of XRP supply and dumping it on retail over the coming years.

😊 Do further research

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