Exploring Crypto World #3 - Ripple
The cryptocurrency XRP is the brainchild of Ripple Labs and can be most easily described as the lovechild of traditional banking systems and the defi system.
The cryptocurrency XRP is the brainchild of Ripple Labs and can be most easily described as the lovechild of traditional banking systems and the decentralised financial system that many blockchain projects have created.
Centralised versus Decentralised
Boasting the competitive advantage of low transaction fees and higher transaction speed that blockchain projects hold over the traditional banking system, Ripple has opted to take a more 'bank-like' approach to securing cross-border transactions (or any for that matter).
The normal perception of crypto finance projects is the complete decentralisation of transaction validation across a field of random computers around the world. This of course is opposed to the complete centralisation that an institution like Western Union offers, where the validation of transactions falls completely on them.
Ripple incorporates elements of both by creating a default list of validators of a transaction of users (people making the transaction) can use, of which they (Ripple) are apart of. However, they also provide the option for users to select their own validators, providing a list of curated sources as well as giving users the freedom to go beyond that.
Many advocates of cryptocurrencies see this as a weakness, but its also possible for it to be a strength. Making a financial transaction system that essentially acts as a bridge between the pre-blockchain and blockchain worlds offsets one of the biggest vulnerabilities that most cryptocurrencies face: Lack of trust borne out of lack of understanding.
Ripple brands itself as a solution to banks first and foremost. By designing a system that facilitates transactions of cryptocurrencies, fiat currencies and even gold, the Ripple system is a really attractive alternative to current financial institutions' processes. By decreasing man power and discretionary intermediaries in the transaction process, banks would find this service would be of great benefit to them, even if they elect to only deal with fiat currencies. The most telling upside to this is that people can choose to bank with their current bank and still enhance the value of this cryptocurrency. This means that institutional trust does not have to erode for the Ripple project to thrive.
This kind of adoption is already in motion, with a growing list of partners in the financial system which can be seen here (valid as of February 2021).
Supply
The supply of the XRP coin is something that is also divergent from the typical cryptocurrency, with the entire money supply being 'pre mined'.
Mining, is a term used to describe the discovery of coins not yet in the circulation of public markets. This is a system used by Bitcoin, where people who validate transactions from peer to peer are rewarded with a part of a Bitcoin.
Instead the XRP model is to hold all unreleased coins in escrow (think of it as financial limbo) and release a fixed portion over a period of time until they reach the cap of all created coins. Many people perceive this to be a weakness as the decrease in scarcity is linked to a decrease in value, however it's likely that this has already been 'priced in' (the market has already taken the future supply into account when determining the value of the coin).
Landmark Regulatory Battle
The discretionary release of new coins into circulation has landed the Ripple project in some legal battles over whether or not Ripple is a 'security' which would qualify it for more stringent regulatory control under the authority of the SEC.
This has produced a landmark legal battle for both the future of cryptocurrencies and the SEC (the US' regulatory agency regarding securities e.g. stocks). The Ripple case is that it does not fulfil the promise of a share in the profit of Ripple Labs for holders of XRP, and that the SEC was negligent in waiting years before making this claim in what is argued to be a blatant power grab. Over 12,600 XRP holders have asked to act as 'third-party defendants' in the case.
The SEC claim is that Ripple conducted an unlicensed ICO (Initial Coin Offering) and was not exempt in this action, however as stated before, a share of profits was not part of this value exchange and therefore by common standards does not qualify as a security. The standard that the SEC wishes to impose it seems, would defeat the purpose of cryptocurrencies' utility.
While it seems Ripple has the more convincing case, with the SEC enduring criticism from a wide range scholars on the subject, there are complications of financial might that may come into play. The monetary bandwidth of Ripple limits its ability to fight a protracted legal battle which means a settlement might be a likely scenario, where Ripple pays a fine but avoids legal reclassification.
Here are some of the latest developments in the legal setting, covered by Michelle Lim of the publication Forkast:
In two separate rulings earlier this month, Judge Netburn rejected the SEC’s demand for up to eight years of Garlinghouse and Larsen’s (Co-founders of Ripple) personal financial information, and granted Ripple access to the SEC’s communications with third parties regarding Bitcoin, Ether and XRP.
The rest of the article summarising the legal battle can be viewed here
Takeaways
Ripple's competitive advantage is that it operates in between the polarities of financial systems that traditional and blockchain finance has created
Ripple offers a viable solution to the marketability hurdle that blockchain projects deal with today by assimilating itself with the current financial architecture in place today
Ripple is currently in a pivotal legal battle against the SEC which, if successful would regulate cryptocurrencies to the point that they lose their competitive advantage according to Ripple
Coming Soon...
The Loneliness Epidemic
What actually is blockchain?