What Is Ripple (XRP) and How Does the Payment Network Work?
What Is Ripple (XRP)?
Ripple is a crypto company that offers software and payment infrastructure to financial institutions, while XRP is a digital asset that runs on the XRP Ledger. Those three names are often mixed up, but they mean different things.
The XRP Ledger, often shortened to XRPL, is an open blockchain that keeps track of accounts, balances, and trading orders. XRP is the native crypto of this network. Ripple is a private company that helps develop the XRPL, among other things, and also offers its own payment services.
A transaction on the XRPL is basically a digitally signed instruction. You can use it to send XRP, open an account, or place a trading order. The digital signature proves that the instruction was really approved by the account owner.
Ripple also offers Ripple Payments, a service for cross-border payments. That service can use blockchain and crypto technology. But that does not mean Ripple handles all transactions on the XRPL, or that you can only use XRP through a Ripple product.
Key Takeaways
- Ripple is a crypto company, XRP is a digital asset, and the XRPL is the open network where XRP runs.
- The XRPL keeps track of accounts, balances, and trading orders, among other things.
- XRP transactions are digitally signed instructions from an account.
- Ripple offers payment software to financial institutions, including Ripple Payments.
- XRP and the XRPL can also be used outside Ripple products.
What Is the Difference Between Ripple and XRP?
Ripple is a company and XRP is the digital asset of the XRP Ledger. So when you buy XRP, you are not buying a piece of ownership in Ripple.
The XRPL was created in 2011 and early 2012. Jed McCaleb, Arthur Britto, and David Schwartz built the network. In September 2012, McCaleb, Britto, and Chris Larsen founded OpenCoin Inc., the later Ripple entity.
The XRPL is open source. That means the code is public and others can contribute to it. Ripple holds XRP and provides development work for the XRPL, but it does not own XRP or the XRPL.
At launch, there were immediately 100 billion XRP. Of that amount, 80 billion XRP was given to the then-current OpenCoin in exchange for development on the XRP Ledger. That distribution makes Ripple an important player around XRP, but it does not mean the company controls all XRP.
How Does the XRP Ledger Network Work?
The XRP Ledger works because independent servers follow the same rules and try together to keep one shared ledger. So there is no single central authority approving all transactions.
When you send XRP, you sign the transaction with the keys for your account. Those keys are similar to proof that you are the owner. If you keep those keys yourself in a crypto wallet, then you are responsible for access.
After that, validators come into play. A validator is a server that checks transactions and new versions of the ledger. Validators exchange proposals and see whether they agree on which transactions are valid.
Each server chooses a Unique Node List, or UNL. Put simply, that is its own list of validators that the server trusts not to collude. For a server, a validator only counts if it is on that server's UNL.
A new version of the ledger is validated when 80% of the relevant validators agree. A consensus round usually takes about four to six seconds. Once a version is validated, it is not rewritten. Later transactions can of course still change your current balance.
The XRPL does not use proof-of-work mining like Bitcoin. So there are no miners using computing power to find new blocks and get block rewards for it. Instead, a small amount of XRP is destroyed for every normal transaction. That is meant to stop spam. When the network is under heavy load, that fee can go up.
Important to know: servers can choose their own UNL, but those lists need enough overlap to avoid different versions of the ledger. The default setup uses recommended validator lists from both the XRP Ledger Foundation and Ripple. Other parties can also publish a signed validator list.
What Is XRP Used For?
XRP is used for transaction fees, as a payment currency on the XRPL, and as a possible intermediate step when trading between tokens. So the coin has a direct technical role within the network.
Every normal transaction costs a small amount of XRP. That fee does not go to validators or Ripple, but is permanently destroyed. This makes it more expensive to flood the network with huge numbers of useless transactions.
Every XRPL account also needs a reserve. That reserve is XRP you have to keep to keep an account and certain extra items active. Right now, the base reserve is 1 XRP, plus 0.2 XRP per extra ledger object, such as a trading order. These values can change through fee voting.
Of course, you can also just send XRP from one account to another. In addition, the XRPL has a built-in decentralized exchange, or a DEX. There, users can trade XRP and issued tokens.
Sometimes XRP can work as a bridge asset. That means XRP is used as a temporary middle step if someone wants to swap token A for token B, for example. If the route through XRP is better than a direct swap, the DEX can automatically use that route. XRP is technically available for this, but not every international payment needs XRP.
Ripple also uses XRP and XRPL technology in its own solutions. Still, XRP use is not tied to Ripple: anyone can use the open XRPL according to the network rules.
What Is the Difference Between Ripple and Bitcoin?
Ripple and Bitcoin are not really fair to compare one-to-one, because Ripple is a company and Bitcoin is a network plus the name of the native asset BTC. The better comparison is XRP with bitcoin, or the XRPL with the Bitcoin network.
Bitcoin uses proof-of-work. Miners use computing power to find valid blocks. The chain with the most proof-of-work is then treated as the valid version.
The XRPL works differently. Here, validators check transactions through consensus and UNLs, without proof-of-work mining. Under XRPL rules, about 80% agreement is needed, and a round usually takes four to six seconds.
Issuance is different too. The full supply of 100 billion XRP already existed at creation, and no new XRP can be added through transactions. Bitcoin is issued through mining.
Bitcoin is designed as peer-to-peer electronic cash. In addition to XRP payments, the XRPL also supports issued tokens, a built-in DEX, and payments where different currencies or tokens are exchanged. Those are different technical choices, not automatically a reason why one network is better than the other.
How Is the Value of XRP Determined?
The value of XRP is set on trading markets by supply and demand. There is no built-in mechanism that gives XRP a fixed price in euros or dollars.
Usage can influence demand, though. Think of XRP for fees, payments, or as a possible bridge asset in the DEX. Demand for liquidity can also play a role. But none of these factors determines the price all by itself.
Supply matters too. There have been 100 billion XRP since creation, and the protocol does not allow new XRP to be added. Only the XRP that is destroyed as transaction fees disappears from the supply.
What Are the Benefits of XRP?
The benefits of XRP mainly come from how the XRPL is designed: transactions can be validated quickly, the base fee is usually small, and the network does not use proof-of-work mining.
A transaction is usually included in a validated version of the ledger after about three to six seconds. That is called finality: the point at which the network says the transaction should no longer be reversed. That is useful for applications that want quick certainty about a payment.
The standard fee is normally 10 drops of XRP. A drop is a very small part of XRP: one millionth of an XRP. The fee can rise when the network is busy. Also, the value in euros depends on the XRP price, so a small fee in XRP is not always exactly the same cost in euros.
The XRPL also has a built-in DEX. There, you can trade XRP against tokens, but also tokens against each other. If a swap works out better through XRP, auto-bridging can choose that route.
XRP also has a fixed role in the network: you need it for fees and reserves. No energy-intensive mining is needed to produce new blocks, because the XRPL works with validator consensus.
What Are the Benefits of XRP?
One practical benefit is that after validation, you know where you stand quickly. A validated version of the XRPL is not changed afterward. If someone wants to send XRP after that, it happens through a new transaction in a later version of the ledger.
The fee also has a clear purpose: protection against spam and denial-of-service attacks. Someone who wants to overload the network with lots of pointless instructions has to pay XRP for each instruction. That XRP is destroyed instead of being paid out to validators.
The built-in DEX can also combine routes. Say there is no attractive direct swap between two tokens. Then the DEX can check whether first swapping to XRP and then to the other token works out better. That only happens when that route is more favorable.
These benefits do not remove risks outside the protocol. A wrong address, lost keys, risk at a crypto exchange, and price volatility are still things to watch closely.
Conclusion
Ripple, XRP, and the XRP Ledger are three different things: Ripple is a crypto company, XRP is the native crypto, and the XRPL is the open network where everything runs. The XRPL uses validators and UNLs instead of mining, which means transactions can usually be validated within a few seconds.
XRP has a concrete role in this network for fees, reserves, payments, and possibly as an intermediate asset on the DEX. At the same time, the price of XRP still depends on supply and demand in the crypto market, along with factors like usage, liquidity, news, and Ripple's XRP holdings. So fast technology and usefulness are not the same thing as a guarantee about the future price.
