Update
A lot has changed about Ripple since this article was published in May of 2017. Since then, I have updated my thoughts and released them in a blog post for Hackernoon.
You can read that article here.
Original Post
This morning, I saw a post of r/cryptocurrency warning potential users of a so-called fraudulent coin called Ripple (token XRP). Here are the contents of the post:
As many of you have likely noticed, Ripple has skyrocketed in value, becoming the 2nd most valuable cryptocurrency by market cap (reaching close to $9 Billion this morning). However, it seems that many people treat Ripple like any other cryptocurrency, like Bitcoin and Ethereum. This fundamentally misunderstands why Ripple was created and how it should be used.
In this blog post, I want to state how Ripple is different and give a recommendation for future use (spoiler: don’t invest).
Ripple is not an Open Blockchain. Individuals can’t get full access to the Ripple Network.
Unlike Bitcoin, Ethereum, Litecoin and 90% of all cryptocurrency blockchains, Ripple is a relatively closed blockchain. Through some effort, users can go download a wallet and transfer Ripple to it, but you have to create trust lines with other organizations in order to get access. In this way, you can’t just send money to whomever you want, they have to accept you as trustworthy before allowing transactions. And considering most users are banks, they have no reason to accept you.
The reason for this is because Ripple is designed to take real world asset and transfer them to the Ripple Network. This is done through a process known as ‘issuance’, where a bank will create a transaction that adds the real world asset to the Ripple Blockchain. They can then trade these issuances with other Ripple 3rd parties, taking advantage of the low cost of transacting on the blockchain.
The reason for these trust lines is because issuances hold very real value. If I have an issuance for a pound of gold, the other parties trust that I actually have this asset. If a malicious 3rd part creates a fake issuance, it will be treated as real. Even one instance of a fake issuance can break the trust of the system and collapse the network.
Because of this, Ripple is a blockchain for banks, primarily focused on B2B. Normal consumers are not supposed to interact with the system and have better alternatives available.
You can read more about the specifics here.
XRP is not a cryptocurrency in the Traditional Sense
When Bitcoin and Ethereum were originally created, their cryptocurrencies, BTC and ETH, were designed to be stores of value. When you created a transaction, you were sending a store of value to another account (for payment for goods and services). Miners created nodes on the network to process transactions and were compensated with this cryptocurrency, either through fees or mining rewards.
This is not how Ripple works. XRP was mined all at once by the parent company, with a majority of the cryptocurrency held by them. When a transaction is made on the XRP network, there is a fee paid in XRP, but this is not compensation. All transaction fees are ‘irrevocably destroyed’, not being paid to any members.
XRP was created as an anti-spam measure to make it costly for people to spam the network with transactions. All XRP was created to be destroyed and if the network lives long enough, will be destroyed. This is in contrast with BTC and ETH, which are specifically designed to be long-term stores of value.
While XRP does seem to have an incentive around trading (as state here), the ultimate point of XRP is to be burned, not held.
You can read more about transaction fees here.
The Founders of Ripple Recommend Not Investing in Their Currency
From the link above:
Private exchanges and liquidity providers may choose to hold additional XRP for trading. Ripple (the company) does not promote XRP as a speculative investment.
XRP has unique properties and a special use case that does not fit into the traditional cryptocurrency paradigm. The majority of the currency is controlled by the Ripple Foundation and while they absolutely have the option to sell of their share for a quick profit, this goes against the goals of the organization and their mission.
One thing I am not certain of is why the cryptocurrency is allowed in exchanges in the first place. If you have ideas about that, please comment on this post, as I have not found any research explaining that decision one way or another.
Conclusion
This article is not intended to be a defense of Ripple and their practices, but an explanation of why Ripple is different from traditional cryptocurrencies. Because the Ripple organization is such a heavy holder of XRP with unknown goals, it’s highly speculative on how the cryptocurrency is going to be valued in the years to come.
Here’s another way to think about XRP: Ripple owns the vast majority of the XRP (over 60% of the supply). They can decide to cash in on the value, or completely devalue the market by flooding it with cheap XRP. At this point, we don’t know what they’ll do with this high valuation, but regardless, you are at the whim of a powerful 3rd party with uncertain goals. And more importantly, they’re telling you the currency is not good for speculation.
For long-term holding, this is a deal breaker, particularly in a market with so many good options.
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XRP*
Thanks!
maybe your favorite coin couldnt resist ripple (xrp) to be the toughest or you scared of your investment that cant even go the path of xrp.lol
XPR clearly is deficient compared to the one true cryptocurrency: Dogecoin.
SInce when does “Ripple (the company) does not promote XRP as a speculative investment” equal “The Founders of Ripple Recommend Not Investing in Their Currency” ?
The purpose of offering XRP is for member entities (ie Banks and other trusted 3rd parties) to use XRP in their transactions. Normal individuals like you and myself wouldn’t be part of that network, so the only reason we would ever purchase XRP is for speculation purposes, which is exactly what they’re recommending against. They want banks to invest, not individuals.
Yeah, but c’mon we all know that banks invest to make money. They control the price of gas and gold through the amount of futures and options contracts that they trade. They have all kinds of insight as to what will happen because they are in the know. One of the Federal Reserve presidents made a comment about The Fed coming up with their own digital currency because it is clear that they are scared of Bitcoin (unless the theory about the international bankers creating Bitcoin is true). So maybe Ripple is right up their alley. It’s hard to really say. In the early stages of Bitcoin there were a lot of articles similar to this one being put out saying that Bitcoin was a scam. Why? Either the banks were doing it to discourage Bitcoin buyers, or wealthy individuals were telling people to stay away so they could hoard up. Do your own research guys. And remember what Bruce Lee used to say, “separate the wheat from the chaffe”.
Yeah, but while you’re “researching”, bare in mind that Ripple is a scam. Its not like bitcoin in the least.
There’s a lot of problems with XRP, and you can claim that maybe they’re doing some shady things in the way they market their products to bolster XRP’s price, but it’s not a scam. It’s a real product, with a real market, solving a real problem. It’s just that XRP is not necessary for that solution… it’s just bolstered by speculation that banks might use it one day.
Watch the money run from bitcoin to xrp. People want accountability when it comes to their money. Always have, always will.
Funny to see how WRONG all the people were about Ripple and XRP. I knew you were all wrong. Sorry, but at Harvard Business School we actually learn how to evaluate a company. Based on that, and it was damn simple, I loaded up on xrp in April 2017. It’s Jan 2017 and I am officially retired for life! It was the most OBVIOUS deal/opportunity I have ever seen.
Glad I didn’t follow the altruistic and foolish Bitcoin masses, haha.
TIP: Invest with your brain, not your ideology.
I took a screen of the supply of ripple 2 weeks ago and again now.
It has gone up about 90,000,000
It also went to 10c a couple of hours ago and has now returned to 21c
Cheesy…
I assume your text is talking about Ripple’s “Issuing Gateway”. In that sence you might be right. However, at the link you gave yourself, you can read about two additinal kinds of gateways:
“•A Private Exchange holds XRP and lets its customers buy and sell that XRP in its own system. Most cryptocurrencies rely on private exchanges to provide a market for the cryptocurrency, but the Ripple Consensus Ledger has a currency exchange built into the protocol itself.
•Merchants accept payment within the Ripple Consensus Ledger in exchange for goods and services in the outside world. Currently, Ripple does not have widespread support for merchant operations.”
My speculation is, that one day when everything is settled there will be an exchange rate between Ripple and FIAT. And it won’t be less then the current Ripple’s exchange rate at that time, because the ripple company is earning money with the value of their token (with the amoutn they kept themselves.
Furthermore, appearently the design includes an option for merchants to be directly attached to the ledger.
with best regards!
But since XRP will inevitably become scarce by usage, isn’t there still intrinsic value to own, even for those who cannot access the network?
That depends entirely on how Ripple decides to act. They own 60% of the total XPR. If they want to make it scarce, they can. If they want to flood the market, they can.
This is something that just doesn’t exist in Ethereum or Bitcoin. There are plenty of whales, but no user controls this much of the market. That’s concerning.
Thank you. It seems that their intention is to keep transactional cost of XRP at around 10 USD for any gateway.
10 usd per year that is
Bitcoin mining pools are controlling the bitcoin market, this is the same for Ethereum.
Bitcoin is absolutely in control of the Bitcoin network.
And the Ethereum miners are absolutely not in control of the Ethereum network.
When the DAO hardfork happened, the mining community voted against the fork. The Ethereum Foundation want the fork, and pushed it through anyway. As POS is implemented for Ethereum, an ice-age clock will be put in place that makes mining less and less attractive, forcing the miners off the network.
Ethereum has a very different battle being fought than the Bitcoin Network.
ripple is a great diversion to regulate and suppress the exponential growth of Bitcoin relative to fiat currencies.
ripple plays on the greed of people by continuing the PUMP up. As long as the music is playing, people will be diverted away from bitcoin and focused on ripple.
ripple is a brilliant move by the banksters to control the exponential growth of bitcoin because bitcoin is a true marker that exposes the real hyperinflation of the petro dollar that is going on
Good post. If Ripple (the company) was to sell the currency they own, they could very easily flood the market and crash the price. I doubt they would do that, but it’s just another risk to owning this one.
Have you ever thought the people who own Ripple might cash out and flood the markets and screw the banks over…everybody going down in a giant tsunami while being away on higher ground. Another reason not to own Ripple. On the other hand, I believe if you do speculate in this one pick a tiny amount of your money and wait for the big payoff since all banks will use it, it could be worth a lot.
Yeah Jon, that’s my take (in regards to speculation). I’m not spending too much money but if it mimics the growth it did in the last 11 months, I’m smiling. I’ll take the risk and my investment is minimal.
No one can just dump their ripple. The market wouldn’t buy and no settlement. They can split it into tiny transactions either because of transaction costs that specifically preventing these attacks. Therefore trust is created between banks and majority coin owner. This is future of institution transactions.
Can t split*
Hands down the Ripple network/blockchain is the best for conducting monetary transactions. The Bitcoin blockchain is way to slow, uses too much power, and is too expensive. Ethereum strength and best application lies in Smart Contracts.
Currently the Ripple network is the only one that can handle enormous transactional volumes.
Here is what is going to happen:
1. Bitcoin will be used like gold. As a long term store of value.
2. Ethereum will be the platform that all smart contracts run and are funded on using Ether cryprocurrency.
3. Ripple/XRP will be used for commercial, consumer and peer to peer daily monetary transactions.
It is the network/blockchain design that determines it’s capabilities and applications. Just like any other man made product.
All 3 of these networks/blockchains and their currencies will continue to exist and grow. You should own all 3.
Buy and sell don’t invest that’s the bank job but remember it takes money to make money
Absolutely written nonsense!
1) As individual I’ve FULL access @Ripple #blockchain & @Interledger #ILP
2) Besides 4 fees, #XRP can (will) be used as BRIDGE & Xborder currency
3) #XRP on #XRPLedger is a PERFECT fit to replace global NOSTRO accounts
1) I don’t know what you mean by ‘full access’, but regardless of what definition you use, this isn’t true. You don’t have the right to run a validator node, nor do you have the ability to send issuance to anyone you want. You can send XRP to anyone you want, but then again, what blockchain doesn’t support that?
2) This is far from certain. You’re hoping that everyone just forgets that Ripple Labs owns 55% of all XRP and that adopting it full stop would give them unbelievable financial power. Ripple’s competitors don’t have this problem (no native assets).
3) XRP is very far from perfect, and has one of the worst cryptoeconomics out of any cryptocurrency (55% owned by Ripple Labs). People use Ripple despite XRP, not because of it.
XRP is intended for bank use. It’s a means for them to participate in the andvance in technology without having to build their own chain or maintain it. IMO, it’s real value is that it allows banks to protect profit margins and lower headcount without negatively impacting production. Meaning, by participating in Ripple, a bank can save vast amounts of money on processing transactions, time and efficiency related to this as well as have a need for less employees, all the while the information being publicly available. This is important because banks are losing fee revenue left and right. Due to the design and intended target audience (banks) the public exposure is more secure as its primarily exposed to member institutions and not the masses for the most part. Lastly, on the outside chance Crypto does wreck their world, they are already participating and now have a potential currency replacement for the defunct USD. And better yet, they can still place “In God We Trust” on it so people now feel safe again and can continue to think this “currency” has some “value”.
I really like your response. Thank you for the thoughtful answer.
Thanks!
As long as trust is in tact, banking will keep XRP relative; short AND long term. If the vehicle fits the solution, gov’t may keep this interesting. I cannot think of one reason not to portfolio >marginally.
Actually, I can think of a bigger reason: XRP might have an alternative use as a platform competitor to ETH.
So, KIK, after seeing the network congestion due to Cryptokitties, decided to launch their ICO on Stellar. You can view the article here: https://www.coindesk.com/goodbye-ethereum-kik-plans-move-ico-tokens-stellar/.
Stellar is very similar to Ripple. Very. If an significant number of ICO’s start launching on Stellar, it would be possible for Ripple to open it’s doors to platforms, thus giving XRP a reason to live.
If XRP has a future, it’s in platforms, not banking.
No one has mentioned that Ripple has put all it’s shares in escrow to be released gradually, to ensure that they can never flood the market. Seems to me that if the banks are into it, then it could be a good investment in the medium term. Most people are using crypto currency more as stocks than currency any way. Outside of bitcoin not much is being used to make comercial purchases, as far as I can tell.
Thanks for the comment.
This is a recent addition that just went into placement. While it does ‘secure’ the supply, it still doesn’t change the fact that Ripple is still 100% in control of the XRP supply. Up until this point, they have sold about 300 million XRP a month, so this doesn’t actually change their plans or force any change.
If they weren’t in control of how this XRP was distributed, I might be more inclined to agree.