Ripple
Ripple is a real-time gross settlement system (RTGS), currency exchange and remittancenetwork by Ripple. Also called the Ripple Transaction Protocol (RTXP) or Ripple protocol,[3] it is built upon a distributed open source Internet protocol, consensus ledger and native cryptocurrency called XRP(ripples). Released in 2012, Ripple purports to enable "secure, instantly and nearly free global financial transactions of any size with no chargebacks." It supports tokens representing fiat currency, cryptocurrency,commodity or any other unit of value such as frequent flier miles or mobile minutes.[4][5] At its core, Ripple is based around a shared, public database or ledger,[6] which uses a consensus process that allows for payments, exchanges and remittance in a distributed process.
The network can operate without the Ripple company.[7] Among validators are companies, internet service providers, and theMassachusetts Institute of Technology.[8][9]
Used by companies such as UniCredit, UBSand Santander, Ripple has been increasingly adopted by banks and payment networks as settlement infrastructure technology,[10] withAmerican Banker explaining that "from banks' perspective, distributed ledgers like the Ripple system have a number of advantages over cryptocurrencies like bitcoin."[11]
History
Early development (2004–12)
The predecessor to the Ripple payment protocol, Ripplepay, was first developed in 2004 by Ryan Fugger,[13][14] a web developer inVancouver, British Columbia.[15] Fugger conceived of the idea after working on a local exchange trading system in Vancouver, and his intent was to create a monetary system that was decentralized and could effectively allow individuals and communities to create their own money. Fugger's first iteration of this system, RipplePay.com,[16] debuted in 2005 as a financial service to provide secure payment options to members of an online community via a global network.[15][17]
This led to the conception of a new system byJed McCaleb of eDonkey network,[18] which was designed and built by Arthur Britto and David Schwartz.[19] In May 2011, they began developing a digital currency system in which transactions were verified by consensus among members of the network, rather than by the mining process used by bitcoin, which relies on blockchain ledgers.[16] This new version of the Ripple system[15] was therefore designed to eliminate bitcoin's reliance on centralized exchanges, use less electricity than bitcoin, and perform transactions much more quickly than bitcoin.[15] Chris Larsen,[16]who had previously founded the lending services companies E-Loan and Prosper, joined the team in August 2012,[18] and together McCaleb and Larsen approached Ryan Fugger with their digital currency idea. After discussions with long-standing members of the Ripple community, Fugger handed over the reins.[16] In September 2012 the team co-founded the corporation OpenCoin,[16] or OpenCoin Inc.[18][20]
OpenCoin and Ripple Labs (2012–13)
OpenCoin began developing a new payment protocol called the Ripple Transaction Protocol (RTXP) based on Ryan Fugger's concepts.[16] The Ripple protocol enables the instant and direct transfer of money between two parties.[21] As such the protocol can circumnavigate the fees and wait times of the traditional correspondent banking system,[21][22] and any type of currency can be exchanged including U.S. dollars, euros,renminbis, Indian rupees, yen, gold and airline miles.[23] To maintain security OpenCoin programmed Ripple to rely on a common ledger that is "managed by a network of independent validating servers that constantly compare their transaction records." Servers could belong to anyone, including banks or market makers.[21] The company also created its own form of digital currency dubbed XRPin a manner similar to bitcoin, using the currency to allow financial institutions to transfer money with negligible fees and wait-time.[24]
Among OpenCoin's early investors were[25]Andreessen Horowitz and Google Ventures.[21] On July 1, 2013, XRP Fund II, LLC (now called simply XRP II)[26] was incorporated as a wholly owned subsidiary of OpenCoin, and headquartered in South Carolina.[26] The following day, Ripple announced its linking of the bitcoin and Ripple protocols via the Bitcoin Bridge. The bitcoin Bridge allows Ripple users to send a payment in any currency to a bitcoin address.[27][28]Ripple also developed early partnerships with companies such as ZipZap.[29] On September 26, 2013, OpenCoin Inc. changed its name toRipple Labs Inc.,[20] with Chris Larsenremaining CEO.[30] On the same day the Ripplereference server and client became free software, released as open source under the terms of the ISC license.[2] Ripple Labs continued as the primary contributors of code to the consensus verification system behind Ripple, which can "integrate with banks’ existing networks."[31] In October 2013, Ripple partnered further with ZipZap, with the relationship called a threat to Western Unionin the press.[32]
Focus on banking market (2014–17)
By 2014, Ripple Labs was involved in several development projects related to the protocol, releasing for example an iOS client app for theiPhone that allows iPhone users to send and receive any currency via their phones.[33][34][35]This Ripple Client app no longer exists.[36] In July 2014, Ripple Labs proposed Codius, a project to develop a new smart contractsystem that is "programming language agnostic."[37]
Since 2013, the protocol has been adopted by an increasing number of financial institutions to "[offer] an alternative remittance option" to consumers.[38] Ripple allows for cross-border payments for retail customers, corporations, and other banks, and Larsen was quoted stating that "Ripple simplifies the [exchange] process by creating point-to-point and transparent transfers in which banks do not have to pay corresponding bank fees."[23] The first bank to use Ripple was Fidor Bank inMunich, which announced the partnership in early 2014. Fidor is an online-only bank based in Germany.[39] That September the New Jersey-based Cross River Bank and Kansas-based CBW Bank announced they would be using the Ripple protocol.[3] By December Ripple Labs began working with global payments service Earthport, combining Ripple's software with Earthport's payment services system. Earthport's clients include banks such as Bank of America and HSBC, and it operates in 65 countries. The partnership marked the first network usage of the Ripple protocol.[40] In December 2014 alone, the XRP price value rose over 200%, helping Ripple surpass litecoin to become the second biggest crypto-currency, and setting Ripple's market capitalization at close to half a billion dollars.[41] On December 29, 2017, XRP briefly became the second largest cryptocurrency, with a market capitalization of 73 billion USD.[42]
In February 2015, Fidor Bank announced they would be using the Ripple protocol to implement a new real-time international money transfer network,[43] and in late April 2015, it was announced that Western Union was planning to "experiment" with Ripple.[32]In late May 2015, Commonwealth Bank of Australia announced it would be experimenting with Ripple[44] in relation to intrabank transfers.[45] Since 2012, representatives of Ripple Labs have professed support for government regulation of the crypto-currency market, claiming that regulations help businesses grow.[46] On May 5, 2015, FinCEN fined Ripple Labs and XRP II US$700,000 for violation of the Bank Secrecy Act,[26] based on the Financial Crimes Enforcement Network's additions to the act in 2013.[47] Ripple Labs agreed to remedial steps to ensure future compliance, which included an agreement to only transact XRP and "Ripple Trade" activity through registeredmoney services businesses (MSB), among other agreements such as enhancing the Ripple Protocol.[26] The enhancement won't change the protocol itself, but will instead add AML transaction monitoring to the network and improve transaction analysis.[47] As of 2017, the current release of the server (known as rippled) is version 0.70.1.[1]
The year 2015 and 2016 marked the expansion of Ripple (company) with the opening of an office in Sydney, Australia in April 2015[48] and the opening of European offices in London, United Kingdom in March 2016[49] then in Luxembourg in June 2016.[50]Many companies have subsequently announced experimenting and integrations with Ripple.[51]
On June 13, 2016, Ripple obtained a virtual currency license from the New York State Department of Financial Services, making it the fourth company with a BitLicense.[72]
On August 19, 2016, SBI Ripple Asia announced the creation of a Japanese consortium of banks in a new network that will use Ripple’s technology for payments and settlement.[73] The consortium was officially launched on October 25, 2016 with 42 member banks.[74] As of July 2017, 61 Japanese banks had joined, representing over 80% of total banking assets in Japan.[75]
On September 23, 2016, Ripple announced the creation of the first interbank group for global payments based on distributed financial technology. As of April 2017, members of the network known as the Global Payments Steering Group (GPSG) are Bank of America Merrill Lynch, Canadian Imperial Bank of Commerce, Mitsubishi UFJ Financial Group, Royal Bank of Canada, Santander, Standard Chartered, UniCredit and Westpac Banking Corporation. The group will "oversee the creation and maintenance of Ripple payment transaction rules, formalized standards for activity using Ripple, and other actions to support the implementation of Ripple payment capabilities."[76][77]
Concept
Ripple's website describes the open-sourceprotocol as "basic infrastructure technology for interbank transactions – a neutral utility for financial institutions and systems." The protocol allows banks and non-bank financial services companies to incorporate the Ripple protocol into their own systems, and therefore allow their customers to use the service.[79]Currently, Ripple requires two parties for a transaction to occur: first, a regulatedfinancial institution "holds funds and issues balances on behalf of customers." Second, "market makers" such as hedge funds or currency trading desks provide liquidity in the currency they want to trade in.[80] At its core, Ripple is based around a shared, public database or ledger that has its contents decided on by consensus.[6] In addition to balances, the ledger holds information about offers to buy or sell currencies and assets, creating the first distributed exchange.[79] The consensus process allows for payments, exchanges and remittance in a distributed process.[81] According to the CGAP in 2015, "Ripple does for payments what SMTP did for email, which is enable the systems of different financial institutions to communicate directly."[78]
In Ripple, users make payments between each other by using cryptographically signed transactions denominated in either fiat currencies or Ripple's internal currency (XRP). For XRP-denominated transactions Ripple can make use of its internal ledger, while for payments denominated in other assets, the Ripple ledger only records the amounts owed, with assets represented as debt obligations.[13] As originally Ripple only kept records in its ledger and has no real-world enforcement power, trust was required.[13][clarification needed] However, Ripple is now integrated with various user verification protocols and bank services.[82] Users have to specify which other users they trust and to what amount.[13] When a non-XRP payment is made between two users that trust each other, the balance of the mutual credit line is adjusted, subject to limits set by each user. In order to send assets between users that have not directly established a trust relationship, the system tries to find a path between the two users such that each link of the path is between two users that do have a trust relationship. All balances along the path are then adjusted simultaneously andatomically.[13] This mechanism of making payments through a network of trusted associates is named 'rippling'. It has similarities to the age-old hawala system.[83]
Design features
XRP
XRP is the native currency of the Ripple network. XRP are currently divisible to 6 decimal places, and the smallest unit is called a drop with 1 million drops equaling 1 XRP.[111] There were 100 billion XRP created at Ripple's inception, with no more allowed to be created according to the protocol's rules.[112] As such, the system was designed so XRP is a scarce asset with decreasing available supply.[112] Not dependent on any third party for redemption, XRP is the only currency in the Ripple network that does not entail counterparty risk, and it is the only native digital asset. The other currencies in the Ripple network are debt instruments (i.e. liabilities), and exist in the form of balances.[2]Users of the Ripple network are not required to use XRP as a store of value or a medium of exchange. Each Ripple account is required, however, to have a small reserve of 20 XRP[113] (US$19.80 as of December 26, 2017[114]). The purpose for this requirement is discussed in the anti-spam section.
Distribution
Cryptocurrency market capitalizations as of 27 January 2018, in billions of US dollars, with Ripple at top right.[115]
Of the 100 billion created, 20 billion XRP were retained by the creators, who were also the founders of Ripple Labs. The creators gave the remaining 80% of the total to Ripple Labs, with the XRP intended "to incentivize market maker activity to increase XRP liquidity and strengthen the overall health of XRP markets."[112][116] Ripple Labs also had a short-lived 2013 giveaway of under 200 million XRP (0.2% of all XRP) with some of the amount given to charities such as the Computing for Good initiative, which began offering XRP in exchange for time volunteered on research projects.[117] As of March 2015, 67% of Ripple Labs's original 80% was still retained by the company,[112] with Ripple Labs stating that "we will engage in distribution strategies that we expect will result in a stable or strengthening XRP exchange rate against other currencies."[118] In May 2017, to alleviate concerns surrounding XRP supply, Ripple committed to place 55 billion XRP (88% of its XRP holdings) into a cryptographically-secured escrow. The escrow will allow them to use up to 1 billion monthly and return whatever is unused at the end of each month to the back of the escrow queue in the form of an additional month-long contract, starting the process all over.[119][116] The amount of XRP distributed and their movement can be tracked through the Ripple Charts website.[120]
As a bridge currency
One of the specific functions of XRP is as a bridge currency,[102] which can be necessary if no direct exchange is available between two currencies at a specific time,[121] for example when transacting between two rarely traded currency pairs.[110] Within the network’s currency exchange, XRP are traded freely against other currencies, and its market price fluctuates against dollars, euros, yen, bitcoin, etc. Ripple's design focus is as a currency exchange and a distributed-RTGS, as opposed to emphasizing XRP as an alternative currency.[110] In April 2015, Ripple Labs announced that a new feature called autobridging had been added to Ripple, with the intent of making it easier for market makers to transact between rarely traded currency pairs. The feature is also intended to expose more of the network to liquidity and better FX rates.[122]
As an anti-spam measure
When a user conducts a financial transaction in a non-native currency, Ripple charges a transaction fee. The purpose of the fees is to protect against network flooding by making the attacks too expensive for hackers. If Ripple were completely free to access, adversaries could broadcast large amounts of "ledger spam" (i.e. fake accounts) and "transaction spam" (i.e. fake transactions) in an attempt to overload the network. This could cause the size of the ledger to become unmanageable and interfere with the network’s ability to quickly settle legitimate transactions. Thus, to engage in trade, each Ripple account is required to have a small reserve of 20 XRP,[113] (US$4.96 as of December 5, 2017[114]), and a transaction fee starting at .00001 XRP (US$0.000002 as of December 5, 2017[114]) must be spent for each trade. This transaction fee is not collected by anyone; the XRP is destroyed and ceases to exist.[123] The transaction fee rises if the user posts trades at an enormous rate (many thousands per minute), and resettles after a period of inactivity.[85]
Reception
Since its debut the Ripple protocol has received a fair amount of attention in both the financial and mainstream press. Ripple has recently been mentioned in industry articles by The Nielsen Company, the Bank of England Quarterly Bulletin, NACHA, and KPMG, with many of the articles examining Ripple's effect on internationalizing the banking industry.[124]In April 2015, American Banker asserted that "from banks' perspective, distributed ledgers like the Ripple system have a number of advantages over cryptocurrencies like Bitcoin."[11] Wrote the Federal Reserve Bank of Boston, "the adoption of distributed networks, such as Ripple, may help the [banking] industry realize faster processing, as well as greater efficiencies for global payments and correspondent banking."[124] Writing forEsquire about Ripple as a payment network in 2013, Ken Kurson said that "the big financial-service brands ought to feel about Ripple the way the record labels felt about Napster."[125]The New York Times website Dealbook points out in 2014 that “[Ripple] is winning something that has proved elusive for virtual currencies: involvement from more mainstream players in the financial system.”[10] In August 2015, Ripple has been awarded as Technology Pioneer by World Economic Forum.[126]
- Comparisons with competition
Though XRP is third in market capitalization to bitcoin as a digital currency,[127] many members of the press have described Ripple as an up-and-coming rival to bitcoin. In late 2014, Bloomberg called bitcoin a "failing" digital currency, after bitcoin's currency fell 54 percent in value in one year. Ripple was described as a significant competitor, in part because of its real-time international money transfers.[128] Bill Gates supported this outlook and mentioned the Ripple system when asked about bitcoin in 2014, stating "there’s a lot that bitcoin or Ripple and variants can do to make moving money between countries easier and getting fees down pretty dramatically. But bitcoin won’t be the dominant system.”[129] About Ripple's allowance of any electronic value holder, the Vice President of the St. Louis Federal Reserve and professor at Simon Fraser University, David Andolfatto, stated in 2014 that "Ripple is a currency-agnostic protocol. Ripple is the winner. It processes anything."[130] For its creation and development of the Ripple protocol (RTXP) and the Ripple payment/exchange network, the Massachusetts Institute of Technology(MIT) recognized Ripple Labs as one of 2014's 50 Smartest Companies in the February 2014 edition of MIT Technology Review.[131]
- Reactions to XRP
The reaction to XRP is polarized in the crypto-currency community.[81] Proponents of bitcoinhave criticized XRP for being "pre-mined," as XRP is built directly into the Ripple protocol and requires no mining. Also, Ripple Labs' distribution of the original limited amount of XRP currency has met with a fair amount of controversy,[92] and in particular the founders' retainment of 20% is seen as a high percentage. However, Esquire countered in 2013 that "if that is devious, then so is every company that's ever gone public while retaining the great bulk of its shares."[125]Much of the controversy was settled after the announcement that the founders[93] Jed McCaleb[132] and Arthur Britto[93] would be selling their XRP at a mediated rate over several years, "a move that should add stability and restore confidence to the XRP market."[93] CEO Chris Larsen in turn donated 7 billion XRP to the Ripple Foundation for Financial Innovation, with the XRP to be "locked up" and donated over time.[133] In 2016, of the 20% allocated initially to the founders, nearly half had been donated to non-profits and charities.[132][133][134]
Ripple has also been criticized to be not truly decentralized, or for using only a few core validation nodes for transaction consensus, compared to Bitcoin and Ethereum in the five digits. Bitcoin developer Peter Todd notes, "..Ripple's technical documentation doesn't make any of these risks clear – nowhere do they describe in detail how nodes can fall out of consensus with one another if their UNLs (Unique Node List) don't match."[135]
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