Did you know that it takes an average of between 3-7 days to complete an international wire transfer?
But what if there was a way to achieve this more quickly, and at a fraction of the cost?
Well, this is exactly what Ripple Labs is trying to do with its advanced international payment settlement system.
Let's take a detailed look at Ripple, the technology behind it, its benefits and downsides, its popular cryptocurrency XRP and some of the issues the technology is having with the SEC.
So, what is Ripple?
Essentially, Ripple is an international payment settlement system designed to facilitate the transfer of funds across the world quickly and at low cost.
The system itself was founded in 2012 as Ripple Net by a start-up called Ripple Labs. Their vision was to create an alternative to the SWIFT interbank system that remains the most used international payment system in the world.
To better understand the significance of Ripple and its technology, it is important to explain briefly how the current international payment system works.
Let’s say you want to wire a payment to your supplier in China, for your up-and-coming toy brand in the United States, right? You’ll need to initiate the transaction from your US-based bank.
To do so, you’ll need the supplier’s bank details, particularly the specific SWIFT code of their account in China.
In most cases, it takes well over three days for this kind of transaction to be completed. That’s not to mention the high transaction fees, and currency conversion fees, on top of sending and receiving fees as the money makes its way to China.
Ripple is leveraging decentralized technology to not only speed up the process but also to reduce transaction costs to virtually nothing.
How does Ripple work?
Put simply, Ripple is a decentralized network that acts as the intermediary between senders and receivers.
Its network is designed to use a consensus protocol featuring nodes - computers, basically - to validate and process transactions. If this sounds confusing, just keep watching to get a better understanding.
Now, these nodes are spread out all over the world but connected to the same network. When a transfer is initiated on Ripple, these nodes process and verify the transaction for it to go through.
The nodes use something called a consensus protocol to do the validation.
What Is a Consensus Protocol?
Think of it as a kind of voting mechanism. Each computer gets one vote, deciding whether to process the transaction or not based on pre-set conditions.
This essentially means the entire network of computers must agree that a transaction is valid, hence it’s a “consensus”.
For example, the nodes will check if there is enough money in an account to complete the transfer and pay the transaction fees. If everything checks out, they approve the transaction, but if not, the request is rejected.
Once consensus is reached, the transaction will be processed, validated, and, just as importantly, recorded on the blockchain. This makes it possible to see person A transferred a certain amount of capital to Person B.
It is, however, worth noting that for Ripple Net, 100% consensus is not required for transactions to be validated. Instead, the network only needs 80% of the computers or nodes in the network to agree.
Also, unlike other decentralized networks that use consensus-based validators, Ripple chooses who can run nodes on the network.
Typically, the network has a list of trusted validators, and anyone who wants to join this list has to go through a rigorous process before they get approved.
How is Ripple different from SWIFT?
For starters, there are no hidden intermediaries in Ripple.
Once a transaction is validated on Ripple Net, it is completed without any need for additional third parties.
Also, it takes seconds, depending on network congestion, to complete the validation. On a SWIFT transfer, it takes days.
And finally, it costs only 0.00001 XRP for each transaction.
We will talk more about XRP later in the video, but in essence, this is around 0.000004 United States Dollars "$" (USD). It's virtually nothing!
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What does Ripple's XRP token offer?
XRP is basically a type of cryptocurrency or digital money designed to facilitate transactions on the Ripple network.
The vision that Ripple Labs has for XRP is, however, quite bold.
Think of it this way. When you transfer money to a different jurisdiction, that money will have to be converted into the local currency there.
So, for example, if you are sending money to China from the US, you will send it in dollars, after which it will be converted at the bank to Chinese Yuan.
But what if there was simply a universal currency that could be used across different transfers?
Well, this is what Ripple wants to create with XRP. The ultimate goal is to settle all transactions on Ripple Net using XRP, reducing currency conversion fees and headaches associated with traditional SWIFT payments.
Now let’s take a closer look at Ripple's benefits
Ripple offers three key benefits compared to SWIFT and other methods of international payment settlements.
The first benefit is speed.
Ripple can settle international payments extremely quickly, thanks to its fast decentralized network.
This means that a transaction that takes days to complete via SWIFT can complete in only a few seconds on Ripple.
The second benefit is scalability.
Although currently, the network is only capable of completing 1500 transactions per second, the goal is to eventually reach 60,000 transactions per second. This would make it bigger in scope than Visa.
The third benefit is the cost of transactions.
Since there are no third parties, intermediaries, or greedy banks, it costs only fractions of a cent to complete a transaction on Ripple.
Compare that to the average $10 to $50 that you have to pay for using SWIFT and the advantage is clear.
But Ripple also offers additional benefits that come with decentralized networks.
For instance, it is a completely trustless system, meaning that you do not have to rely on a centralized entity like a bank to process your transactions.
The system is also censorship resistant, in that, no one has the power to unilaterally stop your transactions from going through or seizing your money on its way to an intended party.
Does Ripple Have Downsides?
For all its benefits, Ripple is not without its downsides.
Firstly, although the network claims to be decentralized, some questions have been raised about how true this is.
As we explained before, Ripple Net runs on a consensus protocol that validates transactions.
However, not everybody can actually become a validator.
Ripple uses a small list of its trusted validators, which means that the system is still, per se, centralized to some extent.
Furthermore, since this is a small list of validators, they could potentially band together and defraud the system using fake transactions. As a Ripple Net user, you have to trust them to act appropriately, which kind of undermines the trustless nature of decentralized technologies.
Another major issue that Ripple has a liquidity problem.
The SWIFT banking system deals with $6 trillion a day. Honestly speaking, there isn’t enough liquidity in Ripple Net yet to deal with such a huge volume of transactions.
Also, for folks who plan on investing in XRP, you should bear in mind that a huge chunk of the tokens earmarked for circulation is already held by Ripple Labs. This gives the company a lot of power to control the price movement of XRP tokens in the future.
Finally, at the time of writing, Ripple is also currently deep in a legal battle with the Securities and Exchange Commission, a major regulatory body for the financial industry in the US. The SEC, in a lawsuit against Ripple, is arguing that XRP is an asset and not a currency.
The agency adds that the regulatory environment around XRP should change to reflect its status as a security and not a currency.
The lawsuit is seen as a major event in crypto as it could create a significant legal precedent, with a lot riding on how it's settled.
Conclusion
Ripple is a decentralized, international payment processor which uses the token XRP.
It’s aiming to revolutionize international payments, greatly reducing both time and cost when compared to traditional processors such as SWIFT.
It still has some hurdles to face, with restrictions on validator nodes, insufficient liquidity and a potentially harmful SEC judgement hanging in the balance.
