Ripple

Ripple (XRP)

The first question: Ripple or XRP? Are they the same?

Fundamental Analysis

Introduction:

Ripple is a company. It is not a cryptocurrency.

XRP is a token created by Ripple, and acts as the cryptocurrency.

But there are some fundamental differences between the concept of BTC or Ether as opposed to Ripple. Below is a snapshot of such differences.

BasisBTC/EtherRipple
CentralizationDecentralizedCentralized
Creation of Tokens/CurrencyThrough miners which help in recording the transaction in the blockchainThe coins are already created beforehand, no coin will be created at any point of time
Total no of coins21 million for BTC/Unlimited for Ether100 billion

Upon seeing the above table following thoughts should come to mind:

1. Isn’t the whole idea of cryptocurrency (or atleast the idea of cryptocurrency as propounded by Satoshi Nakamoto) involve making the system decentralized, where we, the netizens and common folk, after millions of years of oppression by the rich and mighty, band together and create an alternative to the system of money in its current form as propounded by those in power. And in the process we were to render these institutions and regulations useless, for the world in essence should be our backyard!

I empathize with your impassionate and grandiose sense of justice and morality but that was just true for BTC, more specifically for the usecase that BTC was trying to solve (A use case that I tried to define above). Ripple is not here to replace fiat currencies. It is here to solve a problem, which is the difficulty faced by individuals/institutions while trying to transfer money abroad.

2. But the tokens are all created, so who will get these tokens? Wasn’t this the chief problem in BTC & Ether where we tried to use a Proof of Concept, and wasted so much energy to keep our hardware miners running adding transaction after transaction to the Blockchain?

Yeah, the founders of ripple took all the tokens, i.e. XRP.

3. Oh my god, Clive run, this is a scam. The owners have already taken all the tokens!

Just a minute, the owners have taken all the tokens because that is exactly what is required in this situation, for the problem that needs to be solved demands it. Besides, of the 100 billion that were created initially, the owners retained only a portion of them. They have also promised to put their holdings in an escrow. Escrow is a mechanism that locks up the coins, and these are only released according to some preset rules. In this case since the market is afraid that the owners have the power to dump all of it, the escrow will prevent the founders from doing that.
Quoting them

“We’ll use Escrow to establish 55 contracts of 1 billion XRP each that will expire on the first day of every month from months 0 to 54. As each contract expires, the XRP will become available for Ripple’s use. You can expect us to continue to use XRP for incentives to market makers who offer tighter spreads for payments and selling XRP to institutional investors.”

https://ripple.com/insights/ripple-to-place-55-billion-xrp-in-escrow-to-ensure-certainty-into-total-xrp-supply/
So that should remove doubts regarding the sincerity of the team.

4. Now what is the problem that Ripple aims to solve, can you explain it? Why is this such a big deal, and all them gurus in youtube channels speak as if sending money to people in other countries is something we do on a daily basis. The only money I’ve ever sent was to my mom and wife, and both of them are in the same country as me! Besides I went abroad once, all I had to do was go to a bank and convert my money to the foreign currency, and that was done almost immediately. If this was so easy, is transferring money to someone from a different country really such a huge problem?

Yes, this is a huge problem. The existing systems for banking were put in place years ago. What we’ve been doing until now was just converting this manual process into an automated process, but at the end of the day this process remains the same. In short the process is bad because it takes a lot of time 3-5 days and a significant transaction fee, we needed to figure out a better alternative, and Ripple is trying to be that alternative.

5. Can you explain the existing process to me?

So we have 2 models for transferring money, but first let me get you acquainted with the players:

Country ADescriptionCountry BDescription
AgentThe local agent/shop where you will generally go to deposit money.AgentThis is the local shop or Microfinance company where your wife/mother will go to collect the money.
Money Transfer Operators (MTO)These agents will pool the money and then deposit it with the MTO.Money Transfer Operators (MTO)These are, as before, like wholesalers or aggregators. They will get the money from the settlement bank and forward it to the agents.
Settlement BankThis is the bank that the MTO banks with. It holds an account with the Bank, and the sends over transfer instructions when it requires to do so.Settlement BankThe settlement bank receives the money from the Receiving Bank (Described below).
Remitting BankSometimes the settlement bank and the remitting bank are the same. However, often, they are different. If they are different the settlement bank will have to reach out to a remitting bank (which are bigger banks with significant reputation globally), and the remitting bank will transfer the money.Receiving BankThe receiving bank is another globally recognized bank that receives the money from the remitting bank. Since it receives the money if foreign currency, it hands over that currency to the central bank of that country and then the central bank in exchange for that foreign currency issues local currency. This local currency is sent to the settlement bank of this country’s MTO.
Batch Process
Step 1The sender (in Country A) deposits Currency X with an agent intending to send money to Country B (Whose currency is Y).
Step 2The agent goes to the local MTO and deposits the whole amount collected during the day.
Step 3The MTO aggregates all the money of currency X going to Country B.
Step 4The MTO partners with MTOs of different countries, it singles out the MTO of the concerned country and sends them a file containing the details of every transmission, to, from and amount.
Step 5The MTO transfers the aggregated amount into the settlement bank.
Step 6The settlement bank sends the money to the remitting bank.
Step 7The remitting bank sends it over to the receiving bank.
Step 8The receiving bank deposits the money in currency X that arrived in the country’s central bank, and then the central bank gives it money in the country B’s local currency Y.
Step 8The receiving bank forwards this money to the account that country B’s MTO had in the settlement bank.
Step 9Country B’s MTO then checks the file that it received in step 4 and forwards the requisite amount of money to the various agents who helps move the money to even remoter locations.

For doing all this imagine the time it takes them. If you had to transfer money one after the other, aggregating it in each batch, obviously it takes a lot of time. 3-5 days minimum.

For doing all this, each participant takes a share of the money as fees, first the agent, then the MTO, then the settlement bank, that indirectly charges the MTO to maintain an account for them, then the remitting bank. Same thing on the receiving side. This whole process ends up inflating the cost.

2 words: Imagine the time; Imagine the cost.

The Pre Fund Model
Step 1Country A’s MTO opens an account keeping say 100,000 with the receiving bank which is not converted into the local currency. This is called the prefunded account.
Step 2A sender goes to an agent, and transfers say Currency X 1,000. For that the agent charges X 50.
Step 3The Agent then forwards this money to the same country (i.e. A’s) MTO.
Step 4The MTO and the Agent share the fees in whatever ratio they want. Say 50:50. So in country A, agent takes 25 and MTO takes 25.
Step 5The Receiving bank with the prefunded account advertises that the current transfer rate is X 1 = Y 100, which is actually different from the rate that it gets from the central bank, usually its lower.
Step 6Country A’s MTO sends instructions to Country B’s MTO to dispatch funds from the pre funded account.
Step 7In such a case, the Receiving Bank sends the money to the Central Bank, which gives them an exchange rate of say X 1 = Y 102, so for X 1000, it gets Y 1,02,000. But since it has advertised a rate of X 1 = Y 100, it pays out Y 1,00,000. Making Y 2000 in the process. It sends Y 1,00,000 to B’s Settlement Bank.
Step 8Country B’s MTO Collects the money from the settlement bank and forwards it to the Agents
Step 9The Agents distribute the money in all locations.

Hence this is again, a very convoluted process that takes a lot of time. Here again fee is involved in every level, bringing up the costs.

2 words again: Imagine the time; Imagine the cost.

Now there is a question that most of you have missed, how the transfer is happening in the first place? Forget the participants for a moment, when the Remitting Bank is sending money to the Receiving Bank, how is it doing that? Is it the same as when we send money to our friends? Answer is no, because it has to be more complex. Here in comes various players that lie hidden in the system:

1. How is it that we send the money? (Like: RTGS/NEFT)

2. Market makers

How do we send the money?

Short answer is that just like RTGS, NEFT there is a system of protocols called SWIFT, which is currently being used to transfer money overseas.

Market Makers?

So when we send say Dollars from US to India, we need to convert it into Rupees. However, to do that I need to find someone who will be ready to buy Dollars and give Rupees in exchange! But is it feasible? What guarantees that each time we do this we will find a buyer who is willing to buy exactly the same amount of dollars that we are trying to send and give us Rupees in exchange? This is done by market makers and central banks. They are big players, who buy your dollars, and take a ‘spread’. A spread is nothing but the inflated amount over the current exchange price. For example, if they have ready buyers at 102 of a certain currency, offer just 100 for it making the spread 2. Similar to what the receiving bank was doing to make money in the previous table. These Market Makers are those who provide liquidity.

Being Market Makers they face a problem. If there are currency pairs that are liquid in the following manner:
A/B, B/C, C/D, D/E

So, to get a swap from currency A to currency E, one has to first convert A to B, B to C, C to D and D to E.
This is a hassle and it costs more. Hence, if only there were a bridge currency like

A/Bridge, B/Bridge, C/Bridge and so on..

We could do any conversion in just two steps, A to Bridge and Bridge to concerned currency.

Back to Ripple: Finally!

XRP is being pushed as that Bridge currency.
And Ripple is nothing but a system of protocols, that is trying to replace SWIFT.

6. How is Ripple better than swift?

This is beyond the scope of discussion. Here is a good starting point. But in a nutshell, Ripple is better.

7. Why did the company keep most of the XRPs?

The idea is to ensure that XRP stays stable, with the company holding most of the tokens for ripple one can hypothesize that they will be able to create both demand and supply for the market. It is in the company’s interests that XRP is stable. And as a result the founders will not suddenly sell off the huge amount that they have ~55 billion XRPs. It is important to note here that founders are separate from the company Ripple. About ~10 billion is owned by the founders themselves and ~35 billion is in circulation. Now it obviously poses the risk that the Company/Founders can sell their Ripple, leading to oversupply and in effect cause the price of Ripple to fall. However it will hurt the company itself, so as an investor one has to take a call on the founders/investors. To further simplify the concept, to be a successful bridge currency, XRPs cannot have too many fluctuations, and we can only assume that the founders will not let that happen.

Now that we have set the stage for Ripple, let us actually analyze it to see whether it is a good investment!

The Website: https://ripple.com/

Founders:

Ryan Fugger
Website: http://ryanfugger.com/
Nothing much is known.

Jed McCaleb
Founder of the infamous Mt. Gox, which in BTC’s early days was the premier exchange for BTC transactions.
Read more about Jed McCaleb’s journey: This man is equal parts genius and equal parts crazy.

Current CEO: Brad Garlinghouse
Has quite a resume.
https://www.linkedin.com/in/bradgarlinghouse/

Roadmap for development: As stated by founders/website

Listed on all major stock exchanges.

Backed by a lot of big names. For more details visit: https://ripple.com/company/

Verdict: I expect this coin to rise. They have a great team backing them. Their crypto actually solves a particular purpose. This is not a proof of concept coin like Ethereum or BTC, but I expect this coin to do lots.
Coin Rating: 5/5