XRP is an established cryptocurrency that is built on Ripple Inc.’s XRP ledger (XRPL) using leading-edge blockchain technology. Ripple was founded in 2012 and clearly distinguishes itself from other cryptocurrency creators, for example Bitcoin, as it does not use proof of work (mining); and issues the cryptocurrency, XRP, differently.
The XRP ledger (XRPL) uses a validator network to manage the decentralised ledger. This is different from proof of work because it uses a different algorithm to reach consensus. Validators do not get incentivised through a block reward to validate transactions and therefore no new coins get minted during this process. Instead, coins must get issued to come into existence. This is the reason the XRP ledger is so much faster and more efficient than other cryptocurrency blockchain systems.
As there is no proof of work, how would XRP come into existence and why is it needed?
The XRPL is open source and anyone who is interested can participate on the network. You can build gateways, exchanges or other interesting functionality with XRPL. The consensus algorithm can handle around 1,500 transactions per second and with payment channels you can push this to much higher throughput.
But what if the ledger gets spammed by a malicious actor?
What if a competitor network wants to bring down the eco-system? All they would need to do is to set up a node and send thousands of transactions per second onto the ledger. This will clog the network and the system becomes unusable for everyone else.
The solution to this is to charge a small fee on each transaction. Therefore, the malicious actor will have to pay to spam the network. The fee will dramatically increase when the ledger’s specifically developed algorithm detects such activity. This will end up costing the bad actor and they will have to stop. If the validators were getting rewarded for validating the transactions, the bad actor would simply be paying themselves for spamming the network. Therefore, the fee gets destroyed and ultimately makes it unattractive for the malicious actor.
So what is the fee made up of? It cannot be the same as what was issued by the gateway, because then, as a gateway, a malicious actor can issue a currency, then spam the network and destroy the funds that were issued. This creates another loophole.
That is why XRP was issued onto the XRP Ledger
Ripple is the gateway and issuer of XRP. The transaction fee on each transaction on the XRPL is paid with XRP and this XRP is then destroyed (or burned in their terms) during the process. The XRP that was issued was written into the XRP protocol and no-one, not even Ripple, can issue more XRP.
Here are the logistics:
- Ripple issues the XRP and therefore wallets are required to hold the XRP.
- On the first day XRP was created, 100 billion XRP was issued into Ripple’s wallet.
- Important to remember here is that this XRP had no value, whatsoever. No-one used it, no-one needed it and it was not listed on any cryptocurrency exchanges.
- The intention was that participants on the XRP ledger would need XRP to pay for the transaction fees.
- Ripple sells XRP at an agreed price in order to get these participants wallets operational.
In many cases, especially in the beginning, Ripple gave away XRP to exchanges and staff members for free. It is understandable that the owners and executives received XRP. As mentioned before, XRP had no value at this stage, so if you had 1 million XRP it meant nothing in terms of value. All you could do with it was to store it in your wallet and use it to enable transactions on the XRPL.
Over several years since 2012, XRP was listed on crypto exchanges and participants started experimenting with this concept. Ripple raised capital through private equity, has shareholders and is an extremely well-funded company.
Their mission is to enable fast, efficient and very cost effective cross border payments and thereby competing with large payment networks, globally.
As Ripple began distributing the XRP (as it had 100 billion to start with) and the eco-system grew, XRP became valuable. People started to speculate on its price via crypto exchange platforms. Now, it needed to have some value, otherwise if it had no value, malicious actors could use XRP to spam the network. They now needed to buy XRP from Ripple or from a reputable exchange on the open market place and then attempt to spam the network which would cost them money to do so. This was therefore a deterrent to these activities.
In early 2017, Bitstamp, the first cryptocurrency exchange, listed XRP on their orderbook. Consumers could now start trading XRP and participants did not need to buy XRP directly from Ripple anymore, therefore enabling anyone to buy and sell XRP on their crypto exchange. Many exchanges followed Bitstamp by listing XRP and during 2017, the price (value) of XRP sky-rocketed as did Bitcoin and several other top-market capitalisation altcoins.
Ripple has created an innovative alternative payment rail to traditional payment networks by using a decentralised ecosystem for financial institutions. Their products, xCurrent, xRapid and xVia are all geared towards bringing institutional clients onto the XRP ledger.
The XRP ledger well and truly outperforms any other money transmission technologies available, including traditional banking systems, globally. It is light-years ahead of all competitors.