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How Does Ripple (XRP) Work?

Robert Morel

Robert Morel

Robert Morel is a Full Stack Software Developer. Specializing in legacy applications. I have a particular interest in server management, operations and provisioning of deployment pipelines.
Ripple is renowned for being one of the most innovative payment platforms in the world, rivaling traditional giants like SWIFT and being embraced by financial institutions in various regions. So how exactly does Ripple work and what sets it apart from other blockchain-based payment systems and from traditional payment platforms?

Ripple as a payment platform

When most people think of funds being sent via Ripple, they imagine actual funds leaving one account and appearing in another. In reality, it works a little bit differently as no actual funds are being sent when Ripple is used. Instead, the promise of payment is what is being transferred between users of Ripple.

When people make use of the Ripple platform to send funds between each other, there are at least two other parties who are involved called Ripple gateways. The gateways in question refer to institutions such as Bitstamp who validate transactions and they are needed because the platform is a large one and not all users have a pre-existing relationship with each other.

Another tool employed by the Ripple ecosystem is chains of trust which are used to link the various Ripple gateways who have confidence in each other. Should an individual send a payment to another using Ripple, the two or more gateways involved will exchange IOU information using the https protocol and the ledgers are updated to reflect the transaction that has taken place.

These transactions require a very small amount in terms of transaction fees, usually about 0.00001 XRP, and takes only a few seconds to update the ledger. It has happened in the past that millions of dollars in XRP has been moved for mere cents in transaction fees and in a very short amount of time. This is in stark contrast to the traditional SWIFT system which often comes with high transaction fees and can take hours and even days to register transactions, much to the complaints of users all over the world. Naturally, this has driven a lot of business to RippleNet across the globe. 

RippleNet offers distinct services to financial institutions in terms of sending and receiving funds. xCurrent is the service that helps banks send and receive funds, xVia, which allows businesses to make payments and xRapid which allows businesses to make use of XRP  to minimize liquidity. It should be noted that Ripple as a company holds ownership of a majority of the XRP tokens in existence which is about 60 billion. 

Ripple’s payment system is rather simple on its surface but leverages a very stable cryptocurrency and the power of blockchain to move across borders in a seamless way that points to the future of the financial industry. Some of RippleNet’s most prominent users include Moneygram, Western Union, and SBI Holdings. 

XRP as a Token

Of course, Ripple is also well known for its XRP token which is the third-largest cryptocurrency by market capitalization, behind ether and bitcoin. Ripple has a very unique payment system and XRP is the asset that holds the ecosystem together as it is the means of transaction settlement. By making use of XRP, Ripple is able to settle roughly 1,500 transactions per second and does so in mere seconds. 

Unlike some of its peers like bitcoin, Ripple is not mined per se. Instead, it can only be purchased through a crypto exchange and there is a finite amount of it in circulation and because it is not mined, new tokens are not constantly being created. About 100 billion XRP has been created and 60 percent of this is held by Ripple themselves, who control the circulation of the token. Most of its use is restricted to its use for settlement transactions. 

There is some controversy about the proper classification of XRP as while it is often referred to as a cryptocurrency, it does not exactly function as one in the traditional sense. Because it is used as a settlement tool and due to the nature of its origin, some argue that it should be classified as a security and this has led Ripple into some legal trouble. The management of Ripple, however, insists that it is not a security or a share in Ripple. Nonetheless, there are merchants across the internet that accept XRP as a form of payment and XRP holders are known to HODL the token in the hopes of trading it when the price is significantly higher as they would other cryptos. 

XRP can be stored in dedicated XRP wallets that come with secure keys but most have a minimum balance requirement of 20 XRP. it should be noted that if one seeks to buy XRP, you will likely have to first buy another cryptocurrency and then exchange it for XRP as few platforms allow the direct buying of XRP with fiat currencies such as USD.

Robert Morel

Robert Morel

Robert Morel is a Full Stack Software Developer. Specializing in legacy applications. I have a particular interest in server management, operations and provisioning of deployment pipelines.