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The beginning of the end – Ripple’s riddle

Exclusive Research

  • Once the darling of crypto world and silicon valley, Ripple seems to be struggling to capture new and old investors alike.
  • Unlike true decentralised networks, Ripple largely relies on a group of bank-owned servers to confirm transactions, making it a permissioned network.
  • The ongoing battle between the SEC and Ripple Labs Inc. has not only cost the network financially, but has also led to several backers abandoning ship.
  • Though most of the Ripple supply, not held in circulation, is stored in escrow, it’s possible large quantities may get introduced at inopportune times.

Three blockchain OGs go round the outside

Ripple’s beginning, believe it or not, dates back to 2004 when it was developed by software developer Ryan Fugge. It was initially a payment transfer system known as OpenCoin that provided secure payment options to members of an online community via a global network. When Jed McCaleb (founder of the now-defunct Mt. Gox exchange), Arthur Britto and David Schwartz joined the team in an attempt to build their own solution to compete with Bitcoin’s - it led to the birth of Ripple in 2012.

At its core, Ripple is focused on advancing the world of payments, especially cross border payments, which has historically proven to be fragmented and slow. Ripple aims to take on traditional institutions by providing a more efficient system for payments that settles in real-time, while being cheaper, more secure and more transparent.

Ripple acts as both a cryptocurrency and a digital payment network for financial transactions. It is a real-time gross settlement system, currency exchange and remittance network built upon a distributed open-source protocol. It supports tokens representing fiat currency, cryptocurrency, commodities or other units of value such as frequent flier miles or mobile minutes. The token used for the cryptocurrency is pre-mined and utilises the ticker symbol XRP. XRP serves as an intermediate mechanism of exchange between two currencies, or networks, as a temporary settlement layer denomination.

Wolf in sheep's clothing?

The whole appeal of blockchain and the crypto world is decentralisation - permissionless networks where anyone can spin up a node without unattainable requirements. Decentralised networks strive to reduce the level of trust that participants must place in one another and deter their ability to exert authority or control over one another in ways that degrade the functionality of the network. Perhaps, the drawbacks of permissionless networks is that they don't have very high scalability, as it takes longer to validate a transaction. But with tons of new concepts such as taking transactions off chain and other layer 2 solutions, the need for centralization is becoming a moot point.


While Ripple has snuck into the crypto world with the blockchain avatar, it really is a permissioned network. Ripple compromises decentralisation to attain speed. In its network, existing validator nodes need to give permission to new nodes before those can also become validator nodes. While this system enables Ripple to achieve high scalability, it makes it a more centralised network, making it vulnerable in the hands of bad actors.

Unlike other blockchain protocols the Ripple Ledger (XRPL) does not employ a proof-of-work (PoW) algorithm or a proof-of-stake (PoS) algorithm to validate transactions. Instead, it relies on a more “efficient'' mechanism called the “XRP Ledger Consensus Protocol” to validate transactions in just 3-5 seconds. The XRP Ledger is maintained by independent participants. For each transaction to be successful, there should be an agreement (consensus) among independent validators. While PoW blockchains produce blocks, compartmentalised segments of the overall chain that each include certain information, the XRPL produces “ledgers.” Every ledger holds information such as data tying it to the former ledger in the chain, account totals and more. Transactions and network alterations must achieve agreement from a certain number of validators. And while in theory anyone can set up such a server, if Ripple does not include your server in their trust lines, then you're not part of the consensus-making process thus making it centralised.

The SEC won't let me be or let me be me so let me see

While regulators are still hashing out how best to classify cryptocurrencies, Ripple is viewed differently by the SEC who claims that the development and distribution of XRP were conducted by Ripple in a centralised way thereby making it a security. Ripple has been in a court battle with the SEC for almost a year, where the SEC has accused Ripple and two of its executives, CEO, Bradley Garlinghouse, and co-founder and executive chairman of its board, Christian Larsen, of conducting a $1.3bn unregistered securities offering. The SEC argues that XRP is a security, and not a commodity or other type of asset, because it was generated, distributed, and sold by Ripple Labs.

It is likely that the answer to whether XRP is decentralised or not will have huge legal ramifications for Ripple and investors in general. If these coins were issued to raise money, then it could attract further unwelcome attention from regulators⁠ such as the Commodity Futures Trading Commission and the Financial Crimes Enforcement Network.

If the SEC, for example, were to deem XRP a security, it could have dire consequences for its usefulness for exchange transactions. In fact, one such case is moving through the California court system right now. It would also have a large impact on investors. If Ripple were to decide one day that they would stop working on XRP, then the token may as well be worthless. In contrast, Bitcoin, because of its many contributors and decentralised manner, would not sink with the loss of any one company. In all, these factors point to one conclusion.

Even with the current lawsuit, the company continues to run its regular day-to-day activities and meets up with its objectives and obligations. Ripple has been winning its case against the SEC so far. In its latest win, the judge denied the SEC access to Ripple’s legal advice. Ripple has also been stacking up its list of partners as the firm recently announced a partnership with Bhutan, a Buddhist kingdom on the Himalayas, to pilot the South Asian country’s central bank digital currency (CBDC).

It looks so empty without me

The company has concentrated on targeting banks and this is a turn-off for many early adopters of blockchain technology. In fact, Jed McCaleb left Ripple in 2013 and forked out Stellar, which retained the daily-life functionalities similar to the original Ripple.

As for the token, XRP is only used by banks. But the token is tradable on public exchanges. This is pointless, because individuals have no need for ripple, except for speculative purposes. Speculation means price fluctuations and that’s a horror for banks giving them a reason to abandon it.

Ripple, the company, owns more than 60% of XRP, and even though the likelihood of a massive sell-off is minimal, they have the magical 51% advantage and hence control the blockchain. Since ripple is pre-mined, there exist little or no incentives for common nodes to work in the network, which then leaves the corporates, like banks, to provide the validator nodes. The token peaked in 2018 reaching a market cap over $100bn, but has ever since been on a downward trajectory with moments of artificial spikes keeping the hopes of the community alive

The centralised nature, threat of the escrow supply dumping on the markets and the ongoing battle with the SEC make Ripple a tough sell. Not only have investors and VCs jumped ship, the regulatory scrutiny makes it difficult for traditional institutions to adopt the technology. Ripple may have started off as a genuine idea, but with a variety of risks strung around its neck, the risk/reward for an investment points to the downside.

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