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What is ripple?

Ripple is used on a network blockchain technology to connect banks, payment providers and digital asset exchanges via its own ‘RippleNet’. Ripple aims to provide an incredibly cheap and frictionless experience to facilitate cross border transactions for a multitude of different currencies and assets, making it potentially one of the most scalable digital assets in the world today.

Source: Bloomberg

The origins of ripple

It may come as a surprise, but ripple actually originates from a payment protocol originally developed in 2004, five years before the first bitcoin was mined. This community based payment system aimed to 'provide secure payment options to members of an online community via a global computer network through the use of traditional currency and virtual currency'. Put simply, the goal was to take the concept of credit lines with a bank, and apply them to a trust network between friends and communities, and rely on the six degrees of separation concept.

How ripple works

Before we look at ripple, we need to look at the concept of the RippleNet, the network ripple transacts with.

Imagine you and a friend are on holiday, and you meet up with your friend’s cousin and their friend, who neither of you have ever met. The four of you have a meal at the airport on the way back, and you decide to pay for everyone. You trust your friend will pay you back so you accept an IOU from him, but you don’t really know his cousin or friend. You do however know that your friend trusts his cousin, and that his cousin trusts his friend. You therefore accept an IOU from them. This is the basic principle of the Ripple network – a web of trust between parties who know each other and trust each other by association, to deal their own personal ledger and ‘debt’ (IOU’s), without a need for an intermediary.

With this concept of debt in mind, you can go one step further with the ripple network. Imagine after getting home you want a haircut, and the barber you go to also knows your cousin. He would be willing to accept the IOUs, as he knows you and your cousin, and by association the trust with the other two (your friend and your cousins friend). You can then offload the debt to effectively pay for your haircut.

If you extrapolate this basic concept, allow the network to be multicurrency and cross border, and make it near instant, you have the fundamentals of the ripple network. All users trust and debt balances are updated simultaneously and automatically, causing a ‘ripple’ effect across all trusted associates.

Is ripple a cryptocurrency?

The digital currency which lives side by side with the ripple network is known as XRP, and acts as a bridge between multiple different currencies. Simply put, you can send GBP to someone on the other side of the world who has a USD bank account via RippleNet via a number of ‘gateways’ which automatically convert any transaction or exchange. The path may look roughly like this: send GBP via the GBP/XRP gateway to convert GBP into XRP. This XRP then gets sent over RippleNet and hits the USD/XRP gateway to convert back into USD, and the USD then hits the recipients account. It basically allows different financial institutions to communicate directly, and rather than act as cryptocurrency it acts as a settlement, or remittance provider.

Why is ripple going up in value?

The world in general is going mad for cryptocurrencies at the moment, and there are many out there who are looking for the next bitcoin. People see the low price of ripple and think that it could be like betting into bitcoin back when it was $3, however due to the significantly larger supply (nearly 39 billion vs bitcoins max of 21 million), these values can’t be compared.

What is interesting is that ripple has come from a relatively low market capitalisation, and has seen significant gains over the last 12 months. This obviously garners media attention, which continues to fuel the crypto bull market, but there could be more to this than just the hype.

Advocates of the network and cryptocurrency think that this could be the end of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payments system which is currently in use. SWIFT is currently used by the majority of banks throughout the world. If you were to send funds, your cash would basically pass through this SWIFT process and take three days to settle. Bitcoin is trying to become a possible global currency, but currently can still take hours to settle. Ripple takes 3.7 seconds.

What are the negatives of ripple?

Ripple have taken the blockchain model, and have tried to make it commercially friendly and ‘for the banks’. They don’t have a decentralised consensus network in the same way as a number of other coins out there, and in fact the system is wholly owned by ripple labs – this is in direct opposition to a key philosophy of many other cryptographers and crypto users. Furthermore, in theory, ripple could increase the supply of XRP and devalue the coin, and in a worst case scenario they’d be able to run the entire ripple network without the actual coin itself. This, for many, is too great a risk.

Where is the price of ripple likely to head?

As with all assets, no one can truly know where they are heading. The price of ripple could very much rise tomorrow, or it could fall. As with all cryptocurrencies, it’s important to have a firm understanding of the trade you are placing, the volatile nature of the asset itself, risk management with the use of stops and guaranteed stops, and a clear trading plan before getting into the deal.

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