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Ripple and ether are two of the biggest cryptocurrencies by market capitalisation. Here we compare the two coins and their respective networks – RippleNet and Ethereum. Discover the technology behind each cryptocurrency, their pros and cons, and most importantly for traders, what moves their prices.
Ripple is a cryptocurrency, which is commonly identified by the three-letter code ‘XRP’. It runs on top of RippleNet, a blockchain network that connects to banks’ software and enables to them to communicate directly with each other to confirm transactions. The cryptocurrency, software and network are tightly controlled by Ripple Labs (sometimes called ‘Ripple’ for short), so any bank or institution joining RippleNet must be approved by this company.
What sets RippleNet apart is that each bank in the network is a ‘gateway’ through which money and other assets can move in and out of the system. Each gateway approves the other gateways that it trusts, with the network then establishing trust lines across the network to facilitate payments. Payments can be made using any currency or asset, with the network selecting the cheapest route. XRP is the common currency of the network and is used to provide liquidity when necessary – for example, if converting GBP into an exotic currency.
The word Ethereum is commonly used to refer to the cryptocurrency ether (ETH). But, strictly speaking, such uses are not accurate. Ethereum is really the name of a decentralised network, which is underpinned by the cryptocurrency. Both were invented by Ethereum co-founder, Vitalik Buterin.
What sets the Ethereum network apart from most others is that it enables users to create decentralised apps (‘dapps’) and smart contracts. Dapps are essentially software applications that run across a network of computers, and therefore run without the possibility of interference or downtime (at least according to the Ethereum Foundation). Smart contracts are binding agreements, which are written as lines of code and can therefore automatically enforce their own clauses. Ether is used to process transactions on the network, including those automated by dapps and smart contracts.
Both ripple and ether are powered by blockchain technology, which enables their respective networks to validate transactions. It does this by defining a protocol by which the order of transactions is checked against a shared transaction history and agreed by the network. This prevents users from spending their cryptocurrency tokens more than once, because all pending transactions are checked against the shared transaction history and dismissed immediately if they don’t align with it.
However, while both cryptocurrencies solve this so-called ‘double-spend problem’ using blockchain, the way their respective systems validate transactions couldn’t be more different. Let’s take a look at each method in turn.
RippleNet uses an unusual form of blockchain technology, which approves transactions using what it calls a ‘consensus’ or ‘distributed agreement’ protocol. This essentially asks the network of gateways to agree upon an order for transactions, with it simply taking the majority view.
Ripple Labs claims that this system has a number of advantages over other systems. It is, for example, less energy intensive than the ‘proof-of-work’ algorithms used by bitcoin and ether, while it also enables more than one participant to add transactions to each block. However, this is only possible because Ripple Labs approves the gateways, which has led critics to claim that it is not really a decentralised cryptocurrency.
Ether uses a ‘proof-of-work’ algorithm to approve transactions, which means that computers in the Ethereum network compete to validate pending transactions. They each check a group of pending transactions against the network’s shared history and compile the ones that align with this into a new block. They then attempt to generate a cryptographic signature for their block – based on the data contained within it – through a process known as ‘mining’.
This system works because these cryptographic signatures (known as hashes) are very difficult to generate, but easy for other machines in the network to verify. The difficulty of generating them is adjusted so that only one complete block is generated every 15 seconds or so across the whole network. This leaves enough time for the other machines to check the block’s validity and update their records, ensuring that the order of transactions is agreed across the network.
While this system is very secure and truly decentralised, it can be very energy intensive.
With such different offerings, it’s not surprising that both ripple and ether have different pros and cons:
Cryptocurrency markets tend to be very volatile, and ether and ripple are no exception. For this reason, it is essential to understand how supply and demand factors can affect their prices. Here we take a look at each in turn.
Like traditional ‘fiat’ currencies, the supply of ripple and ether varies over time with these changes affecting their valuations. If demand were completely static, their prices would fall as supply increases and rise as it falls.
Of course, in reality, things are not quite this simple as demand shifts over time – though as a general principle it tends to hold true. Cryptocurrency tokens tend to be more valuable when there is a limited supply, than when there is a more plentiful supply.
The circulating supply of ripple is close to 40 billion coins (as of October 2018). The maximum supply is 100 billion.
Ripple Labs previously controlled all of the remaining coins, but 55 billion were moved into an escrow account in December 2017. From this pool, one billion coins are made available to the network every month. Any that remain unclaimed are put back into escrow and held for a future month. The idea is to provide a degree of certainty about how many coins can enter the market at any given time.
There are currently more than 102 million ether coins in circulation, and there is no maximum supply. However, a maximum number of 18 million new coins can be created each year. These are given to users as a reward for ‘mining’ (the process by which transactions are verified).
When thinking about the supply of ether, it is also important to factor in that a small amount is ‘burnt’ as ‘gas’ in each transaction – meaning some ether is destroyed. This creates a cost that prevents users from spamming the network. It is expected that approximately 1% of ether will be burnt this way each year, so this deflationary pressure should be outweighed by the inflation from mining for many years to come.
Demand for ripple and ether depends on a wide variety of factors, including:
With ripple used on RippleNet and ether tied to Ethereum, the future of both cryptocurrencies is likely to be heavily dependent on how widely these networks are adopted. Ripple’s valuation, for example, is likely to be strongly impacted by any news of bank integration, while ether could see its value rise on the back of a popular dapp. However, it is important to remember that RippleNet can run without XRP, so the cryptocurrency’s valuation may not always be correlated with the network’s success.
The market capitalisation of these coins is likely to have an effect on demand. If the market capitalisation of either coin begins to approach bitcoin’s, for example, we could see a surge in demand for that coin. This would likely happen in anticipation of the ‘flippening’ – a theoretical day in the future when a cryptocurrency overtakes bitcoin as the number one by market capitalisation.
Press – both good and bad – can have a marked effect on cryptocurrency valuations because it can change public perception and, in turn, demand. As a result, ether and ripple are likely to see their prices move in response to any major press coverage. This could include exposés surrounding controversies such as exchange hacks or security flaws, or opinion pieces on how the cryptocurrencies could be adopted.
The price of ether and ripple can also move in response to key events or announcements. These include technological developments, forks, cryptocurrency regulations and even competitors entering the market. Like other asset classes, these cryptocurrencies can also move in response to macroeconomic releases.
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