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XRP: A Story Of Resilience

XRP: A Story Of Resilience

Explainers Essentials

25 Jun 2021

Ripple is a technology company using crypto and blockchain technologies to provide solutions to send money globally. XRP is a digital asset native to the XRP ledger created to streamline cross-border transactions and has for a long time ranked in the top 10 cryptocurrencies by market cap.

Despite recent troubles with the SEC, XRP has kept up with the bull run of the last few months and Ripple as a company continues to evolve its services and secure new partnerships, banking on its brand image as a reliable partner.

Ripple explained

Ripple’s blockchain-based global payments network RippleNet helps financial institutions conduct transactions more efficiently and cost-effectively. Instead of having to rely on several intermediaries to perform transactions, and incurring fees at every step, financial institutions can now use Ripple as a trusted agent in between two parties in a transaction. It effectively replaces SWIFT, the dominant settlement framework used by major financial institutions today.

The XRP digital asset is used in RippleNet and acts as a bridge currency to facilitate the transfer of money between different parties. If for example a bank wants to send USD to another bank which requires JPY, the sender would first convert USD to XRP then send it via the XRP Ledger after which the receiver can convert the XRP into JPY. All this within minutes and at a much lower cost than any traditional system offers.

XRP Ledger explained

The XRP Ledger does not run with a proof-of-work (PoW) or a proof-of-stake (PoS) system, but achieves consensus through a process called Federated Consensus to validate transactions. As a result, the XRP Ledger can enter transactions into the ledger in 3-5 seconds and has an on-chain transaction capacity of roughly 1,500 per second, but requires 80% of validators to remain honest, and outsiders must trust insiders when joining or re-joining the ledger.

Anyone can be a validator but new validators must be added to trusted Unique Node List (UNL) in order to participate in the consensus process. Active validators on the ledger today include universities, exchanges or financial institutions. There are currently 150+ validators from around the globe, 36 of which are UNL nodes. 6 of the UNL validators have domains.

XRP token

From the beginning, XRP was a critical component of the cross-border transactions network. The token has been available for trading since 2012, and it has gone through many ups and downs – like any other crypto asset out there. While the price stayed in the $0.004-$0.006 zone for most of the early years, it soared to its all-time-high in 2018 reaching $3.37. After a long crypto winter trailing in the $0.20-$0.40 range, XRP rode the recent bull run back up to $1.83, currently trading at $0.83 amidst bearish sentiment.

The total supply of XRP is 100bn, all minted ahead of the network launch and intermittently sold on the open market. Ripple owns about 6% of that supply reserved for the company itself, with another approximately 48% held in a reserve for regular release into the market through sales. This model has raised some concerns with XRP holders, as Ripple could flood the market with coins and dilute the value, which is why the company aims to reduce these uncertainties by implementing mechanisms such as predictable releases.

Ironically, releasing additional XRP in a scheduled and predictable manner to ease concerns for XRP holders is what might have been the trigger for the SEC to file legal action against Ripple, as it might make the token look less like a currency and more like a security – which would have to be governed under a stricter regulatory framework.

SEC takes issue with Ripple and XRP

Ripple made headlines for the wrong reasons near the end of 2020. The SEC alleged in December 2020 that all of Ripple’s sales of XRP had been one long unregistered securities sale, and filed legal action against Ripple and two of its executives. The SEC has taken the view that XRP is a digital security rather than a cryptocurrency, meaning that Ripple executives would have failed to register their ongoing offer and sale of billions of XRP to retail investors, depriving potential purchasers of adequate disclosures about XRP and Ripple's business.

In response, Ripple has clarified it never held an ICO, never made projections about profits for XRP holders, and has no relationship with the majority of XRP holders – most of which would have bought XRP on the open market. XRP holders do not acquire any claim to the assets of Ripple, hold any ownership interest in Ripple, or have any entitlement to share in Ripple’s future profits.

While the case is ongoing, the damage to its reputation had already been done and fear took hold of the market. After some exchanges like Coinbase placed limitations on XRP trading, many holders sold off the coin prompting many more holders to sell as well, dragging the price down.

Yet, things are looking up.

On March 29, a court order granted a group of XRP holders the right to file a motion to intervene in the case against Ripple by April 19. The holders blame the SEC’s case for causing them to lose money when the XRP price plunged in December. And even though it is far too early to tell, the narrative around the legal case seems to point towards a favourable outcome for Ripple.

Additionally, the list of companies associated with the Ripple network remains long with big players such as American Express, Azimo, bKash, LuLu Exchange, Nium, SBI, Siam Commercial Bank and many more.

The future of Ripple

Legal troubles aside, the company is making steady progress in expanding the network and upgrading core functionalities.

In March 2021, Ripple announced that it has agreed to acquire 40% of Malaysian cross-border payments firm Tranglo, to meet growing demand in Southeast Asia. Tranglo will play a critical role in supporting existing corridors, such as the Philippines, and introducing new On-Demand Liquidity services within its current network. Southeast Asia is a key region for Ripple, as it focuses on the challenges of processing cross-border payments in a highly fragmented landscape.

Before news of the SEC lawsuit broke, XRP holders were getting excited over the Spark (FLR) token airdrop that will be the native token on the Flare Network. That airdrop incited a huge surge in the price of XRP before the SEC lawsuit news tanked the price.

Flare Network is a highly scalable distributed blockchain network utilizing the Federated Byzantine Agreement-based (FBA) Avalanche consensus mechanism.

Flare integrates with the Ethereum Virtual Machine (EVM) and natively supports smart contracts. Most importantly, Flare has the capability to create two-way bridges between different blockchain networks to achieve trustless interoperability. Simply put, this means that it can connect with other chains to expand their networks’ and native tokens’ functionalities by, for example, integrating smart contracts.

For that reason, FXRP is a big deal as it bridges XRP with other chains, allowing the cryptocurrency to support smart contracts while offering holders the chance to utilize it in DeFi solutions and a massive number of dApps via Flare.

Despite the weight of the SEC leaning on Ripple, their story is far from over. With cautious optimism, we should expect these early crypto pioneers to continue making waves as they expand their network of global financial institutions and now start tapping into the DeFi space.

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