Sending money across borders through traditional methods can take several days and can be expensive. Blockchain technology has paved the way for innovative solutions that have the potential to revolutionize cross-border payments. Ripple has developed a system that aims to make international transactions faster and more efficient. In this article, we will explore the challenges of traditional international money transfers, and how Ripple’s use of blockchain technology has the potential to solve these problems and change the way we do international transactions.
Summary
- 💡 Ripple, as a blockchain-based alternative to the SWIFT network, aims to revolutionize and speed up cross-border fund transfers. With RippleNet, cross-border fund transfer processes only take a few minutes, making it much faster than traditional methods.
- 🔗 XRP Ledger is a decentralized ledger that facilitates transactions, and XRP is the digital currency used on the XRP Ledger.
- 👩🏻💻 XRP Ledger uses a special consensus algorithm called Proof-of-Association (PoA), which requires each node to create a list of trusted nodes, called Unique Node List (UNL), that they rely on to achieve consensus.
International Money Transfer and Payment
The current international financial system is connected through SWIFT or Society for Worldwide Interbank Financial Telecommunication. There are approximately 11,000 financial institutions worldwide that are members of SWIFT, which facilitates financial messages such as fund transfer instructions. This system is also behind most international payment and fund transfer transactions.
For years, SWIFT has been considered an inefficient payment system because it requires multiple layers of transactions. However, blockchain technology has emerged as a solution to this inefficiency, offering a faster and more cost-effective way to do cross-border payments and fund transfers.
Ripple, a distributed ledger technology, has the potential to revolutionize traditional financial procedures by providing a more efficient, faster, and affordable payment network.
SWIFT is overseen by central banks of the countries that are members of the G-10. These countries are Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States. Belgium acts as the main overseer along with other members, including the US central bank, the Federal Reserve. As of November 2022, more than 11,000 global SWIFT member institutions send an average of 44.8 million messages every day.
What is Ripple?
The emergence of Bitcoin paved the way for the development of various blockchain-based technologies, including Ripple. Ripple Labs – a technology company based in the United States – developed the Ripple blockchain infrastructure in 2012, following the innovation brought by Bitcoin.
Ripple Labs then launched RippleNet, which is specifically designed to offer faster, cheaper, and more efficient cross-border transactions for use by banks, as an alternative to SWIFT.
RippleNet functions as a currency exchange system and money transfer network, and is also responsible for the XRP ledger (XRPL), which allows payments through XRP (XRP).
RippleNet is a blockchain-based alternative to the SWIFT network, which aims to revolutionize and speed up cross-border fund transfers. Unlike SWIFT, RippleNet eliminates many of the layers required for the network to function, providing a transparent and fast transaction settlement status. With RippleNet, end-to-end transfer processes only take a few minutes, making it much faster than traditional methods.
The XRP Ledger
Ripple operates on a blockchain that stores permanent transaction records through its ledger called the XRP Ledger. The XRPL is also responsible for recording transaction data such as balances, accounts, and transfers, which are secured cryptographically with a pair of keys (private and public keys). The holder of the private key is the only one who can approve transactions. XRP transactions can be settled within seconds, providing fast payment solutions for cross-border transactions and facilitating currency conversion for institutions.
In 2024, Ripple is on its way to implementing two major upgrades: native smart contract capability and XRPL EVM sidechain. These two upgrades are being implemented in parallel as both will open up different opportunities for the XRPL to thrive.
In summary, Ripple is a technology company that provides payment solutions, while XRP Ledger is a decentralized ledger that facilitates transactions, and XRP is the digital currency used on the XRP Ledger.
Who created Ripple and XRP Ledger?
XRP Ledger is a blockchain-based payment system created by Ryan Fugger in 2004. However, XRPL did not become an actual blockchain ledger until after Bitcoin was released. In 2011, Jed McCaleb took over the project and co-founded Ripple with Chris Larsen and Arthur Britto in 2012. They launched XRPL in June of that year and introduced the XRP token in December.
XRP Ledger developers opposed the energy waste associated with Bitcoin’s Proof-of-Work (PoW) consensus mechanism. They believe that the real value of Bitcoin is transaction publicity and the state, not the PoW consensus mechanism.
How XRP Ledger Works
Unlike most blockchains, XRPL uses a special consensus algorithm called Proof-of-Association (PoA). This consensus algorithm requires each node to create a list of trusted nodes, called the Unique Node List (UNL), which they rely on to achieve consensus.
Validators, which are nodes involved in voting on improvement proposals, must gain trust from other nodes before being given access to the consensus process. Most nodes use one of the default UNLs, which are recommended by XRPL Foundation, Ripple, and Coil. However, they can create their own if desired.
All nodes in XRPL run the same open-source software called Rippled. Validators do not receive rewards in PoA; their main incentive is to support network decentralization. Stock nodes process transactions and allow developers to reference and broadcast to the network, but they do not participate in voting.
Nodes rely on their UNLs to confirm the state of the network. Every 3-5 seconds, a new block, known as a ledger, is created through a two-phase consensus and validation process as shown below.
Advantages of PoA compared to PoW and Proof-of-Stake (PoS) include:
- Lower hardware requirements reduce electricity costs and overhead, making validator costs more affordable than PoW miners.
- Block production is not directly dependent on who has the most capital, as in PoS.
- No reorg (changing blocks after validation).
However, PoA also has some disadvantages, including:
- PoA’s freedom from high external costs and locked-up capital means it will not have the same financial ability to punish bad actors.
- Validator connections can be severed, and nodes can be removed from the UNL as retaliation, but there will be no financial impact from such attacks.
- The implementation of PoA in XRPL is not decentralized (in terms of block-producing nodes) like the most popular PoW/PoS chains, which may be due to a lack of financial incentive to participate.
Ripple and XRP Potential
Ripple and XRP’s potential as an asset was always hindered by the SEC lawsuit regarding XRP’s status as a security. However, on July 13, the US court declared that XRP is not a security and the SEC lost their lawsuit. This landmark decision makes XRP the only cryptocurrency besides BTC with regulatory clarity in the U.S.
With the court decision, institutional investors started flowing into Ripple. Bitwise, Canary, and 21Shares filed S-1s for XRP spot ETFs. Additionally, Grayscale launched its XRP Trust product on September 12, 2024.
While XRP has yet to show its potential within the crypto industry when compared with other blockchains, Ripple’s appeal to institutional investors is palpable. This will further increase with the planned launch of its stablecoin Ripple USD (RLUSD). RLUSD will position Ripple (XRP) as one of the primary crypto projects for stablecoin payments both in crypto and in real-world needs.
Conclusion
Ripple has the potential to revolutionize cross-border payments and remittances. It could replace the existing SWIFT network and provide fast, cost-effective transactions. Ripple aims to impact enterprises and financial institutions by offering a Liquidity Hub for crypto trading and digital asset management.
Ripple has positioned itself as an experienced developer for various institutional needs. With the SEC lawsuit now clear, institutional investors are starting to flow into Ripple and XRP as an asset. Additionally, the launch of RLUSD will position Ripple as one of the primary institutional options for crypto payments.
References
- Dave Cohen, David Schwartz, and Arthur Britto, Consensus, XRP Ledger, accessed on April 27, 2023
- Red Sheehan, XRP Ledger: More than Ripples, Messari, accessed on April 27, 2023
- Emi Lacapra, What is Ripple: Overview, history and XRP cryptocurrency, Cointelegraph, accessed on April 27, 2023
- Shobhit Seth, What Is the SWIFT Banking System?, Investopedia, accessed on May 2, 2023.
- XRP Team, “Q3 2024 XRP Markets Report“, accessed on December 1, 2024.