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What is Ripple? (XRP, IOUs, Gateway and Validators Explained) - YouTube
Channel: 99Bitcoins
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What is Ripple?
[1]
How does it work?
[2]
Is XRP, Rippleâs cryptocurrency,
a good investment?
[5]
And what does this all have to do
with the banking system?
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Well stick around,
[9]
in this episode
of Crypto Whiteboard Tuesday
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weâll answer these questions
and more.
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Hi, Iâm Nate Martin from 99Bitcoins.com
[22]
and welcome to
Crypto Whiteboard Tuesday
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where we take complex
cryptocurrency topics,
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break them down and translate them
into plain English.
[30]
Before we begin
[31]
donât forget to subscribe to the channel
[32]
and click the bell
so youâll immediately get notified
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when a new video comes out.
[37]
Todayâs topic is Ripple and XRP,
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one of the leading cryptocurrencies around.
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Have you ever had occasion where you
needed to wire money to someone
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only to be told it might take several days
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for that money to appear
in their account?
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Thatâs because most major banks
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are still using systems that were built
40 years ago for this task.
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Swift, MoneyGram and Western Union
are just some examples of
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slow, expensive
and relatively limited systems
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that financial services use
to transfer money.
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On top of that,
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not all of the banks are connected
via the same network.
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So, in many cases,
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you donât even have a direct line
between two banks
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when they need to transfer money
from one account to the other.
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In order for bank A
to send money to bank B
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that it doesnât have
any direct relationship with,
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more often than not
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it will have to go through
several intermediary banks,
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searching for common network connections
between each other
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in order to clear a path for the money.
[90]
Thatâs why international wire transfers
are so slow and costly;
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Each bank along the way
takes time to process the transaction
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and a fee for servicing the process.
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In some cases,
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bank transfers must involve
currency conversions,
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which make things
even more problematic and expensive.
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For example,
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directly transferring currency
from Japan to Nicaragua,
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means turning Yens into Cordobas,
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which is generally not feasible.
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The reason is that Japanese banks
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donât usually hold accounts
denominated in Cordobas
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because thereâs not
a lot of demand for them.
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However, both Japanese
and Nicaraguan banks
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hold accounts in dollars.
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So instead,
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an individual or bank
will usually trade Yens for Dollars
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and then Dollars to Cordobas.
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As you can imagine,
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this process can be costly
due to the multiple conversions.
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In short, the banking system today
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doesnât have a main connecting network
with a uniform set of rules.
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Each time you want to exchange
or send money
[146]
through the banking system,
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you need to find a path
to transfer that money,
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depending on the circumstances.
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Thatâs exactly what Ripple
is here to change.
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Just like the Internet has its own rules,
or protocol,
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to transfer information known as http.
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RippleNet uses a protocol,
known as RTXP,
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for moving value around the world.
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Ripple Labs, the creators of RippleNet,
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aim to create the âInternet of Valueâ -
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a way for money to move
as quickly as information does.
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Through the use of RippleNet,
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there is no reason to pay a fortune
and wait days
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when transferring money globally.
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The idea for Ripple
was actually first conceived
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way back in 2004 by Ryan Fugger
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and was called RipplePay,
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but in 2012 was passed to
Jed McCaleb and Chris Larsen
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who founded OpenCoin
later to be called Ripple Labs.
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Unlike most cryptocurrencies
who focus on the individual,
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Ripple Labs aims to serve banks
and payment providers,
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allowing them to lower transaction costs
and expedite settlements.
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But how does it all work?
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RippleNet is a network based on
a set of rules known as
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the Ripple Transaction Protocol
or RTXP for short.
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The network consists of computers,
known as validators,
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that are spread around the world
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and maintain a shared ledger of
who owns what.
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Validators make sure every transaction
sent through the network
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follows the RTXP rules.
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Anyone can run a validator
and help maintain the Ripple network
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just like anyone can run a Bitcoin node
to maintain the Bitcoin network.
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Companies who want to access
the Ripple network can use gateways.
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Gateways,
which are usually run by banks,
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act as entry points to Ripple
for people outside the network.
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Itâs the same idea as going to a bank
or a credit company
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to gain access to the banking system.
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So Ripple basically offers businesses
an alternative to the banking system
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in the form of an Internet of value
called RippleNet.
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Ripple products like xRapid,
xVia and xCurrent
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are offered to companies
in order to optimize
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their current solutions for transfering money
around the world.
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Itâs worth mentioning that for you,
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as a customer of a financial service
using Ripple,
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this solution is transparent.
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If the bank switches to this technology,
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your bank account balance
could be residing on the XRP ledger tomorrow
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and you would never know it.
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This all sounds great,
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but what type of currency
can actually be sent
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through the Ripple Network?
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Well,
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unlike other cryptocurrency protocols
which support only their own asset,
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Ripple offers
two different types of âcurrenciesâ:
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IOUs and XRP.
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IOUs are tokens on the Ripple network
that can be stored on any Ripple wallet.
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Just like we can store
a variety of Ethereum tokens
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on an Ethereum wallet,
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we can have plenty of tokens
coexisting on the same Ripple wallet.
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But we really should
stop the comparison here,
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since this is as far as the similarities go.
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Any participant on the Ripple network
can issue an IOU,
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however an IOU doesnât represent
something you OWN.
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It represents something you OWE.
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Itâs a debt,
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an obligation to pay back
something you got in real life.
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When I issue an IOU to someone,
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it means I owe them something.
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When I hold an IOU
issued by someone else,
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it means someone owes me something.
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Each IOU has a name
that is comprised out of
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who issued it and what it represents.
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For example,
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USD.Bitstamp is an IOU
issued by Bitstamp
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promising to pay back USD dollars.
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An IOU can be issued for
any type of real world asset.
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For example
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you can have an IOU for dollars, EUROs,
gold, oil, airline miles and even cows.
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For each asset we borrow,
we will issue a new IOU.
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Unlike other forms of debt
that can be traded,
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IOUs for the same asset type
are not interchangeable
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if they were issued by two different people.
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For example,
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if I borrow money from you
and issue you a 20 USD.Nate IOU,
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that IOU canât be added to
a 20 USD.Bitstamp IOU.
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Since each IOU has a different credit line
or trust line
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you can only redeem
the USD.Nate IOU from me.
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Itâs important to note that
the IOU itself is not the asset,
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itâs just a promise by the issuer
to give you the asset back in the future.
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This promise wonât do you any good
if the issuer isnât good for his word.
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Thatâs why trust plays
an important issue with IOUs.
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In order for you to accept
an IOU from someone
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you have to trust that
they will be able to pay you back.
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In RippleNet this is known as a trust line.
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A trust line is somewhat similar to
a line of credit with the bank.
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Itâs an agreement to trust someone
up to a limited amount of money.
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Aside from IOUs
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there is another currency
the Ripple protocol supports - XRP.
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XRP is a currency issued by Ripple Labs
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to help transfer payments
through the Ripple Network.
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For example,
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if a bank wants to move
large amounts of money,
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instead of needing to use
multiple intermediary banks
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to transfer the money,
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it can just convert the money to XRP
and send that XRP to the recipient bank.
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Itâs important to note that
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two banks donât have to use XRP
to transfer assets between them.
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Instead, they can choose to keep
an âopen tabâ using IOUs only,
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without ever closing it.
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Still, XRP is a form of payment
that unlike an IOU is final
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and is considered a tradable asset
by anyone on the network.
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Unlike IOUs,
XRP is the actual asset
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so there is no counterparty risk.
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In other words,
once you've received payment in XRP,
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the transaction is made
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and thereâs no fear that the other party
will not meet its obligations for payment..
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So, if no trust is needed
and no trust line needs to be opened
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when sending XRP
to other network participants,
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why do we even need IOU?
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The simple answer is that XRP,
being a cryptocurrency asset by itself,
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is relatively volatile
and also not respected worldwide.
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IOUs, on the other hand,
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are treated and valued
as the assets each represent.
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XRP has additional advantages as well.
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Itâs fast and scalable.
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Sending an XRP transaction
through the network takes 4 seconds
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as opposed to Bitcoinâs
10 minute average.
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Also, XRP can handle
1,500 transactions per second
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while Bitcoin can handle only 7.
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So the upside of using XRP
as a form of payment is pretty obvious.
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One question people ask us a lot is
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âif XRP is a cryptocurrency,
can it be mined?â
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The answer is - no, it canât.
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Mining in Bitcoin is done
in order to confirm and determine
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the order of transactions
on the blockchain.
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In Ripple
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transactions are handled
through a different process.
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Let me explain:
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When an XRP transaction is broadcast
through the network,
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the validators that maintain the network
decide if itâs valid or not
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through voting.
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When a validator receives the transaction,
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it consults with other trusted validators
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and they vote on whether
the transaction is valid.
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If 80% or more vote it âvalidâ -
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the transaction is updated
in the Ripple ledger.
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This list of trusted validators
that a validator consults with
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is known as a Unique Node List
or UNL for short.
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Each validator has its own UNL.
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Deciding who will be included
in the validaorâs UNL
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is completely up to the person
who runs the validator.
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However, Ripple offers
a default list of trusted validators.
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Validators donât get compensated
for their work
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like Bitcoin miners do with new coins.
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When Ripple Labs started out
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they actually issued, or âpre-minedâ,
a total of 100 billion XRP
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and according to the Ripple protocol,
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no more XRP can ever be created.
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You might be wondering,
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who owns all of these pre-mined coins?
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20 Billion XRP
were given to Ripple founders -
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Jed Macaleb, Chris Larsen
and Arthur Britto.
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Ripple Labs holds around 7 billion XRP.
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40 billion XRP have been sold
to companies and individuals.
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The remaining supply
is sealed in a smart contract
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that releases 1 billion XRP
into Ripple Labsâ hands each month
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until all of the 100 billion XRP cap
will be reached.
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XRP can be divided into 6 decimal points
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with the smallest unit
being known as a drop.
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If you want to hold XRP
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you will need a wallet
that supports the currency
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and a minimum deposit of 20 XRP
in your account.
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This is done in order to prevent people
from spamming the Ripple Network
[647]
by opening a large number of accounts.
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One last thing to know about XRP is that
the XRP supply decreases over time
[656]
making it, in theory,
more valuable as time passes.
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This is done through destroying
the transaction fees
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attached to each XRP transaction.
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For example,
[666]
at the time of shooting this video
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weâre down to about 99.99% of
the original 100 Billion XRP.
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The âmissingâ XRP are transaction fees
that have been destroyed
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and can never be used again.
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So, is it a good idea to invest in XRP?
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When people invest in XRP
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they are basically betting that in the future
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banks and institutions
will use XRP to move value
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and will therefore buy XRP
and drive up its price.
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Of course,
banks could always use IOUs instead
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and that will keep XRPâs price
rather stagnant.
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Therefore, the question of
âwill XRP rise in value?â,
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is mainly a question of whether
a majority of banks and payment providers
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choose to utilize it
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instead of their current infrastructure.
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Before we end this video
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I want to touch upon one more subject
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and thatâs the criticism about Ripple
being a centralized platform.
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There are many arguments for both sides,
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and while I clearly have my opinion
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I will try to display
some of the main points of debate.
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Just like Bitcoin,
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once Rippleâs protocol is published,
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Ripple Labs has no control over it.
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Validators run the code themselves.
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This is pretty similar to
Bitcoinâs core development team
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maintaining the Bitcoin protocol
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but having no real control
over the nodes that run it.
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But while Ripple Labs
doesnât control the protocol,
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it does have a lot of influence
since it is the organization maintaining it.
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So, if for some good reason
it determined to create more coins,
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it might succeed.
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Ripple Labs is sort of
a central bank for RippleNet.
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The Ripple protocol itself is open source,
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meaning that if Ripple Labs
ceases to exist,
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the validators can still run
the network themselves.
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On the other hand,
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products the company offers
to banks and institutions
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arenât open source
and are run solely by Ripple Labs.
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The number of Ripple validators today
is relatively small,
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and is a fraction of
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the number of Bitcoin nodes
that maintain the Bitcoin network.
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Since these relatively few validators
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are ultimately responsible for maintaining
the integrity of the network,
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this raises the question:
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how can we know the validators
arenât colluding
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in order to defraud Rippleâs users?
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Another attribute in Ripple
that raises concern is that
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you ultimately have to depend on trust
in order to use the IOU tokens.
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In contrast,
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Bitcoinâs entire system is designed to work
in a trustless environment.
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Additionally,
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while Bitcoin is free for all
and censorship resistant,
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Ripple is committed to
monitoring and reporting
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any Anti-Money Laundering flags
across the network,
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as well as reporting suspicious activity
to relevant authorities.
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On the upside,
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since thereâs no such thing
as Ripple mining,
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the network itself
is much more energy efficient
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compared to Bitcoinâs
extreme energy consumption.
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In the end,
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thereâs no clear answer to
whether Ripple is decentralized or not.
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Personally I think the real
question of centralization arises
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when thereâs one key figure
or company
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that has implicit power
over what the community thinks.
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And in this case,
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Ripple Labs undoubtedly
has the most influence
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on the entire Ripple community,
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making it much more
centralized in nature than Bitcoin.
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Itâs up to you to decide
if you think Ripple is centralized or not,
[856]
or whether that even matters.
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Ripple isnât built
on the same ideals as Bitcoin.
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Itâs a âfor profitâ company,
serving the banking system.
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Perhaps this centralized solution
[865]
is a more efficient means
of international transaction,
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but is it the right one?
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Thatâs it for todayâs episode of
Crypto Whiteboard Tuesday.
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Hopefully by now you understand
what Ripple is and how it works -
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A network designed to move value
around the world,
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mainly aimed at banks
and payment providers.
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You may still have some questions.
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If so, just leave them
in the comment section below.
[887]
And if youâre watching this video
on YouTube,
[889]
and enjoy what youâve seen,
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donât forget to hit the like button.
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Then make sure to subscribe
to the channel
[893]
and click that bell so that youâll be notified
as soon as we post new episodes.
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Thanks for joining me
here at the Whiteboard.
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For 99Bitcoins.com,
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Iâm Nate Martin,
and Iâll see you⊠in a bit.
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