In this episode of Be[In]Crypto’s Video News Show, host Juliet Lima takes a deep dive into Ripple and the XRP cryptocurrency.
In this video, Juliet explains the distinction between Ripple and XRP, and how the technology behind it works. She also goes into detail about the benefits of using XRP, as well as some of the drawbacks. Finally, Juliet summarizes Ripple’s ongoing lawsuit with the Securities and Exchange Commission.
What is XRP?
First of all, while intrinsically related, Ripple and XRP are two distinct things. Ripple is a blockchain network for payments, while XRP is the cryptocurrency that runs the network. Both are operated by a private company called Ripple Labs.
The company and its blockchain derive the name from the fact that the technology enables payments to Ripple through multiple currencies. And whereas RP in XRP naturally stands for Ripple, the X used is a prefix for non-national currencies in the ISO-4217 standard.
How does it work?
The ultimate goal of the blockchain network and cryptocurrency is to improve the process of transferring assets. The most straightforward way to use this currency is to transfer XRP from one wallet to another and directly exchange value.
What makes XRP different from other types of cryptocurrencies is the way it operates. While transactions for many cryptocurrencies are confirmed through either the energy-intensive proof-of-work consensus mechanism or the increasingly popular proof-of-stake, XRP relies rather on a proof-of-consensus model.
XRP was also designed to serve as a link between different currencies. Someone wanting to send $100 worth of value to Japan could convert the currency to XRP, which the recipient could then withdraw in the equivalent Japanese yen.
XRP also holds efficient advantages over traditional bank transfers as well. Instead of taking days or up to over a week, and costing $25-$50 in transaction fees, as is currently the case with traditional banks, XRP can settle the same transactions for usually less than a penny, within 3 to 5 seconds.
Advantages and disadvantages
One thing that makes XRP stand out amongst other cryptocurrencies is its practicality. Rather than shifting to an entirely new financial system, as many envision with Bitcoin, XRP instead works within the current infrastructure to improve it. This could enable it to serve as the next step in the evolution of modern-day banking.
Another unique aspect of XRP is that all transaction fees are actually burned, meaning they are ultimately eliminated from the Ripple network. This makes XRP a deflationary currency, as the initial supply of 100 billion coins slowly dwindles down, which will theoretically make it more valuable over time. Another appealing feature of XRP, given its longer-term potential, is its present price point. Currently, XRP has been trading at less than a dollar, making many investors feel that they have gotten in early.
Despite these features contributing to the overall hype, there are still plenty of concerns about XRP. The first is its potential for appreciation. Given the outsized amount of total coins, 100 billion compared to Bitcoin’s total 21 million, it is perhaps unlikely that it will ever rise in value to a similar magnitude as Bitcoin.
Ripple centralization concerns
The second concern is that XRP is actually very centralized, contrary to crypto’s core ethos of decentralization. Of the 100 billion in total XRP, only about 48 billion are in circulation, the rest of which is primarily controlled by Ripple and have been locked up in escrow. According to the escrow contract, Ripple is currently able to release 1 billion XRP into circulation each month.
While they have so far been prudent in distributing XRP, this poses a serious risk for XRP holders. If a significant amount were to enter into circulation, the overall supply of XRP would jump drastically, potentially causing the price to plummet.
Transactions per second
Although XRP may be faster in terms of individual transactions, economies of scale mean that banks and major payment firms still have the upper hand in terms of overall transactions. Currently, a large major credit card company, such as Visa, can process up to 24,000 transactions per second. For XRP, this figure now stands at only 1,500 transactions per second. Unfortunately, this point of competition between legacy payment platforms and XRP will likely preclude the former from integrating the latter.
Similar to other cryptocurrencies, XRP also has issues with extreme volatility, however, this is especially detrimental in its ambitions to facilitate bank-to-bank transfers of value.
Over the past year, the price of XRP has shifted anywhere between $0.40 and $1.90 but much of this may actually have to do with Ripple tribulations with the SEC.
The SEC and XRP
In December 2020, the SEC, America’s federal securities regulator, filed a suit against Ripple for issuing and selling $1.3 billion worth of XRP to the public, claiming that the assets constituted unregistered securities. However, Ripple argues that XRP is not a security, and had not been considered one from its initial release in 2013 until the indictment.
The initial indictment took a heavy toll on Ripple’s reputation, causing many exchanges to delist XRP, which then led to the price bottoming out. Since then, the SEC and Ripple have been embroiled in a legal battle that will likely end up setting a precedent for crypto regulation moving forward.
So far, it seems that the suit will likely end up favoring Ripple, given some of the commentaries from the presiding judge. She concluded that Ripple did not necessarily do anything wrong, denying the SEC’s motion to strike its “fair notice” defense, in which Ripple’s claims there was no “fair notice” about cryptocurrencies being considered securities. In turn, the court has highlighted just how little guidance the SEC has provided to help cryptocurrency companies comply with regulations.
The argument that cryptocurrencies constitute securities is at the crux of SEC Chair Gary Gensler’s approach to regulating the industry, which is being hotly contested by crypto proponents.
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