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  • Connectivity

    No, Ripple Isn’t the Next Bitcoin

    The company’s cryptocurrency has also seen an incredible run-up in value, but investors may have gotten the wrong idea.

    Not all cryptocurrencies are created equal. Don’t tell that to investors in XRP, though. In the last month the currency owned by Ripple, a company that bills itself as using blockchain technology to build the payment system of the future, soared in price by a whopping 700 percent. XRP’s overall value pushed up to nearly $150 billion and briefly made Chris Larsen, Ripple’s cofounder, one of the richest people on the planet.

    This piece first appeared in our new twice-weekly newsletter, Chain Letter, which covers the world of blockchain and cryptocurrencies. Sign up here – it’s free!

    The exuberance was fueled, at least in part, by a belief that anyone buying up XRP was getting in on the next Bitcoin. But for some it could end up as a very expensive lesson that what they bought into is a different animal altogether.

    To begin with, Bitcoin relies on a network of “miners” running code that validates transactions and keeps the currency secure. Bitcoins are released as rewards for this mining and act as an incentive to keep the network running (see "What Bitcoin Is, and Why It Matters"). In Ripple’s setup there are no miners; all 100 billion coins of XRP that exist were created when the network launched in 2012. Its creators kept 20 billion and gave the rest to the company. Since then, Ripple has been “methodically” distributing tokens to clients, but it still holds nearly 50 billion in an escrow account.

    That’s not all. Ripple uses a novel consensus algorithm (PDF) to validate transactions, and it recommends that clients use a list of identified, trusted participants to validate their transactions. This stands in stark contrast to Bitcoin, where anyone can become a miner.

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    This gives Ripple a large measure of control over XRP’s inner workings, which has led many to argue that it’s not truly decentralized. In that sense at least, XRP is a “really bad” cryptocurrency, entrepreneur and cryptocurrency analyst Ryan Selkis wrote last week in a lengthy analysis.

    But XRP was never meant to be another Bitcoin. Ripple’s big bet is that XRP will become a “bridge currency” that many financial institutions use to settle cross-border payments faster and more cheaply than they do now using global payment networks, which can be slow and involve multiple middlemen. Bitcoin could be used to do this too, but Ripple can settle 1,000 transactions per second, compared with Bitcoin’s seven, and its transaction fees are much lower. The idea is that this will in turn will make the currency more valuable. The company says that more than 100 financial institutions are using its technology, and XRP’s recent spike has been linked to the news that that 61 banks in Japan and two in South Korea have formed a coalition to launch a new Ripple pilot.

    Here’s the catch, though: Ripple’s blockchain-based payment network doesn’t need a bridge currency to work, and nearly everyone using the network has so far chosen to exchange digital IOUs instead. They settle the transactions later, using fiat currency. (UPDATE: As many have pointed out in the comments, MoneyGram, a leading money transfer company, today announced that it would test XRP. The announcement does not guarantee adoption, however.)

    Last week, Brad Garlinghouse, the company’s CEO, tweeted that banks and payment providers are “indeed planning to use (XRP) in a serious way.”

    Nonetheless, people speculating on the token right now probably ought to be aware that widespread adoption is far from a reality, and may not ever be one. And perhaps some folks are starting to realize that: as of this writing, XRP’s total value had fallen back to earth in a big way, losing nearly $100 billion of market capitalization in the process.

    Learn more about the role of blockchains in cryptocurrency and other potential transactions.

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