Introduction
In our series on cryptocurrencies we started with mineable altcoins. In this series we explore the non-mineable variety of cryptocoins and crypto assets (generation 2).
The first in this series is Ripple, the largest pre-mined currency by market cap and also one of the earliest competitors to Bitcoin.
Understanding the concept behind Ripple is a little confusing at first and raises many questions especially if one is looking at it from a Bitcoin point of view. For example, is Ripple a currency like bitcoin or not? Is it decentralized? Why was it premined? Does Ripple have one universal ledger like the Bitcoin blockchain? Does Ripple share Bitcoin’s goals and use cases?
Understanding the concept behind Ripple is a little confusing at first and raises many questions especially if one is looking at it from a Bitcoin point of view. For example, is Ripple a currency like bitcoin or not? Is it decentralized? Why was it premined? Does Ripple have one universal ledger like the Bitcoin blockchain? Does Ripple share Bitcoin’s goals and use cases?
This post is for those who like this blogger, grew up on a Bitcoin diet, and want a closer look at other alternatives.
How Ripple Works – A High Level Overview
Since this blog has an entire section on Bitcoin, those interested in a Bitcoin tour, can start with "The Disruptive Innovation of Bitcoin". And if you know how Ripple works, you can skip this section and head straight to the comparison. Note: Ripple’s distributed ledger technology will be covered in a separate post.
Terminology:Ripple vs ripples vs rippled
Ripple is described as a payment protocol, exchange and remittance platform. In banking industry terms, Ripple Pay is a real time gross settlement (RTGS) platform.
Bitcoin represents both, a network and the bitcoin currency. Ripple is likewise, full of similar sounding lexicon with three or four different Ripples or ripples.
Ripple is the name of the decentralized network. XRP or ripples is the native digital token or currency of the network. Ripple, aka Ripple Labs formerly OpenCoin, is also the name of the company that runs the Ripple distributed ledger which in turn is called Ripple Consensus Ledger (RCL). The software program that runs on the network servers is called rippled.
Ripple Ecosystem: Transactions, Consensus Ledger and Validators
Ripple is designed to allow people to make payments to one another in different currencies or commodities. This scope is quite vast. For example, Person A can use a fiat currency like US dollar to pay Person B in bitcoins or even gold, B can pay C in euros and so on, using the Ripple network.
How is this different from conventional banking and remittances? This is where Ripple’s Distributed Consensus ledger technology comes in. A Ripple network consists of gateways (participating exchanges, banks or any business that accepts currencies), trusted validators and nodes.
A payment transaction, like an everyday payment in the fiat world, is an IOU between a payor and the gateway. So if A wants to pay B in the above example, A, opens an account with a gateway (Bitstamp is a Ripple gateway) and purchases a minimum token in ripples (XRP), as an account opening requirement. The transaction is submitted to the Ripple network which validates transactions details such as account and balances and submits the transaction record on a distributed ledger.
Transactions are cryptographically signed by account holder’s private keys and only signed transactions are accepted by validators. In the process, the Ripple network also makes programmatic decisions to determine cross currency/commodity conversions. Once the transaction is confirmed, the recipient receives an equivalent payment in (bitcoins in our example) from their receiving gateway (can be the same or different gateway). A small fraction of ripples (0.01 XRP) are said to be used up or burned in the process as transaction fees. The role of ripples is to act as a token asset in the transfer and prevent spam transactions.
Gateways to Ripple and Market Makers
Gateways form the entry and exit points to the Ripple platform which is a globally distributed network of servers that each maintain a common ledger of transactions. The Ripple Consensus ledger is decentralized and the network uses a consensus method to validate transactions (ledger nodes automatically agree on which transaction block is accepted and added to the ledger chain).
Ripples can be traded against other currencies on gateways through market makers (similar to an exchange that provides market liquidity and matches orders) and specific cryptocurrency exchanges.
Seven Differences Between Ripple and Bitcoin
1. Coin Use
Both Bitcoin and Ripple are payment networks for digital cash. The difference is that bitcoins have entered into an ecosystem outside the network. Bitcoins can be used to make payments in the real world. There is a merchant, wallet and payment processor ecosystem for bitcoins. There is also a large trading and asset industry growing around bitcoins beyond currency exchanges.
Ripples cannot be used as currency to make merchant payments outside the network, although some business had started accepted Ripple in its early days. Ripples exist as digital asset tokens within the Ripple network to prevent transaction spam. Malicious transactions intended to swap the network burn ripples at a higher rate making an attack inefficient.
Ripples can be traded against other currencies on gateways through market makers and specific cryptocurrency exchanges.
2. Ownership
No one owns Bitcoin not even its pseudonymous creator Satoshi Nakamoto or the developer community that continues to maintain it. The network is distributed across nodes all over the world.
Ripple on the other hand is a permissioned network owned and currently operated by Ripple. Parts of Ripple code, Ripple Trade and Ripple Charts that provide access to the Ripple ledger , is open source, but the network itself is driven by Ripple authorized nodes.
Ripple also determines the operation of the network. For example, Ripple’s own Trading platform, Ripple Trade was recently shutdown, and users had to withdraw funds from their accounts before they could move to the alternative platform Gatehub or other exchanges.
3. Decentralized
Bitcoin is a true Internet peer to peer network. Two individuals anywhere in the world can exchange bitcoins directly from their wallets without using an exchange. Ripple wallets are available offline but ripples can be used only via user accounts Ripple’s trading platform or gateways which are needed to access the Ripple Consensus Ledger.
Ripple’s Consensus Ledger can be described as a decentralized technology. The concept of peer to peer users in Ripple applies largely to the market makers or financial institutions such as exchanges, banks, money transmitters or intermediaries than for individuals. It would be fitting to describe Ripple as a peer to peer payment network for trusted third parties.
4. Network Nodes
The Bitcoin blockchain runs on the permissionless network of participating nodes that run in full or light modes. The higher the nodes and longer the block height, the more difficult to attack or take over the network. Anyone can download and run a Bitcoin node.
Ripple uses distributed ledgers on participating nodes across the globe but the difference is Ripple ledgers are allowed to run only in a permissioned network on trusted validators and unique nodes.
Ripple secures the network from attack by increasing XRP burn in a concerted attack such as very high transaction volumes from a single source. (Since decentralized, trustless distributed databases are automatically updated, it is possible for someone to take over transactions, although at huge cost, by taking over the majority required for consensus. The probability of attack is lowered by increasing odds or making the costs detrimental to the attacker).
Ripple secures the network from attack by increasing XRP burn in a concerted attack such as very high transaction volumes from a single source. (Since decentralized, trustless distributed databases are automatically updated, it is possible for someone to take over transactions, although at huge cost, by taking over the majority required for consensus. The probability of attack is lowered by increasing odds or making the costs detrimental to the attacker).
5. Mining
Bitcoins are generated by the miners when new blocks are added. There is a global mining economy that is actively mining the balance 5.5 million bitcoins from the 21 million limit, igniting several debates on the substantial energy consumed in the proof of work process.
Ripples on the other hand are pre-mined. A 100 billion ripples were generated and are burned up during transactions. Unless Ripple becomes a global payments network there are enough Ripple waiting to be used. Which brings us to the next point.
6. Trading Value
Bitcoin rules markets with a $4oo average value and a $6.5 billion US market capitalization in 2016. Bitcoin’s value is driven by many factors but a big part lies in it emerging as an asset class with some governments recognizing it as a currency or commodity.
Ripple has a lower market value and but the high volume and gateways/exchanges platforms have enabled substantial trading of ripples with fiat currencies and even bitcoins. Ripple grew its user base through giveaways from gateways and a Ripple-Bitcoin bridge. It is likely attracting long position speculators if the demand for Ripple as a settlement platform grows or those who believe Ripples may grow into a cryptocurrency ecosystem like Bitcoin.
Ripple’s roadmap at this points appears divided between in the direction of a global ledger for the worldwide financial system that is the Open Ledger project and going down a cryptocurrency path.
Ripple’s roadmap at this points appears divided between in the direction of a global ledger for the worldwide financial system that is the Open Ledger project and going down a cryptocurrency path.
7. Philosophy
Both Bitcoin and Ripple can be called disruptive systems. Bitcoin was launched to the world as an electronic cash network that removed the trusted third party transaction cost barrier for micropayments. Its design as a currency, and decentralized operation has created many more uses, including that as a alternative asset class on fiat doomsday (Greece and Iceland for example) or spurring digital economies in smaller countries such as Estonia. At the same time, Bitcoin’s open evolution and adaption is taking the path of natural selection and has equal chances of success or failure.
Ripple aims to disrupt an industry process – lowering processing times and fees via a large global distributed ledger with a universal token. Both Bitcoin and Ripple are sometimes compared to the http protocol which made Internet the global peer to peer network today. In that they have adopted decentralized architecture.
But they differ more in philosophy and end goals than in technology.
Summary
The debates around whether Ripple is good or Bitcoin is bad or vice versa may be really for competitive mileage than anything else.
Ripple is by itself, a significant technical achievement that serves a real need to in the world of settlements, which is not a small task in the globally interconnected, over-regulated and over-leveraged world of fiat currencies and stockpiled commodities. But maybe Ripple was able to leverage the Bitcoin “upstart” wave to come into prominence as a cryptocurrency and got its messages mixed up. That is an association which may ultimately have an impact on the future of Ripple, both positively and negatively.
In the final analysis, both Ripple and Bitcoin can end up having their respective places in the world. Ripple has the potential to create an impact within the financial services industry but Bitcoin’s blockchain, like the Internet, can have applications throughout the world.
No comments:
Post a Comment