Is Ripple legit?

In this opinion piece let’s take a look at the cryptocurrency market to see if there is a credible investment alternative to bitcoin, focusing on XRP, the native token for blockchain startup Ripple’s consensus protocol.

I personally tried out the protocol and sought to understand what it was about. In a nutshell, Ripplepay allowed users to issue and swap credit between network participants that trusted each other. In the real world, it’s much easier to create and swap IOUs, or “Post-it notes” between trusting individuals, than it is to design a method for cash payments. With cash payments, you don’t rely on trusting each other, you exchange something of value. Something like gold or bank notes (although technically, the latter is also a IOU, only one that is issued by a bank).

It’s very similar when you try to digitize it: Ripplepay, as payment system, was a much simpler problem to solve electronically than a digital cash system like bitcoin. In a payment network, there is also no need for a global consensus: Bob doesn’t need to know, or agree with me about how much money I owe to Alice.

What you do need in a payment network however, is trust among users. You can’t issue debt to someone who does not trust you. You might have trusted me when I wrote that good for $50 note, but what if I don’t or can’t pay back? Being able to pay electronically without trust, and without counterparty risk, only became possible several years later when Satoshi Nakamoto introduced the world to his solution to this old problem in the form of bitcoin.

By using proof-of-work, he created the first real solution for a digital cash system that could store and exchange value, was extremely resilient to counterfeiting, involved no trust and had no counterparty risk. So, a trust-based IOU payment network like Ripplepay, and a trustless digital cash network like bitcoin, are two completely different things, and yet they are actually quite complementary.

The inclusion of a cash token, that is not an IOU, automatically means you now need a protection against double spends and thus a global consensus protocol, because now everyone on the network needs to agree about token transactions and ownership. These were problems that a distributed payment network shouldn’t have.Instead of using proof-of-work, it relied on a new, unproven consensus protocol.

Relying on trust, rather than proof-of-work, kind of makes sense for Ripple, because you need similar trust relationships anyway for IOUs to work. But this means that an XRP token is absolutely nothing like bitcoin. So, Ripple is highly centralized and XRP is more akin to a PayPal account than a trustless system like bitcoin. That you don’t need a private token on a payment network is perhaps best illustrated by Hyperledger.

In short, it’s hard to come up with any rational reason why XRP exists in the Ripple protocol, other than as a means for Ripple to make money. When Ripple launched, Ripple created 100 billion XRP tokens. But the company, its founders and associated foundations, still own well over 60 billion of the 100 billion tokens. These tokens are supposed to be fungible, so even if parts of them are temporarily locked up by promises or via “smart contracts” (which ironically, Ripple can’t really do), I see no reason to pretend only 38 billion tokens exist.

Some of these points are absolutely reasonable. But note that ILP itself has no native token; it doesn’t depend on XRP and doesn’t add value to it. But also, banks currently control Swift. The only obvious thing that appears missing from Hyperledger compared to Ripple, is the one thing for which I see absolutely no reason for them to want: the XRP token.