Ripple and the XRP Coin
For anyone who’s ever written a traditional bank check to pay a bill or send money to someone, the concepts behind Ripple and XRP should be familiar. When Alice writes Bob a check, Bob doesn’t have to present that check at Alice’s bank. Instead, he can cash Alice’s check at any bank. After Bob cashes the check, Alice and Bob’s separate banks will settle the transaction by transfering the money between them, but that settlement doesn’t happen in real-time. Settlement may not complete for days or longer after the check is cashed. Writing a check used to be a convenient way to transfer money between two people.
Ripple is a company that is attempting to create a large, global network to solve modern versions of this problem. In the above example, Alice and Bob each have a bank they prefer to use. For now, let’s refer to these banks as “agents”. Alice and Bob each have an agent (bank) close to them. The agents know about each other and have a relationship. An agent won’t accept a check written from another agent if it is unknown or untrusted or possibly fake. This system depends on the fact that these two
banks agents trust each other.
Ripple (The Network)
At the core, Ripple is creating this network of agents. In fact, several large banks are already relying on the network that Ripple has created. We just explained why this type of transfer can’t happen without a solid, trusting network of agents. Building this network was the first step by Ripple.
But Ripple did it a little differently. Instead of the traditional way of building this, Ripple created a blockchain that ensures that each transaction is transparant, cannot be changed (immutable), and real-time. By using this blockchain, it’s easier for new agents to join and trust other agents. Everyone is playing by the same set of rules.
Additionally, the Ripple algorithm is clever enough to find the best connection between agents. If Alice wants to send Bob some USD, but Alice’s agent is only directly connected to agents near Bob that accept transactions in EUR, someone needs to find a new agent. Using the Ripple network, the transaction might flow throw several (in fact, many) different agents between Alice and Bob. Alice might give USD to her agent, who transfers BTC to the next agent. That agent, in turn transfers bicycles as payment to the next, who accepts the bicycles and gives Bob the USD he’s expecting.
XRP (The Cryptocurrency)
As just explained, in order to send other items securely and instantly through a network like this, you have to find agents on both sides that are willing to trade that item. So if Alice wanted to send Bob a gold bar, Bob would have to find an agent who had a gold bar, and Alice would have to give a gold bar to her agent, and the agent would have to physically send that gold bar to Bob’s agent after the transaction was completed. That’s not ideal. And it’s harder to do this with rarer and more obscure resources. It’s common to end up with large chains of agents to complete a single transaction.
The XRP currency is a virtual currency that’s exchanged on the same Ripple network. It’s always possible to instantly transfer XRP to any other agent on the Ripple network. Because the XRP currency has a specific value when the transaction occurred, any transaction can be settled using XRP instead of sending physical items between agents.
In the example where Alice wants to send Bob a gold bar, now Bob just needs to find an agent who has access to a gold bar, and Alice needs to take her gold bar to her agent. The agents determine that a gold bar is worth a certain number of XRP, and they instantly transfer that XRP between them. Bob’s agent can now hand his gold bar to Bob, and the transaction is complete. Alice no longer has her gold bar, and Bob has one. The agents have exchanged a gold bar for XRP or XRP for a gold bar, but these items each have value. If Bob’s agent really wanted to keep gold bars in the office, the agent could sell his XRP and go buy a replacement gold bar with the proceeds.
The XRP currency can be thought of as a valid substitute for any item that someone is trying to send through the network.
Unlike many cryptocurrencies, all of the XRP in the world was created at once, when the currency was created. There is no ongoing mining operation happening that miners can exchange calculations for a chance at finding a new XRP. There were 100 billion XRP created initially, and the protocol rules prohibit ever creating new XRP. Each transaction that takes place on the network will destroy at least 0.00001 XRP, which are never replaced.
Why Buy XRP
Buying XRP makes sense if you believe in this network. Each time a transaction on the Ripple network is completed, the XRP that was used to pay the transaction fees are destroyed. This is only a small amount, but it will never be replaced. Over time, the number of XRP in circulation will decrease. This will create more demand for the remaining XRP and will drive the price higher.