Ripple uses a different consensus algorithm and data structure from Bitcoin to enable fast and cheap transactions. The cryptocurrency was created by a San Francisco-based company called Ripple. The company, Ripple, develops and sells payments software built on top of Ripple, the cryptocurrency, to its clients. XRP is the primary crypto-asset on Ripple and is a top 3 cryptocurrency in terms of market cap.
How does Ripple work?
Ripple uses a Federated Byzantine Agreement (FBA) consensus algorithm. Unlike Bitcoin's proof of work consensus algorithm where validators race to find the next accepted block, FBA validators work together to reach consensus on what the next block looks like. Each FBA validator maintains a Unique Node List (UNL). The UNL is a list of validators that a validator can trust and connect to. The backbone of Ripple is thus a network of interconnected validators built on trust. Pending transactions are voted on by validators and transactions accepted by at least 80% of validators are placed in the next block.
Unlike proof of work, where malicious validators are punished by way of wasted computational power building blocks that are rejected, there is little punishment for malicious Ripple validators. Instead, to defend against them, Ripple heavily relies on the UNL to censor malicious validators (any validator not in a validator's UNL is ignored by the latter). However, this does bring into question the network's openness, given that there is no incentive for a validator to expand its UNL and no protocol for users to get into UNLs.
Another difference between proof of work and Ripple’s FBA consensus algorithm is the lack of reward for running a validator. In Bitcoin, mining a block gives the miner newly minted Bitcoins and all the fees paid by transactions in the block. In Ripple, everyone works together to form the next block, and no one gets paid.
FBA enables Ripple to be fast with a high throughput. The website claims that it has a 4 second confirmation time and consistently handles 1,500 transactions per second with the ability to scale to 50,000 transactions per second.
What's the purpose of XRP?
XRP is the primary crypto-asset on Ripple. It serves as an anti-spam mechanism and a bridge currency for custom assets issued on Ripple (i.e. if no direct exchange is available between two custom assets, the two parties can perform the exchange in two parts. Exchange asset 1 for XRP and then exchange XRP for asset 2).
XRP serves as an anti-spam mechanism in two ways. First, accounts need to have a minimum of 20 XRP to submit transactions. This is known as the account's "reserve". Second, every transaction needs to pay a fixed XRP fee. This XRP is burned (removed from the total supply). Because there is no way to create new XRPs and existing XRPs are burned through transactions, XRP is a deflationary currency.
Ripple's software: xCurrent, xRapid, and xVia
As mentioned above, Ripple, the company, develops and sells software built on top of Ripple, the cryptocurrency. The three primary software products developed by Ripple are: xCurrent, xRapid, and xVia.
xCurrent is not built on Ripple. Instead, it's an interbank communications and settlement software built around the Interledger Protocol (ILP). xCurrent comprises of two primary layers. The first layer is a communications protocol that is used to perform tasks like validating payment information and obtaining payment processing fees. The second layer is a funds settlement layer that uses ILP to coordinate a transfer of funds. The settlement layer first ensures that funds are committed on both sides and then simultaneously releases the committed funds to each side. By leveraging distributed ledger technology, xCurrent increases the efficiency of interbank communication by allowing banks to settle transactions (especially multi-currency transactions) faster with transparency and integrity. xCurrent is currently Ripple's most popular product among its clients.
When XRP is used in xCurrent as a bridge currency to settle transactions, Ripple defines that as a new product called xRapid (source). Put simply, xRapid is a liquidity solution that allows companies to swap in and out of XRP to increase exchange rate efficiency. Without a bridge asset, the spreads can be high between infrequently traded currencies which results in expensive trades. As of June 2018, there are 3 companies using xRapid in real-money transactions and 7 companies testing xRapid (source).
The third software product is xVia. Although we know fewer details about xVia than xCurrent or xRapid, what we do know is that it's a standardized payment interface into RippleNet (the network of financial institutions using xCurrent or xRapid to settle payments). xVia is the last stage in Ripple's product ecosystem. In April 2018, Ripple announced 5 new customers of xVia.
Similarities to Stellar
Ripple shares many similarities with another top cryptocurrency called Stellar. This is unsurprising, considering the two projects share the same co-founder, Jed McCaleb. Jed was instrumental in the development of Ripple and served as the CTO of the company before leaving after a fallout with other executives. He forked Ripple's codebase to create Stellar. Today, Stellar's codebase has largely been rewritten (for example, it has a different implementation of an FBA consensus algorithm) though the cryptocurrencies are functionally similar.
The company behind Ripple
Ripple, the company, is based in San Francisco. The CEO of Ripple, Brad Garlinghouse, previously held senior leadership positions in Hightail (now OpenText), AOL, and Yahoo!. Garlinghouse leads a team of executives at Ripple that oversees a 200-500 employee company.
Ripple has extensive corporate and banking customers. One of its most significant partnerships is with the SBI Group, a Japanese financial services company group. SBI Holdings owns a 10% stake in Ripple and is currently leading a consortium of Japanese and Korean banks in piloting Ripple's software (mainly xCurrent for now).
The company controls the vast majority of XRP
The total supply of XRP started out at 100 billion. This has slowly dropped from the burning of XRP as transaction fees. The current total supply is at 99.99 billion. Out of this, about 20 billion is owned by the public and 79.99 billion owned by the company or its co-founders and senior leadership. The company currently has 55 billion XRP locked up in a Ripple escrow account that automatically releases 1 billion XRP every month for the company to spend.
The company and its senior leadership owns a disproportionately large amount of XRP compared to the public. A key concern with this is that, given XRP's relatively low trading volume, a small group of individuals can easily crash the whole market. Another concern is that this disproportionate ownership makes it more likely for XRP to be classified as a security.
Ripple's FBA consensus algorithm doesn't incentivize good behavior nor does it disincentivize bad behavior.. It relies on the Unique Node List (UNL) to create a network of trust and censor the unknown or untrustworthy. Because it's cheap for an attacker to spin up a large number of validators, users cannot use the simple heuristic that the network with the most validators is the right network to trust. Instead, Ripple requires a systemic centralization of trust in a core consortium of validators. Without mining rewards, the algorithm also doesn't incentivize users to operate validators and even if it did, there’s no easy way for users to become part of the trusted core consortium of validators. As such, Ripple's consensus algorithm is not open, and this reduces decentralization.
In addition, Ripple provides a recommended default UNL that initially contained only Ripple-operated validators. There has been an effort to include third-party validators in this default list but this initiative still doesn't solve the problem of a closed network.
Ripple is backed by a well-funded company that boasts a long list of established corporate and banking customers. Moreover, the cryptocurrency is fast, has a high throughput, and is cheap to use. However, Ripple’s perks come at a high cost. It’s concerning that the company and its senior leadership own the majority of all XRP. Additionally, there are centralization concerns with the network given the closed nature of its consensus algorithm.