When it comes to the cryptocurrency industry, Ripple's XRP token is one of the most established digital assets there is.
Launched in 2012, XRP has had a long and rich history as volatile as the crypto space. As EQONEX lists this popular token for our clients, let's take a look at the background of Ripple, the utility of the XRP token, and its prospects moving forward.
The terms "Ripple" and "XRP" are often used interchangeably. However, Ripple and XRP are not the same. Established in 2004 by software developer Ryan Fugger in the days before Bitcoin, the first version of Ripple, RipplePay, was a website that extended credit to people in its community (although not through cryptocurrency). In 2011, programmer Jed McCaleb began developing the XRP cryptocurrency, and Fugger handed over control of RipplePay to McCaleb's team in 2012 when XRP was launched.
Ripple is essentially a payment protocol that uses blockchain technology to process international money transfers fast and with minimal cost.
Today, more than 100 financial institutions worldwide use RippleNet for real-time remittances, international bill paying, e-invoicing, and more, with some of the most well-known names including Santander, Bank of America, and American Express.
XRP, on the other hand, is the native cryptocurrency of Ripple, and investors who like what Ripple is doing and want to get involved can purchase XRP tokens.
So, if XRP can settle international payments quickly and with minimal cost, how does it differ from Bitcoin (BTC)? In several key ways. Let's take a look at the biggest differences between the two major cryptocurrencies below:
Mining vs. validating
The Bitcoin blockchain uses mining to verify transactions and mint new coins. Through mining, miners lend enormous computing power to the network to solve complex mathematical puzzles. The first miner to solve the puzzle adds the next transaction block to the Bitcoin blockchain and receives block rewards as an incentive. XRP, on the other hand, uses its own consensus protocol in which the majority of "validators" review a transaction and universally agree on whether it is approved.
Energy consumption and speed
Leaving the Lightning Network (Bitcoin's layer 2 scaling solution) aside, sending XRP is faster, cheaper, and more energy-efficient. Bitcoin comes under constant scrutiny for its Proof-of-Work (PoW) mechanism, which consumes excessive energy, often more than entire countries like Switzerland or Argentina. For this reason, most new blockchains adopt a Proof-of-Stake (PoS) consensus mechanism that requires validating transactions according to the amount of stake (capital) lent to the network, rather than computational power.
XRP does not reply on PoW of PoS, but its own protocol called the XRP Ledger Consensus Protocol to validate account balances and perform transactions efficiently and with minimal energy output. This makes XRP one of the more environmentally-friendly cryptocurrencies out there.
Token supply and distribution
Bitcoin has a much smaller token supply than XRP, with a hard cap of 21 million coins, making it a scarce deflationary asset. XRP also has a capped supply, but it is orders of magnitude higher than Bitcoin at 100 billion tokens, which explains why the price of XRP sits at less than $1 compared to BTC's $40,000.
As discussed above, new bitcoins are distributed through mining, where the coins are added to the supply and mined until they reach a maximum of 21 million. XRP was premined, which often causes criticism, as all 100 billion tokens were minted before XRP was launched, and Ripple regularly releases 1 billion XRP from escrow monthly, which dilutes the price of existing tokens on the market.
Ripple is a private company
While XRP is decentralized, it's important to remember that it is still connected to a private company, rather than Bitcoin which is a completely decentralized network with no affiliations with any entity.
As an old-timer in the crypto space, XRP got off to a strong start, establishing partnerships with major global financial institutions, claiming to have over 300 financial institutions globally in 2019. However, Ripple consequently came under fire in 2020, forcing some partners to distance themselves. The U.S. Securities and Exchange Commission (SEC) filed a lawsuit against the company for selling $1.3 billion in "unregistered securities" through its XRP token.
While Ripple continuously denied that XRP is a security, the lawsuit caused immediate pain, with many naysayers calling for the demise of both the company and its token. However, as events have unfolded and the lawsuit is close to reaching a conclusion, most commentators agree that Ripple is about to emerge victorious, as the SEC has failed to prove its case. At this point, Ripple will likely either decide to settle or see the case out until a victory.
Either way will likely be bullish for the XRP token as it can place this unfortunate incident in the past and reforge some of the partnerships it lost. And if Ripple were to secure a complete victory over the SEC, the company would be spared any legal expenses and be exempt from future securities regulation.
A victory for Ripple would also set an important precedent for the cryptocurrency industry, as a benchmark case stating that cryptocurrencies are not securities, leaving many blockchain projects free to continue development unhindered. So, if you're interested in Ripple and looking to invest in its XRP token, now could be an exciting time.
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