XRP is a cryptocurrency issued and managed by Ripple Labs Inc., the company behind the Ripple payment protocol, a real-time gross settlement system. However, people often mistakenly use the terms Ripple and XRP interchangeably to refer to the cryptocurrency, which has led people to believe that both the cryptocurrency XRP and Ripple are the same.
In fact, although Ripple Labs Inc. issued XRP and manages its ongoing distribution, the company has no control over the cryptocurrency or Ripple Consensus Ledger, the blockchain on which XRP is based. Instead, these were released as open source software.
What is ripple?
Both the company and the payment protocol are called Ripple, but it is the payment protocol that we are interested in. Ripple is a real-time gross settlement system based on an open source distributed protocol that includes XRP Ledger and RippleNet.
Both financial and non-financial entities can integrate the protocol into their systems. It is open and anyone can join without prior approval from Ripple. As such, the protocol and crypto are entirely separate entities from Ripple Labs Inc., the company.
Ripple’s stated goal is to enable “secure, instant and nearly free global transactions of any size without chargebacks.” As such, it is presented as an alternative to the Society for Worldwide Interbank Financial Telecommunications (SWIFT), which serves as an intermediary for the financial transactions of banks around the world.
What is the XRP ledger?
The XRP Ledger is the backbone of the Ripple protocol and, like any other blockchain, is a distributed ledger interconnected through a peer-to-peer network. However, it does have one key difference from other blockchains: its consensus mechanism.
Operating within a distributed peer-to-peer network means that XRP Ledger faces the same challenges as other blockchains: solving the problem of double spending and ensuring network-wide consensus on account status and balances.
XRP Ledger solves these problems by using a fault-tolerant Byzantine agreement protocol over collective trust subnets, the XRP Ledger Consensus Protocol. As such, unlike other blockchains, it is neither Proof-of-Work nor Proof-of-Stake based, instead using its own consensus mechanism.
What is XRP?
XRP is the native cryptocurrency of Ripple’s XRP Ledger, although Ripple calls it a digital asset. XRP was pre-mined before launch and 100 billion units were created, a number that cannot be increased or decreased according to their protocol.
When XRP was created, the creators transferred 80% of all XRP to Ripple Labs Inc. and kept 20% for themselves. Since owning such large amounts of XRP would inevitably give the company too much power over the XRP price, it placed 50 billion XRP in an escrow account as a sign of goodwill.
This escrow account is governed by a built-in smart contract that controls the release of XRP. The smart contract is designed to release one billion XRP each month for five years while simultaneously sending any unused XRP back to the escrow account, adding another month to the five-year period.
Since its inception, Ripple has presented XRP as a convenient way to link different currencies within the Ripple protocol. Just as Ripple presents its protocol as an alternative to the SWIFT system, it also intends for XRP to become the settlement currency of choice for financial institutions within its protocol.
How are Ripple and XRP interrelated?
It all comes down to ownership and who controls what. The fact that Ripple Labs Inc. owns the majority of the XRP supply gives it central control over it, even if the XRP is held in escrow. It also makes the net worth of the company as a whole dependent on the rise or fall of the XRP price.
Ripple vs. XRP
So, to summarize, Ripple Labs Inc. is a software company whose business is to license paid software to financial institutions. The company created and launched the Ripple payment protocol, which is based on an open source distributed protocol and includes both the XRP Consensus Ledger and its native crypto, XRP.
Although the existence of XRP is completely independent of Ripple Labs Inc., the fact that the company owns the majority of the crypto gives it effective control over its supply. This effectively puts the cryptocurrency in the hands of a central authority, which is why XRP is considered a controversial cryptocurrency.
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