What Is XRP And How Does It Work?

Have you ever heard of XRP? Are you familiar with the company named “Ripple”? If those questions raise doubt in you, this article is the perfect first step in understanding what they are, how they work, and why they are important for the traditional finance system.

What Is XRP?

To understand the roots of XRP, it’s essential to know what the Ripple is because they are not the same thing. So, Ripple is a fintech company that was started in 2004 as Ripplepay. The company's main goal was to make international transactions cheaper and faster. In 2012, the company started working with crypto when David Schwartz, Jed McCaleb, and Arthur Britto bought Ripplepay and created XRP, a digital asset that aimed to drive innovation in the financial payments space. Now XRP is the native token on the XRP Ledger (XRPL), which is a distributed, open-source, decentralized blockchain. Although, the question of decentralizations stays open, due to the fact that Ripple holds 50% of the circulating supply of 57,818,864,895 XRP.

XRP Ledger Key Features

As we said, the XRP Ledger is a blockchain designed to provide secure, fast, and low-cost transactions. It has several unique features that distinguish it from other blockchain networks. Here are some of them:

1. A unique consensus mechanism: unlike Bitcoin's Proof-of-Work or Ethereum's Proof-of-Stake, the XRP Ledger uses a unique Ripple Protocol Consensus Algorithm (RPCA). It relies on a network of nodes to agree on the order and validity of transactions.

2. Low transaction fees: XRP Ledger's transaction fees are incredibly low compared to many other blockchains; they are typically around 0.00001 XRP (approx. $0.000385) per transaction.

3. High scalability: the XRP Ledger can handle up to 1,500 transactions per second (TPS). This ability makes XRP ideal for financial institutions that require high throughput.

4. Versatile interoperability: XRP Ledger supports interoperability with other cryptocurrencies. Using Interledger Protocol (ILP), XRP can connect with other blockchain networks, allowing seamless transfers between different crypto without a centralized exchange.

5. Elevated energy efficiency: the XRP Ledger is designed to be highly energy-efficient compared to PoW blockchains. Its consensus algorithm eliminates the need for energy-intensive mining and the danger to the environment.

How Does XRP Work?

As we already mentioned, XRP uses a Ripple Protocol Consensus Algorithm that doesn’t require energy-consuming mining rather than Proof-of-Work. This technology is achieved through a network of trusted validators, known as the Unique Node List (UNL); they confirm transactions and agree on their order. If 80% of nodes deem a transaction to be valid, a unique node can then proceed with validating that transaction. This unique approach enables XRP to process transactions within 3-5 seconds, ensuring rapid settlement compared to many other coins.

The described features of XRP work to create XRP's main function, which is to facilitate value transfers across borders, acting as a bridge currency in Ripple's payment network, RippleNet. Moreover, financial institutions and payment providers can use XRP to settle transactions between different currencies quickly and inexpensively, avoiding delays and high fees.

In this regard, XRP is often compared with Bitcoin, as they are both used as a tool for making payments, but they work in very different ways. Bitcoin operates on a Proof-of-Work consensus algorithm, which is slow, costly, and energy-intensive, while XRP uses the Ripple Protocol Consensus Algorithm, enabling faster and cheaper transactions. BTC focuses on security and decentralization as a store of value. XRP, in its turn, is designed for speed and cost-effectiveness, particularly in cross-border payments. While Bitcoin aims to disrupt traditional finance by offering an alternative to government-controlled money, XRP works alongside the current financial system to improve cross-border transactions.

XRP VS Traditional Banking System

XRP and the traditional banking system differ fundamentally in how they handle transactions. The traditional banking system relies on a series of intermediaries such as banks, clearinghouses, and payment networks to perform financial transactions. This often results in delays, high fees, and complexity, especially with international transfers. Transactions can take several days to complete, with fees that vary depending on the amount, country, and institutions involved, sometimes reaching 300$.

In contrast, XRP aims to solve these issues by providing a decentralized, fast, and cost-effective ($0.000385 of fees) alternative. Ripple focuses on streamlining cross-border payments for financial institutions by offering an easier and cheaper way for banks to send money across borders. This makes XRP a compelling alternative to traditional banking because more and more banks are starting to use the XRP ecosystem.

By today, Ripple has formed partnerships with large financial institutions, including over a hundred banks. Among them are Santander Bank, American Express Bank, SBI Holdings, Standard Chartered, Bank of America Financial Center and others.This partnership helps solidify its credibility and real-world use case.

Pros And Cons Of XRP

Despite all the positive aspects of XRP that we discussed above, it also has some problems that you may encounter when working with it. For your comfort, we’ve gathered the main advantages and disadvantages of XRP in one table.

Aspect	Characteristics
Pros:	Characteristics High speed: XRP transactions settle in just a few seconds, making it one of the fastest cryptocurrencies available. Low fees: XRP's transaction fees are minimal (approx. $0.000385), making it an affordable option for cross-border payments and remittances. High scalability: the XRP Ledger can handle 1,500 transactions per second, making it capable of handling high-demand periods. Elevated energy efficiency: unlike PoW-based coins , XRP does not require special equipment for mining, which makes it an energy-efficient option.
Cons:	Characteristics Centralization concerns: despite the decentralized nature of the XRP Ledger, Ripple holds a 50% of the XRP supply, which concerns the public about its centralization. Regulatory uncertainty: XRP has faced ongoing legal battles (e.g., with SEC), which made its long-term future uncertain. Limited use case: XRP is primarily used for cross-border payments and has not seen widespread adoption in other areas such as DeFi or smart contract platforms. Adoption challenges: while Ripple has made progress, XRP is still not universally accepted across all banks or financial institutions.

Even though XRP doesn't replace the banking system, it enhances it by offering more efficient methods to settle transactions. Its speed, low fees, and energy efficiency make it an ideal ally for those who are ready for the merge of traditional finance and the crypto space.

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