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 usually mistakenly employ 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 thing.
In fact, although Ripple Labs Inc. did issue XRP and manages its ongoing distribution, the company does not have control over the cryptocurrency nor the Ripple Consensus Ledger, the blockchain upon which XRP relies. Instead, these were released as open-source software.
What Is Ripple?
Both the company and the payment protocol go by the name Ripple, but it is the payment protocol that is of interest to us. Ripple is a real-time gross-settlement system built upon a distributed open-source protocol that includes the XRP Ledger and RippleNet.
Both financial and non-financial entities can integrate the protocol into their systems. It is open, and anyone can join it without any prior approval from Ripple. As such, the protocol and the crypto are wholly 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 with no chargebacks.” As such, it presents itself as an alternative to the Society for Worldwide Interbank Financial Telecommunications (SWIFT), which serves as an intermediary for financial transactions for banks worldwide.
What Is the XRP Ledger?
The XRP Ledger is the backbone of the Ripple protocol, and like any other blockchain, it 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 the XRP Ledger faces the same challenges as other blockchains: Solving the double-spend problem and ensuring network-wide consensus on the state of accounts and balances.
The XRP Ledger solves these problems using a Byzantine fault-tolerant agreement protocol over collectively trusted sub-networks, the XRP Ledger Consensus Protocol. As such, unlike other blockchains, it does not rely on either Proof-of-Work or Proof-of-Stake, using its own consensus mechanism instead.
What Is XRP?
XRP is the cryptocurrency native to 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 increase nor decrease according to its protocol.
When XRP was created, the creators transferred 80% of all XRP to Ripple Labs Inc., while keeping 20% for themselves. As possessing such large amounts of XRP would inevitably bestow far too much power to the company over XRP’s price, it put 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 also sending any portion of unused XRP back into the escrow account, adding another month to the five-year period.
Since its inception, Ripple has presented XRP as a convenient way to bridge different currencies within the Ripple protocol. Just as Ripple presents its protocol as an alternative to the SWIFT system, it also intends XRP to become the settlement currency of choice for financial institutions within its protocol.
How Are Ripple and XRP Interrelated?
It all boils down to ownership and who controls what. The fact that Ripple Labs Inc. owns most 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 decline of the price of XRP.
Ripple vs. XRP
So, to recap, Ripple Labs Inc. is a software company whose business is to license payment software to financial institutions. The company created and released the Ripple payment protocol, which is built atop a distributed open-source protocol and includes both the XRP Consensus Ledger as well as its native crypto, XRP.
Even though XRP’s existence is entirely independent from Ripple Labs Inc., the fact that the company owns most of the crypto’s existence gives it effective control over its supply. This puts the cryptocurrency effectively in the hands of a central authority, which is also why XRP is considered a controversial cryptocurrency.
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