Rippe Will be the Next Bitcoin

Is Ripple going to beat bitcoin to the punch?

Ripple is an interesting new development in banking and finance that is not well known just yet, but it has great potential and although it is not a direct competitor with bitcoin, it has undeniable elements that work the same way. It has interest from high-profile investors and industry stalwarts such as Bill Gates.

Ripple is a decentralised payment system and distributed currency exchange, supporting any currency plus its very own native currency, XRP. The Ripple network is a distributed database containing information on accounts, balances and trades, with this database being called the Ripple ledger. This ledger is the same idea as bitcoin.

The ledger is maintained by the network, with servers running a Ripple daemon, or being ‘rippled’, with every server containing its own copy of the current and complete ledger. A transaction is made by making a change to the ledger, which is thereby agreed upon by all the other servers, which then update their copy of the ledger. All ledgers say the same thing at all times. The software is open-source, so innovation is ripe for the picking, just like bitcoin.

In fact, it’s like the socially-acceptable version of bitcoin.

Currency comes into and out of the Ripple network using a gateway, which is an entity that accepts currency deposits from customers, then gives them a balance in return much like a bank might, with these currencies also incorporating bitcoin, using BTC.Bitstamp as the bitcoin currency gateway, for example. To take money out, a user redeems their balance for cash, with the gateway that issued the original balance being responsible for redeeming it with its own deposits.

All a company needs to be a gateway is provide access to the Ripple network, though it appears to only be a money services business of some kind. To use a gateway, a user must ‘extend trust’ to a gateway to hold its balances, because essentially you are lending them your money on the promise that they will pay it back – that’s exactly what banks do with your paycheck each week. Balances swapped between users utilise the trusted gateway, but users do not have to trust each other, just the gateway.

The XRP, or ‘ripples’, is the digital currency of the Ripple network, and only exists within Ripple at a finite amount of 100 billion units. No more, like bitcoin’s 21 million, can ever be created. XRP is the only currency that is an asset within Ripple, with all other currencies simply balances – a gateway’s liability. This makes XRP an asset, not a liability, and users can exchange value in XRP without taking on another party’s risk, which you do when you exchange other currencies.

XRP can trade with any other currency in the network, the same way that the AUD trades with the USD. The market price fluctuates, with prices driven by supply and demand, as per usual. XRPs, like BTC, are only worth what someone is willing to pay for them and is not intrinsically worth anything. The XRP is not required to use the system, but it acts as a bridge currency and enhances security. It means if you have dozens and dozens of currencies in action, you can simply use the XRP instead – making it just one currency.

Trading is done is a series of bids and offers, with buy and sell orders posted. This means that people can pay each other money in currencies they do not hold by routing the payment through a market maker, with a market maker being an entity that has trust gained from the two gateways being used to do the transfer. Algorithms find the cheapest pathway through the network, which is usually direct, however if it needs to hop through different market makers and gateways, it will.

Ripple is making inroads with digital currencies and fiat in a way that is taking on bitcoin as the dream machine.