September 19, 2016

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Distributed Ledger Technology -The New Payment Protocol (Part 2)

This second part of a two-part blog series explains about the Ripple Protocol and how it is different from other similar technologies. The first part of this blog series explored the concept of Distributed Ledger Technology and its role in enabling the digitalization of real money.

Though a lot has been already written on Blockchain, I would like to focus on a similar DLT technology called the Ripple Protocol. Ripple is a new global payment open network—it does for money what internet did for information.

Ripple is a network for financial transactions on the internet. It can easily make transactions of any kind and has a native currency called XRPs similar to what Blockchain has—Bitcoins. Bitcoins and Ripples are mere applications on the DLT.  Ripples can be sent instantly to anyone with a Ripple account. Sending money will be like sending an SMS or email in Ripple network.

Ripple – Bitcoin

Though Ripple and Bitcoin are conceptually the same, they have their own similarities and differences as a competing technology on the DLT.

Similarities

  1. Both Bitcoin and Ripple are decentralized which means that both are open-source protocols and not owned by any federal agency or bank.
  2. They eliminate financial trust-requirements like federal agencies, central banks, financial institutions etc. 
  3. For cashing out, they still necessitate trust-based relationship. This means that to redeem Bitcoin/XRP for USD we need an intermediary gateway.  
  4. They allow for anonymous, Person-to-Person transactions with no cost across the internet.
  5. They use algorithms to confirm that their networks come to the same inferences—If one person authorizes Transaction Y, the entire network comes to the agreement that Transaction Y has happened.

DIFFERENCES

  1. Bitcoin and Ripple approach differently to reach network consensus. Bitcoin uses Mining (proof of work) whereas Ripple uses an iterative consensus process.
  2. It is claimed that Ripple is faster than Bitcoin as it takes far less time to finalize transactions.
  3. Ripple is currency agnostic with the Ripple network tracking information of any currency whereas the Bitcoin network tracks the movement of Bitcoins alone
  4. Bitcoin is dependent on centralized exchanges whereas the Ripple network acts as a decentralized currency exchange. A Bitcoin can also be traded on the Ripple network without fear of an exchange going down.

Why consider Ripple or Bitcoin?

Financial institutions are wasting heaps of money by continuing to use a transaction infrastructure that was designed decades ago to support a different financial ecosystem and without the benefit of the internet.

Case for Ripple

Bitcoin has the market perception issue. It scares people and they often associate it with the deep web, illegal activity, possible money laundering, and so forth.  Ripple actually is not affected by these stereotypes and the reason why is because even though Ripple has a native currency, the Ripple protocol is currency agnostic protocol. This means that by using Ripple, you can transact in Bitcoins, Lakecoins, USD, Yuan, Yen, GBP, or any currency. 

This is one of the reasons why banks and other financial institutions are looking at Ripple as an alternative since it is currency-agnostic and one can continue using the usual real world currency, unlike Bitcoin that requires that we adapt and transfer to Bitcoin as the primary currency.

Perhaps the world would be a better place where everyone can drop their Dollars, AUD, GBP, etc. and start using Bitcoin. But this seems like a big leap. What seems more practical is that individuals keep speaking their own language, but identify there's a better way to communicate with others.

Ripple Criticism

It has been criticized that Ripple is not decentralized since majority of the XRP is owned by RippleLabs and is controlled by OpenCoin. Therefore, they can have complete control of the network. Like a central bank enforcing monetary policy to control the supply/demand of money, OpenCoin can control the supply/demand of XRP.

Since Ripple is currency-agnostic, using real-world currency like USD on a decentralized payment network doesn't make USD decentralized. Real world currencies like USD are still controlled by Federal agencies and central banks. 

Ripple definitely has taken the DLT and Bitcoin technology and made it pleasant for the financial institutions. But organizations, especially financial institutions are seldom moving away and still considering Blockchain over Ripple as R3 and other consortiums are gaining prominence recently.