Facebook’s Libra may be grabbing all the headlines at the moment, yet a major cryptocurrency already exists that’s gained a toehold in mainstream commerce.
XRP, the third-biggest cryptocurrency by market value, seeks to succeed where bitcoin and other digital currencies have largely failed: in powering fast and low-cost transactions.
In a rare example of a cryptocurrency finding a practical use beyond speculative trading, it has gained a certain amount of traction, with some large financial firms using XRP for international payments.
Yet the price of XRP, often referred to as Ripple, has dropped by a quarter so far this year, even as bitcoin has more than doubled and other smaller coins such as ethereum have made slim gains.
XRP’s price performance goes against assumptions of a positive correlation between real-world usage and the price of cryptocurrencies. The fact that bitcoin, the largest digital currency by far, has grabbed an even bigger share of the market this year is a sign that traders looking to capitalize on volatile price moves remain the industry’s main driver.
To track the emergence of hundreds of smaller rivals to bitcoin, collectively known as “altcoins”, Reuters is looking at the leading players as they grab the attention of investors, companies and regulators.
The third in the Reuters series on altcoins looks at the prospects, and challenges, for XRP.
WHAT’S THE IDEA?
Seven-year-old XRP is one of the most successful examples, thus far, of attempts to build cryptocurrencies capable of entering mainstream finance and commerce.
It has been developed by California-based tech company Ripple, which offers a blockchain-based payments platform. XRP is intended to act as a kind of bridge for cross-border payments for firms that use Ripple, and can also be used for e-commerce and peer-to-peer transfers.
The currency was designed to help these companies – from payment providers to remittance firms – settle transactions instantly, pay lower fees and free up capital typically tied up in payments using traditional money.
With traditional transfers, firms often use working capital to maintain balances in their settlement accounts, ensuring liquidity as one currency is converted to another. That helps customers receive funds more quickly.
Ripple says customers can use XRP instead of traditional money for liquidity, allowing firms to free up working capital.
It says payments using XRP settle in four seconds, compared with over an hour for bitcoin and three to five days for traditional systems used for fiat money.
“That’s actually much less exposure and risk,” said Monica Long, senior vice president of marketing and communications at Ripple.
SO HOW’S THAT DIFFERENT TO BITCOIN?
XRP, like Facebook’s proposed Libra, veers away from the ethos of bitcoin, the original cryptocurrency, which aimed to sidestep the financial establishment by dispensing with a central authority.
A team of developers at Ripple maintain the XRP ledger’s software, stewarding the technology. That, potentially, means that companies are more comfortable dealing with XRP than bitcoin, which is largely unsupervised and unregulated.
The way XRP is produced also differs.
While bitcoin “miners” compete against each other using powerful computers to solve algorithms and earn new coins, XRP’s entire supply of 100 billion was created at its birth.
Ripple now holds large reserves of XRP in escrow accounts, selling the tokens to large investors to boost liquidity and widen the spread of the technology. That means the company has centralized control over the supply of XRP.