Causing A Ripple … The Cryptocurrency Competing Against SWIFT

The current infrastructure for transferring payments across borders is the SWIFT (Society for Worldwide Interbank Financial…

Causing A Ripple … The Cryptocurrency Competing Against SWIFT

The current infrastructure for transferring payments across borders is the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network. Often, though, the SWIFT infrastructure is slow and can involve transfers between several intermediate banks (each taking a transaction fee). The recent hacks of the SWIFT network [$81 million hack], too, has also shown that it is struggling to cope with securing the scope of its infrastructure.

So could the SWIFT network now have a serious competitor in Ripple? With SWIFT taking hours (or even days) to clear a transaction, Ripple clears within five seconds and can handle an equivalent throughput of the Visa network.

Causing a ripple

Ripple, created in 2012 by Chris Larsen and Jed McCaleb, has increased its value to around $12 billion.

But is it different from Bitcoin — which is a cryptocurrency — as Ripple (XRP) can also be traded as tokens. These tokens are pre-mined, so there is no need for a mining network. With an XRP token, the value is directly mapped to traditional currencies. Overall it can act as both a cryptocurrency and also as a payment network for transactions.

Currently, it has the third highest market capitalisation of the cryptocurrencies:

Currently, banks solve the problem of transferring money between countries with the SWIFT network, and which is often slow in its operation. Ripple, though, uses a publicly sourced consensus ledger with a distributed infrastructure of trusted gateways. This infrastructure is managed by Ripple Labs. Ripple then aims to complete a currency transaction in seconds, using tokens for transaction fees. These tokens can then be converted back into currency through a cryptocurrency exchange.

So while Ethereum and Bitcoin struggle to scale, and are hitting bottlenecks with the number of transactions that they can support per second. Bitcoin, especially is slow and can take over 10 minutes to create a consensus, and also require a great deal of energy to create it. Ripple’s fast consensus — in less than a minute — can thus be used to quickly transfer funds and compete against Paypal and Visa:

How it works

Let’s look at a simple example. Say Bob wants to send $100 to Alice and who is in a different city. He gives the money to his local agent (Trent) with a password that Alice is required to provide [A]. Trent then contacts Alice’s agent (Peggy) and gives Peggy the money with the password [B]. If Alice then gives Peggy the right password [C], Peggy will then provide Alice with $100 from her account [D]. Now Trent will create an IOU for Peggy for $100, which can be paid at a given time, or used within other transactions.

The trust network created is between Bob and Trent, Trent and Peggy, and Peggy and Alice. These trust elements are created as a Gateway for the chain. Anyone can then register to act as a gateway and thus act as the middleman for the exchanges.

Each currency uses its own gateway such as CADBluzelle (Canadian dollars — CAD), BTCbitstamp (BTC), and USDsnapswap (US $), and multiple gateways can be involved in order to translate the required currencies. This interconnection of gateways creates a “ripple” effect for the transaction.

Balances are thus held at the gateway, and where there could be the risk of a gateway not honouring payments. Users will thus only communicate with gateways which they trust, and which are credit-worthy. In this way, the user will not be exposed to the risk of a transaction hack, as the trustworthy gateway will, hopefully, honour the transaction.

The Ripple network thus does not need a proof-of-work system such as Bitcoin, and the transactions can be cleared within a few seconds. The consensus is then created by validating account balances and transactions by the gateways within the system. This improves on the double-spending method that Bitcoin uses.

So if Eve creates a transaction of $100 and sends them to multiple gateways, all the gateways will then vote on the transaction, and all, but the first, transaction will be deleted (and where the voting system takes five seconds to achieve a majority vote). As there is no central control, the verification of the transaction is distributed.

Each transaction is recorded as an IOU on the public blockchain for the currency used for a user or gateway. These transactions are not linked to an ID, and are pseudo-anonymised (but with complex analysis could be traced to individuals). Unlike the Bitcoin network, the Ripple network scales well and can handle millions of transactions at a time, and where each transaction carries a fee of 0.00001 XRP (which is significantly smaller than the SWIFT network).

Adoption

Many banks including UBS, RBS, Merrill Lynch, Santander, BBVA, UniCredit, and Standard Chartered have adopted the Ripple Network and are actively using it to transfer transaction fees. With its growth in popularity, the largest cryptocurrency exchange in the US — Coinbase — is likely to add it to its currency portfolio of bitcoin (BTC), ethereum (ETH), and litecoin (ŁTC) trading. This will make it easier for users to purchase them. The exchanges where XRP is currently traded are:

CEX.IO — This is a UK-based exchange.
GMOCoin — This is a Japan-based exchange.
Huobi.pro — This is a Singapore-based exchange.

The limit applied for ripple is $100 billion. With every payment a small amount of ripple is intentionally lost, and which reduces the total supply over time. This act as an inflationary control and reduces its supply over time. In order to address worries about the supply of XRP, Ripple Labs have placed 55 billion XRP in escrow. This includes 55 contracts of one billion XRP tokens and which will release one billion XRP tokens into the market each month. This provides for a well-defined release of the tokens.

The Ripple network can handle up to 1,000 transactions per second, which is the throughput that Visa handles. Presently, Ethereum can only cope with 15 transactions per second, and where Bitcoin only supports up to six transactions per second.

Risks?

As with many cryptocurrencies, there are associated risks. In 2015, Peter Todd analysed Ripple and found a number of potential attacks, and rated them in terms of cost, scope, duration, and probability:

Consensus Split. This uses different versions of the protocol to confuse the network, and where it is unable to create a consensus.
Transaction Flood. This is where a large number of transactions are generated, and the network is unable to process the valid ones within a given time constraint.
Coercion of Validators. This is an attack on specific nodes, in order for them to fail to process their transactions.
Software Backdoor. This is where a trusted user adds a backdoor in the software distribution.
Theft of Validator Secret Keys. This is where the secret keys for the infrastructure are leaked.
Simulated Ledger. This is where nodes can simulate the required signature and create a fake ledger.

The major finding was that the end result of applying Ripple would not be that much different from the current centralised approach, and that if more than 20% of Ripple’s network nodes did not agree, there would be a fork in the ledger. At the present time XRP doesn’t actually have to be used, and can be seen as a “settlement currency”, but most of the coins are currently controlled by Ripple.

Conclusion

XRP focuses on translating currencies and overcomes the complexity of the SWIFT network. The creation of the trust network, and in the connection to trusted gateways, increases the overall trust in the network, as the trusted gateway are likely to honour transactions which are incorrectly handled.

And for Ripple, with a clearing time of five seconds, we can see that traditional methods of translating currencies will have some serious competition on their hands. Its method of consensus also does not consume the electricity demand of a medium-sized country, and has a track record of five years of successful operation.

The whole network, too, is not dependent on any one company enacting or securing the transaction, and thus bottlenecks are kept to a minimum. Overall the future of XRP is whether it will be accepted as a settlement current.

So not all cryptocurrencies are the same! Bitcoin seems to get all the attention, but it has so many problems, especially that it will be difficult to sustain its current operation.