While Bitcoin was the first digital currency to scale—it's also the largest cryptocurrency by market value at the time of this writing—it is not the only big name in the marketplace. Investors have taken a keen interest in digital assets for their ability to provide diversification and compelling returns, but they can benefit from knowing that there are alternatives to Bitcoin.
Ripple (XRP), for example, is a cryptocurrency that has frequently ranked among the top 10 digital currencies by market capitalisation. While XRP has frequently been amongst the most valuable digital currencies, it is not without controversy.
In December 2020, the U.S. Securities and Exchange Commission (SEC) announced that it had charged Ripple and two of its key executives, Christian Larsen and Bradley Garlinghouse, with securities fraud for allegedly selling more than US$1.3 billion worth of unregistered securities. The lawsuit had not been resolved at the time of this writing.
Let's take a look at Ripple and Bitcoin to get a sense of their similarities and differences.
What Is Ripple?
Before delving into XRP, it is important to provide an overview of Ripple. It's a global payments system that users can leverage to exchange digital currencies, fiat currencies and even commodities. Parties interested in making transactions can use the network, which can verify that the aforementioned transfer took place successfully.
Ripple, or more specifically Ripple Labs, is also the name of a company that was founded in September 2012. It was initially referred to as "OpenCoin" for several months after three engineers got together and created the XRP Ledger (in June 2012).
The developers, Arthur Britto, David Schwartz and Jed McCaleb, donated 80 billion XRP to the company as a gift, which changed its name to Ripple Labs in 2013. According to the company website, Ripple Labs has hundreds of customers spread across more than 50 countries.
What Is XRP?
XRP is a digital token that can be used for a handful of purposes. It can be used as a bridge currency, meaning that it can be used to enable transactions on the XRP Ledger. Cryptocurrencies, fiat currencies and even commodities can be transferred in this manner.
Coin Telegraph described XRP as being the "Joker" in a deck of cards, meaning that it can be used for any card. In other words, if a user wants to take units of the Japanese yen and convert them to the U.S. dollar, they can do so, a move that will only cost $0.00001.
Further, interested parties can purchase XRP as an investment. The digital token has experienced some compelling gains, rising from roughly US$0.01 in August 2013 to approximately US$1.50 in May 2021, according to figures from Statista. Between these two points, it climbed close to 15,000%.
Investors should know that while cryptocurrencies have varying methods of mining, it is impossible to mine, or create, new units of XRP, as all 100 billion units were on the first blockchain.
It is also important to note that XRP can be destroyed or even lost. If the digital token is sent to an address, and that address cannot be accessed, it is effectively lost. Additionally, every transaction requires a small amount of XRP to be destroyed. As a result, XRP's tokenomics are a little deflationary.
Bitcoin vs XRP
Let's now take a look at the key differences between these two digital currencies.
Number Of Units
One major difference between Bitcoin and XRP is the number of units. Under the current rules, the total number of bitcoins is 21 million. This is a completely different figure from XRP, which had 100 billion units on its first ledger.
How Transactions Work
Another major difference is how transactions are confirmed. Bitcoin uses something called Proof of Work (POW), a system that helps make the digital currency's network less vulnerable to attacks. POW involves miners competing against one another to confirm transactions and then fit them into blocks, which make up the blockchain.
XRP is different in that its ledger uses something called XRP Ledger Consensus Protocol, which relies on "Trust-Based Validation." In order to confirm transactions, the XRP Ledger allows each participant to select a group of validator servers that are in turn set up to help the network achieve consensus.
An individual server receives information from their chosen validators, and if a high enough portion of these validators concur that a group of transactions indeed took place, the server will concur that consensus did occur and a particular ledger will be the outcome of that agreement.
It is worth noting that XRP transactions require very little energy, more specifically 0.0079 kilowatts per hour (KWh). In contrast, Bitcoin uses a substantial amount of energy, as much as Argentina. XRP transactions also take place far more quickly than those of Bitcoin, with the former requiring five seconds for verification and the latter taking 10 minutes.
Bitcoin was designed to be decentralised, a peer-to-peer global payment system that did not require financial institutions. However, Ripple, a centralised entity, distributed XRP in order to raise money, the SEC stated in December 2020. According to the government regulator, Ripple also sold the aforementioned digital asset in exchange for "non-cash consideration, such as labor and market-making services."
Bitcoin and XRP are both prominent digital currencies, but they have important differences. Bitcoin was designed to provide a global payment system that could function outside of financial institutions like banks. XRP was created to serve as the native token of the XRP Ledger, providing liquidity so users could transfer digital currencies, fiat currencies and commodities.
They also have completely different tokenomics, and the networks that leverage bitcoin and XRP have differing energy demands. Plus, the networks that leverage bitcoin and XRP harness different methods of determining consensus, or in other words, deciding which transactions took place.