Ripple Currency is an online system that supports real-time gross settlement method (RTGS), currency exchange, and remittance. The purpose of this article is to assist the reader to understand how this system facilitates payments, the advantages of using the ripple system, and the drawbacks experienced when using the system. The system allows its users to make online payments instantly. To enable this, the online system has been developed on an open source internet procedure, an accounting ledger to allow for reconciliation and a currency called XRP (ripples). The open source internet protocol allows the system to operate interbank transactions platform.
Ripple Currency Explained
For the system to work there needs to be two parties transacting. First, the protocol requires the presence of a regulated financial institution; its purpose is to account for the transacted money. In addition, financial institutions are responsible for maintaining customers’ balances. Second, an institution with features similar to a hedge fund has to provide the necessary liquidity in the currency to a customer who wishes to trade in. This implies that the system shares its database among several institutions that help determine the transactions. The information of the transactions is contained in ledgers that help develop a distributed exchange between financial institutions.
How the Ripple Currency Works
Payments take place using cryptographically marked transactions. The transactions are either valued by the ordinary fiat currencies or the Ripple Currency denomination (XRP). Transactions made using XRP register differently, in the internal ledger of the company. However, the ledger only accounts for transactions made using other currencies as amounts owned. The value of the assets transacted represents the value of the debt obligation.
There are several development designs that facilitate the efficiency of the protocol. First, there need to be gateways who are persons or organizations that allow users to deposit or withdraw their money from the system. In case the user deposits or withdraws money from their Ripple account using the gateways, the company’s distributed ledger reflects the account balance in it. The gateways require users to verify their identity, address, and nationality to prevent criminal activities.
The company requires users to develop trust with their gateways. This action confirms that the user is comfortable with the gateway’s default risk. Nevertheless, the user can use several gateways operating in the same currency. The advanced Ripple system allows the user’s balance to adjust automatically between gateways.
Operations of the protocol are dependent on the consensus ledger. The shared ledger is useful in recording the transaction details. Moreover, the ledger database contains all the information concerning the accounts. Financial institutions are open to manage the ledger. Thus several servers manage the ledger. This is achieved when the protocol is integrated with financial institutions networks.
Surprisingly, the consensus ledger allows any server with the Ripple protocol to use the same set of transactions to manipulate the present ledger. In addition, all the connected servers are continuously communicating with each other thus adjusting the transactions simultaneously. Transactions take place when the servers are in consensus.
Advantages and Disadvantages of Ripple Currency
The performance of the system is incredibly good since it allows secure and instant transactions all over the globe. The transactions carried out by the system are nearly free. Moreover, the Ripple system can support transactions of all sizes. The system is very cheap for users using the XRP currency. The Ripple system offers its users privacy of their transactions. On the other side, the Ripple system has some disadvantages. The system tends to be very expensive to the users who are not using XRP currency. The usage of the XRP is restricted on the Ripple system thus its use is only helpful to Ripple account holders.
Users of this Ripple platform leap many benefits compared to using other payment platforms. First, they use it to make payments across to the globe. In fact, Ripple offers its users a chance to carry out cross-currency transactions in less than 5 seconds. All transactions done using ripple are secure and algorithmically confirmed. Moreover, the account holder is responsible for authorizing any transactions and the processing of payments does not involve third parties.
Users are able to make payments to their counterparts using the Bitcoin platform. In addition, the users will only have to access their account and make a direct payment. The Bitcoin bridge system does not need the Ripple users to either possess any digital currency or use exchanges such as the BTC-e to carry out transactions. Moreover, the Bitstamp can act as a gateway for any Ripple transaction.
The system allows its users privacy. Payment information contained in the Ripple ledger is not open to public scrutiny. Additionally, the online platform can offer arbitrage services thus operating as a market maker. The system allows its users to access market liquidity as well as intra-gate currency conversion services. Moreover, the Ripple system can hold different currencies, and act as a bridge between multiple gateways thus can facilitate payment of transactions between users who have no direct connection. The involvement of other financial institutions in the protocol, allows the Ripple network to handle a large number of transactions using different currencies without assuming the foreign exchange risk.
Disadvantages of the Ripple Currency
There exist many advantages of using this system; however, there are some setbacks. First, the XRP can only operate within the Ripple system. During the inception of the Ripple system, the developers only created 100 billion XRP. The Ripple protocol does not allow production of new XRP. This inhibits the use of XRP currency to users who have the Ripple account hence this controlled use polarizes the currency.
Persons who do have accounts with the Ripple Company find it very expensive to use the company’s platform to make payments. Although the firm charges a transaction fee to protect its system from network flooding, the fee is relatively high to other users. Fees charged by the company are not constant since they rise when there are large amounts of user trade posts. Moreover, gateways can collude with users to use the Ripple system as a platform to launder money thus compromising it. Additionally, Ripple users carry the burden to develop trust with trade partners using the same platform and gateways. This tedious process discourages potential users.
In the case where the UNLs are interrupted, the efficiency of the Ripple system is compromised. This is the case because the transactions will be incomplete. The system discards all incomplete and interrupted transactions in the system from the proposal. Also, the consensus concept can also be vulnerable to attacks from hackers who may execute invalid transactions thus flooding the Ripple system. These attacks may reduce the efficiency of the consensus process.
The Ripple platform offers an efficient way of making payment both in the US and overseas. In addition, the system allows businesses to carry out multi-currency transactions without involving the foreign exchange. Banking has been made easier since users can access banking services without necessary stepping into the banking halls. Moreover, the Ripple system is very efficient in storing transaction details of its clients. However, the system has displayed some few challenges which the company is currently addressing. Using the Ripple platform has proven to be a standard means to make payments across the financial institutions using any currency.