Ripple – too old to be a scam?

By: David Marc
Updated: June 4, 2018


Ripple is a method for transferring fiat currency cheaply, quickly and safely. Whereas bitcoin might be termed a revolutionary product that could one day act as an alternative to fiat currency, Ripple is more of a bridge which connects the old financial system with new technology, basically pulling banks into the web era. Ripple has a fantastic executive team and has made substantial inroads with the mainstream financial system, integrating its technology to three banks in 2014. The second largest cryptocurrency by market cap (still less than 10% the size of bitcoin), Ripple is most likely here for the long haul.


Ripple is a peer to peer payment network in which fiat currency such as USD, GBP and EUR can be exchanged against one another and transferred between individuals at little cost. The ripple network, accessible through RippleTrade, is the platform through which these exchanges can be executed. Fiat currency enters and exits the Ripple network through “ripple gateways”, the first link when a user would like to make an exchange, and the last link when a user would like to receive payment. Effectively, Ripple has put in place the technology that, if embraced by banks acting as mega-gateways, could revolutionize foreign exchange and international bank transfer. A cheap service, with instantaneous execution. As it is now, liquidity levels prevent Ripple from becoming a consistently suitable currency exchange alternative.

Depending on the liquidity within any particular currency pair, matches can be made directly without the need to go through intermediary currencies. The XRP coin is simply a method of facilitating transfers when required to act as a bridge between two illiquid currency pairs. It also acts as a protection against spam as each action, whether opening an account or making a transfer, must be paid for with a small amount of XRP, which is effectively destroyed. This introduces slight deflationary pressure that could contribute slightly to a more valuable coin, but XRP’s primary purpose isn’t really to hold and store value, as is the case with bitcoin. The deflationary pressure is also mitigated by the coin’s distribution, which will be discussed later.

Under the hood

Transactions work similarly to bitcoin, with public-key cryptography utilized to securely send transactions to public addresses. Transaction data is recorded on a central ledger, which is distributed amongst thousands of different nodes, who work together to verify transaction and ledger legitimacy. The ledger works a bit differently to the bitcoin blockchain. The ledger contains all the transactions since the previous ledger iteration, as well as all the account balances in the Ripple network, but does not transcribe the entire transaction history. This leads to a very light ledger, which allows every user to effectively act as a node, as storage size is negligible for home computers.

Verification is handled in an entirely different fashion from the bitcoin method. There is no concept of mining. Rather, consensus is achieved by an automated process in which individual nodes poll trusted nodes to see what the majority position is on transaction and ledger authenticity. This allows for quick transaction settlement – indeed, ledger updates are entered every 5-10 seconds.

So, how do nodes determine the trustworthiness of other nodes? Each Ripple user sets up a list of nodes – someone they know personally, their gateway, or just generally trusted network nodes – that they can be comfortable are legitimate. This contributes to a six degrees of separation effect, in which trusted nodes cooperate with their network of trusted nodes, and so on, until transaction information is disseminated in a trust link to the entire network.

Launch Methodology

The absence of mining, while avoiding inefficient energy consumption characteristic of bitcoin’s proof of work, also eliminates the opportunity to utilize bitcoin’s fair mechanism for coin introduction into the network. 100 billion XRP were created in a premine. 20 billion coins, so effectively 20% of the company, remained with the founders. the additional 80% was given to Ripple Labs, who intends to distribute 55 billion coins through various giveaways, while the remaining 25% will go towards development costs and marketing.

This centralization is a weakness of the Ripple network. It raises trust issues that are not present in bitcoin. The founders have the opportunity to dump coin into the marketplace whenever it suits, and despite their likely good intentions the mere potential of such a dump will be a cause of concern for many. Ripple Labs has tremendous power over the network with such massive control over the money supply. However transparent they prove to be, it is another source for skepticism.

Development Team

It is a bit misleading to call Ripple an altcoin, because it is in fact older than bitcoin. It was originally developed in 2004 by Ryan Fugger and taken over by current CEO Chris Larsen, bitcoin developer Stefan Thomas, and Jed McCaleb, of Mt. Gox fame, in 2012. After falling out with the rest of management in 2014 over an office romance turned weird, Jed McCaleb grabbed the Ripple code and started a Ripple alternative called Stellar.

Mr. McCaleb immediately began to poke Ripple in the eye, unsuccessfully attempting to crash the currency on the way out. He also enlisted Stanford professor and head of the Stanford Secure Computing Group David Mazieres as Chief Scientist of Stellar. In a much publicized review, Mr. Mazieres determined that the Ripple/Stellar consensus system was unlikely to be safe under the circumstances.

What was less well publicized was that Mr. Mazieres¬† ¬†“improvements” caused a massive fork in the Stellar network, leading to disruptions in the Stellar transaction system. It was quite a convenient moment to point out flaws in the underlying Ripple technology. Moreover, in Stellar’s statement quoting Mr. Mazieres, they refer to him as an outside expert, and neglect to mention that the fork troubles¬†arose under his watch.

Ripple’s Future

In May of 2014, German banking service Fidor integrated the Ripple protocol into its transaction system, allowing customers to a cheaper method of money transfer – in any currency – through the bank. Additionally, Fidor will utilize the Ripple for intra-bank payments outside of Germany, which will lower settlement and foreign exchange cost.

Fidor was joined by two US banks, CBW and Cross River Bank, who in September 2014 integrated the Ripple protocol as well. The integration allowed, in the words of Cross River CEO Gilles Gade, their “banking to move at the speed of the web, but with the security and confidence of the traditional financial system”.

This represents an exciting merging of the old systems and the new, in which Ripple provides a bridge for traditional financial institutions to harness the new technologies and innovations of the cryptocurrency markets, while staying true to existing business models.

One look at Ripple’s Board of Directors shows the potential of this bridge between old and new, and inspires confidence in its expansion throughout the banking sector. In January 2015, Gene Sperling, the first person to serve as National Economic Council Director and National Economic Advisor for two presidents, joined Ripple’s Board of Directors. “The currency-neutral Ripple protocol is a unique technology that can fundamentally transform correspondent banking and lead to real-time payment systems”, Mr Sperling said of his reasons for joining Ripple. “Furthermore, by seeking to do for payments what HTTP did for information sharing, the Ripple protocol can help advance the movement toward universal access to financial markets and services.”

He joins an incredible board including Susan Athey, Former chief economist for Microsoft, Professor of economics at Stanford Graduate School of Business, and winner of the John Bates Clark Medal in 2007, awarded to the “American economist under the age of forty…who has made the most significant contribution to economic thought and knowledge.”

Ripple has made headways into the mainstream financial services industry, and is backed by major political and academic heavyweights. It serves to show that Ripple is no flash in the pan and will remain as a viable alternative to bitcoin.

Bottom Line

Ripple might be considered a bridge between old traditional financial systems and decentralized protocols like bitcoin. Ripple makes no claim to revolutionize the way we look at money, but aims simply to enable a cheaper, faster and safer method of utilizing existing money transfer mechanisms. If you are interested in buying ripple, check out our best altcoin exchange article.