Ripple or XRP is a cryptocurrency that hit the markets in 2012. The transactions take place on its network, known as the Ripple network. The main goal of Ripple was to enable smooth international transactions. 

Since it is a cryptocurrency, people are often sceptical about using Ripple. However, to verify that Ripple is a secure cryptocurrency to invest in, you must understand how it works. In this article, we break down the working of Ripple to help you understand the basics of Ripple.

1

The Ripple Network

The Ripple network is an open-source blockchain-based network using a distributed consensus mechanism, meaning the network verifies the information by communicating with the peer nodes. As of now, 35 institutions act as validators. However, there is no central figure to decide the validation nodes, which results in a decentralised system.

The network uses gateways that act as credit intermediaries between two parties, thus creating liability for the users, resulting in counterparty risk. In addition, there is a risk if the gateway does not honour the transaction.

This is where the open-source protocol helps users save themselves from such situations. Users can choose the gateway of their choice, which allows them to steer clear of gateways that they do not trust.

The goal of the Ripple network was to compete with SWIFT. SWIFT is one of the most prominent financial exchange systems. The Ripple network allows you to exchange all sorts of assets for XRP. It does not differentiate between fiat currency and digital assets.

2

Maintaining the Blockchain

Although Ripple is based on blockchain, it functions differently. On the Ripple network, the transactions are recorded as ledgers, not blocks. The ledger further needs to be validated by the peer nodes.

If 80% of the validators agree on a ledger version, it gets saved. This ledger version is impossible to change. Unlike other blockchains, miners are not free to access the blocks. It is up to the peer nodes to verify the information.

Ripple transactions work on a credit basis. Suppose, A initiates an XRP transaction. The validation node/s selected by A will complete the transaction by acting as a credit intermediary. These nodes are primarily financial institutions, so it is easy to place your trust in them.

Since the peer nodes are financial institutions, the counterparty risk is low. Furthermore, each transaction is immediately verified since the network uses a distributed consensus mechanism. This helps to prevent double-spending and faulty transactions.

3

Mining Ripple

Mining cryptocurrency refers to injecting more cryptocurrency into circulation. Miners need to solve complex maths problems to be able to post a transaction on the ledger. The miner who solves the maths problems receives cryptocurrency as a reward. It increases the supply of a cryptocurrency in the market. 

But this does not apply to Ripple because it’s a pre-mined cryptocurrency. As a result, the supply of XRP will decrease over time. Only 100 billion XRP tokens have been created and released in the market. Each Ripple transaction destroys XRP because users have to pay a transaction cost.

4

Ripple's Value

Ripple is a deflationary cryptocurrency whose buying capacity increases over time. It happens due to the limited number of tokens in circulation. Only 100 billion Ripple tokens had been created and circulated back in 2012. Therefore, no more tokens would be further released in the crypto market.

Furthermore, 0.00001 XRP is deducted from each transaction as a transaction cost. This way, XRP in circulation keeps on decreasing, which increases the value of XRP tokens. Thus, Ripple’s value is mainly created by the scarcity of the token.

Another factor that contributes to the value of XRP is the increasing demand. Since financial institutions use it, it implies a trustworthy cryptocurrency. The fast processing rate also makes it a popular cryptocurrency among people. So more and more people wish to own Ripple.

Ripple value hit its highest value in December 2017, when valued at 2.28 US dollars. In April 2021, it again attained a value of 1.4 US dollars.

FAQ

How does the Ripple network work?

The Ripple network is a blockchain-based open network. It works on a distributed consensus mechanism.

What is blockchain technology?

Blockchain is a format that stores transactions’ details in blocks. These blocks connect to other blocks and make a chain of information.  

What is the highest value that Ripple reached?

The highest value of Ripple was 2.28 US Dollars in December 2017. 

What is a Ripple gateway?

A Ripple gateway allows users to enter the Ripple network by enabling them to transfer funds.

Does Ripple have a transaction cost?

Users have to incur a transaction cost of 0.00001 XRP when they make a transaction on the Ripple network. 

What is counterparty risk?

Counterparty risk is the name given to the risk that creditors face if the other party does not clear its dues.

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