It is quite possible to remove Bitcoin (the currency) from Ripple is another cryptography-based approach to
the other technologies that underpin bitcoin (the platform).
exchanging value and one that makes the role of the
However, doing so removes the incentive for miners to
cryptocurrency (XRP, in this instance) much plainer.
bundle and sign transactions, leaving a collection of useful Ripple replaces block mining with a distributed database but otherwise unrelated technologies. These technologies of information about all Ripple accounts. A network
may be used to create a galaxy of ‘block chain’ solutions, of independent services each maintain a copy of the
though often these will have only an incidental relationship database and constantly compare the transaction
to a traditional currency. Filecoin47, for example, allows records with those of other services. New transactions users to store files in the block chain, and rewards them are accepted in the network only when a majority of
with Filecoins for storing blocks on their computers.
services agree that the transaction is valid.
Another example is ZeroNet48, which uses a combination of block chain and BitTorrent technologies to create
XRP is a key technology in the overall Ripple solution.
distributed websites that don’t exist on any single server.
The Ripple protocol allows any currency to be traded over Block chain technologies could even be used to exchange the network, not just XRP, though all accounts are
value via a distributed ledger within a closed system, required to hold a small amount of XRP (20 XRP, or
without involving a cryptocurrency and with all value
A$0.21 as of 15 September 201549) as the currency
denominated in an established currency, as miners can be performs three important roles in the protocol. First, the incentivised via other means.
requirement to hold a small amount of XRP hinders the
creation of spam accounts. The amount is insignificant for normal users but rapidly becomes expensive for malicious Removing the underlying technology, on the other
users with large numbers of accounts. Second, each
hand, creates an unusable currency not backed by a
Ripple transaction destroys a small amount of XRP
government (and its ability to extract taxes), a private (0.00001 XRP, or A$ 0.00000105). This should be
institution (which is expected to honour its
insignificant for normal users, but would rapidly become obligations), a commodity (a scarce and valuable
expensive for malicious users trying to spam the network resource) or a formally defined community (as Bitcoin
with transactions. Third, XRP can be used as a bridging is, since its value rests on trust that the community
currency to facilitate exchanges between two currencies brought together by the mining and exchange of value
not commonly traded, making it challenging to establish process will provide stability and liquidity).
an accurate currency-to-currency exchange rate.
Clearly, the currency is an integral technology in the overall Bitcoin solution to exchanging value. If Bitcoin, One hundred billion XRP was created at Ripple’s
or a related cryptocurrency, is used to create faster, inception, with the protocol’s rules specifying that
cheaper and more efficient international money
no more is allowed to be created. This makes XRP
transfers, they would need to be triangulated through
a scarce asset, which should cause the currency
Bitcoin with the associated risk of passing value through to appreciate over time. The company behind the
a highly volatile currency. Many institutions and
protocol – Ripple Labs50 – has reserved 20 billion
individuals will find this unacceptable.
XRP for fund development.
The Future of Exchanging Value Cryptocurrencies and the trust economy 49
Cryptocurrencies are caught in a Catch-22 situation. On XRP if the firm doesn’t require the anti-spam features the one hand, the unstable nature of many of “the
provided by the currency in the closed environment of
currencies hinders their widespread adoption. The highly the bank and its subsidiaries. Nine of the world’s
variable exchange rates between Bitcoin other stateless biggest banks – including JP Morgan, State Street,
cryptocurrencies and sovereign currencies means prices UBS, Royal Bank of Scotland, Credit Suisse, BBVA
for goods and services quoted in them must be constantly and CBA – are also working together to use block
maintained by merchants, while also making them poor
chain technology (bitcoin, the platform, but without the stores of value for consumers. The most obvious solution cryptocurrency) to streamline the financial markets.
is to foster widespread adoption so that the speculators Their focus is on using the technologies post-trade for who dominate these currencies, and who create the
settlement. One possible example is the issuance of
instability, are crowded out by less active investors, the commercial paper on the block chain, allowing two
merchants and consumers who are looking for a means of parties to transfer ownership within minutes and with
exchange and store of value.
no need for a third party to verify the transaction.
A government could drive this adoption simply by
mandating that citizens use a cryptocurrency to
There is also growing interest in Bitcoin, or another
settle their taxes. However, as we’ve already
stateless cryptocurrency, to replace the US dollar as the discussed, this is highly unlikely.
global reserve currency. The intention is to find a reserve asset for central banks that better reflects the global If not a government though, then why not a
economy as the US dollar is vulnerable to swings in the sufficiently large and stable institution?
domestic economy and policy. This shows in commodity
prices, which go up when the US dollar depreciates.
Multinational firms have expressed interest in using
A stateless currency could help prevent spikes in energy cryptocurrencies to settle cross-border transactions
prices when the US dollar weakens significantly. Indeed, within their organisations. Commonwealth Bank of
there is a trend away from using the US dollar to
Australia (CBA) is a case in point. It announced recently denominate international exchanges of value, shown by
that it was trialling Ripple for transferring payments China’s agreements with various trading partners to settle between subsidiaries of the bank . However, it is not
trades in their own currencies. Stronger evidence can be known if CBA will participate in the global pool of XRP
found in the diversification of reserves held
(and thereby ensure its Ripple protocol will interoperate by many nations. Other major government-with other institutions using the protocol) or whether CBA backed currencies of sufficient scale –
will issue its own version of XRP (making CBA’s
primarily the euro – have similar problems.
implementation stand-alone). CBA can even forgo