What is the role of XRP?

What is the role of XRP?

Much of the criticism of Ripple’s valuation has focused on XRP, which is the native cryptocurrency of its platform. Critics say that the XRP cryptocurrency has not gained enough traction among companies to justify its current valuation. The impact of XRP can be explained by its valuation as an asset or an interbank transaction medium on the Ripple platform.

In fact, the role of XRP in the Ripple ecosystem has become a critical determinant of Ripple’s overall market valuation. Amidst the public uproar, the usefulness of XRP within the Ripple product ecosystem remains somewhat murky to some.

The main takeaway

  • XRP is the token used on the XRP Ledger to facilitate transaction fees and costs and provide liquidity.
  • XRP is publicly available to buy or trade on exchanges.
  • The Ripple ecosystem is designed to enhance cross-border financial transactions by banks and financial institutions.

What is the role of XRP in the Ripple ecosystem?

Current transactions occur across borders between isolated, unconnected technology systems. Ripple uses the Interledger protocol, which enables payments to be routed through interconnected ledgers to link these systems.

Think of it as similar to TCP/IP, which is the protocol that underpins the Internet and enables different computers and systems to talk to each other. The ledgers that make up this protocol can be part of the financial institution’s network or be trusted nodes in a network that spans multiple entities. The system’s end-to-end technology is designed to increase transaction processing speed for cross-border transactions.

Because its technology is smart and futuristic, Interledgers still hasn’t solved the problem of pre-funding fiat currencies in foreign currency remittance accounts. Known as nostro and vostro accounts, these are managed by financial intermediaries, such as banks and money transfer agencies, at either end of the transaction to ensure liquidity for their foreign exchange transactions.

This is where XRP comes in.

Ripple products use XRP to ensure fast liquidity. xRapid, another Ripple product, uses XRP as a “bridge asset” or an asset that businesses and financial institutions can use as a medium of conversion between two different fiat currencies. In such a scenario, the financial institution can purchase an equivalent amount of XRP and send it through the Ripple network. Ripple refers to it as “Third Party Liquidity Provision” and states that it is ideal for banks that do not have a corresponding relationship with each other.

As a cryptocurrency, XRP has a lot of use cases. It can be a currency, security, commodity, lending or interest token.

XRP as a currency

The Ripple solution is not a new concept. In fact, the role of XRP can be seen as similar to the role of the US dollar in the international markets. The US dollar, or US dollar, is the bridge currency used in many international business transactions and currency transfers. It is particularly useful for conversions between currencies traded in international markets. For example, the conversion between the Kyrgyzstani som and the Japanese yen will be routed through the US dollar.

While it can also be used on xCurrent and xVia, the other two Ripple products, xRapid’s XRP transaction, have certain advantages. According to Ripple CTO Stefan Thomas, XRP is faster, cheaper in fractions of a penny, and about three seconds faster per transaction than other digital assets. XRP also offers other benefits: With XRP, banks can provide on-demand liquidity in real time without having to fund nostro accounts beforehand.

But transactions using XRP come with their own set of risks. For starters, XRP’s bridge asset status means that financial institutions rely on Ripple to provide liquidity for transfers. Supply and demand determine the transfer value and are calculated as external risk. This risk is magnified if you consider the risks inherent in using a cryptocurrency that trades in volatile markets. For example, spikes or crashes in the value of XRP can hinder transfers and increase or decrease its value.

XRP as collateral

In February 2018, the US Securities and Exchange Commission (SEC) alleged that Ripple Lab CEOs Bradley Garlinghouse and Christian Larsen manipulated the price of XRP by slowing or speeding up sales depending on the market. The Securities and Exchange Commission (SEC) accused Garlinghouse and Larsen of creating an “information asymmetry” that allowed them to continue selling XRP at “significant risk to investors.” The crux of the accusation was whether XRP could be considered a security offering.

In 2020, former CFTC Chairman Chris Giancarlo argued that XRP should not be considered a security proposition because it did not fit the criteria of the Howey test. However, a potential conflict of interest was apparent because the law firm that Giancarlo represented — Willkie Farr & Gallagher LLP — also acted as legal counsel to Ripple.

In July 2023, a judge issued summary judgment declaring XRP to be a security when it was offered to institutional investors. The judge ruled that when XRP was sold on exchanges in blind transactions, it was not considered a security.

How does Ripple work?

Ripple Labs, Inc. It is the company that created the XRP Ledger and the XRP cryptocurrency. XRP is used to pay for transactions and as a medium of exchange bypassing the slow and sometimes inaccessible traditional cross-border payment system.

How dangerous is ripple?

As a company, many factors affect Ripple’s ability to conduct business. Regulations, demand for their services, and many other influences must be overcome in order to remain profitable. The XRP cryptocurrency is just as volatile and risky as other cryptocurrencies.

Why do banks use XRP?

The Ripple XRP Ledger is designed to accelerate cross-border transactions with banks and financial institutions in mind. Banks can take advantage of XRP because it is instantly convertible to other currencies, and transaction times are measured in seconds rather than hours or days.

bottom line

XRP plays an essential role in Ripple’s activities and products. What exactly this role is and the dependencies and influences that may exist between the two are not yet fully understood. It may never be as long as cryptocurrencies are not regulated and their definition as a currency or investment is indefinite.

The comments, opinions and analyzes contained on Investopedia are for online informational purposes. Read the warranty and liability disclaimer for more information. As of the date this article was written, the author owns 0.01 bitcoin.

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