XRP (XRP -0.32%) is a cryptocurrency designed to facilitate cross-border payments. Transactions are fast and ultra-cheap, which traditionally hasn't been the case when sending money abroad. Launched by Ripple (formerly Ripple Labs) in 2012, the utility of XRP has helped it become one of the largest cryptocurrencies in the world.
Understanding it
Understanding XRP
Like other types of cryptocurrency, XRP is decentralized, but it's closely tied to the technology company Ripple. Ripple has developed a public blockchain called the XRP Ledger (XRPL) and a blockchain-based global payments platform called RippleNet, both of which use XRP.
XRP is the native cryptocurrency on the XRPL, meaning it's the primary token on that blockchain and is used to pay transaction fees. RippleNet uses XRP as a bridge currency for international transfers, which is potentially this crypto's most exciting use.
Role in cross-border payments
XRP's role in cross-border payments
Ripple wants to change the global payments industry with blockchain technology. Banks have long used the SWIFT system for international payments, but it has some notable drawbacks. The average transfer time is about 18 hours, according to a study by Statrys, and in some cases, transfers can take three to five days. The sender also often needs to pay a transfer fee, usually of $15 to $30.
RippleNet, in use by more than 300 financial institutions, is a much more efficient solution. Payments process in three to five seconds and cost a small fraction of a cent. RippleNet also provides an on-demand liquidity (ODL) service, which is where XRP comes into play. International transfers involving multiple currencies are complicated, normally requiring one bank to have reserves available in the other currency, or the transfer will need to involve intermediaries.
With ODL, XRP serves as the intermediary. The sender converts their currency into XRP and makes the transfer through RippleNet. The receiver sells the XRP for their own local currency. It's a real-time cross-border payments service, and it's made possible by XRP.
Investing
Investing in XRP
If you want to invest in XRP, you can buy it on many of the major crypto exchanges. But should you? The fact that XRP has a legitimate real-world use is a big advantage over much of the crypto market, considering how many projects are built around hype without offering anything of value. Ripple is also partnered with some of the biggest financial companies in the world, including JPMorgan Chase (JPM 0.42%) and Bank of America (BAC 0.64%).
However, partnering with Ripple doesn't mean these banks are adopting XRP. Large banks generally don't need a bridge currency for international transfers. They send money through RippleNet because of the speed and low costs, but they aren't actually converting funds into XRP at any point. In addition, financial institutions that use cryptocurrency for money transfers will likely opt for stablecoins instead of XRP. Stablecoins aim to maintain a fixed value, such as $1; the price of XRP can fluctuate quickly.
XRP could still gain value for its role as a bridge currency or for its role on the XRPL. It may be a multibagger, or it could plummet in value. That's par for the course when investing in cryptocurrency. If you decide to buy XRP, limit it to a small amount of your portfolio to keep your risk manageable.
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How transactions work
How XRP transactions work
Every blockchain network has a consensus mechanism, which is how it validates transactions. The consensus mechanism plays a vital role, because it determines transaction accuracy, speed, and cost. The XRPL consensus mechanism is fairly unique. Most modern blockchains use proof of stake, and some older blockchains, most notably the blockchain for Bitcoin (BTC -0.42%), use proof of work.
The XRPL has a network of independent validators. These validators receive transactions, check if these transactions follow the rules, and then propose a list of transactions for the next ledger. The validators share their lists, compare them, and see which transactions they agree on. A new ledger is approved once it has a supermajority, meaning at least 80% of the validators agree on it. By using a validator network, XRPL is able to achieve fast, cheap, and energy-efficient transactions.
