Ripple’s XRP has the third-largest market cap in the cryptocurrency world, but what gives it value?
Ripple Lab’s intent was not to be a store of value or a currency, per se, like Bitcoin. Neither did it intend to be a platform for developers to explore the possibilities of blockchains, like Ethereum. Ripple was always focused on being a payment system, facilitating transfers between banks, currencies, and countries in a way that would not be possible without blockchains.
Ripple does this by serving as an interledger protocol: the ledgers of banks, exchanges, and other institutions which exist on centralized servers at the institutions can interface with the blockchain software to have the necessary information shared securely with Ripple clients on the other side of the world, simultaneously updated when the transactions are cleared. It makes the old system look like the Pony Express, and it is on a fast-track to put SWIFT, an entrenched international nonprofit that holds the current standard, out of the picture.
Unlike Bitcoin and Ethereum, Ripple does not use proof-of-work mining to validate transactions, although Ethereum is planning to switch to proof-of-stake in the near future. Instead, it uses a proof-of-correctness method, in which two stages of validity are quickly passed using information from random other nodes. Over 80% of the nodes have to agree on the correctness of an entire block or it will not be validated. Since mining is not required, it can be faster and more environmentally-friendly than its counterparts. Bitcoin miners use vast amounts of electricity running mining rigs, and all of the proof-of-work required by the blockchain protocol slows transactions down by hours if the exchanges get too busy. Bitcoin transactions are supposed to validate every 10 minutes, by design, and this delay is meant to make it more difficult for hackers to launch a quick attack that could overwhelm the system.
Ripple is also more centralized than the other two, with an actual for-profit company, Ripple, holding the reigns and approving any updates. They also intend to make large banking institutions their clients, who, by the nature of their business, have a very centralized database and governance structure. Ripple uses blockchain technology to bridge between these centralized entities.
Detractors of a privately run and somewhat centralized blockchain insist that this presents too many identifiable points of failure, which is not a problem in a decentralized system, even if everyone trusted everyone to the fullest extent, which is not required in a completely decentralized and trustless system. Ripple is quick to counter that it has a significant vested interest in making the company and its currency succeed and that every partnership they have negotiated and every decision they have made has been instrumental in raising the value of XRP significantly over the past few years, with very large opportunities close on the horizon.