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What Does Ripple Do?

What Does Ripple Do?

Ripple does several things, serving as a protocol for decentralized currency exchange and transfers of value, primarily focused on the financial service industry.

Ripple’s defining characteristic is probably its interface for inter-ledger payments and settlements, meaning the ledgers of other blockchains and the database systems of banks can be seamlessly integrated to offer validation and record-keeping with a reliability and speed that was heretofore unheard-of. Ripple cuts out as many middlemen as possible and dramatically reduces the transaction costs and time required for cross-border money transfers, while also significantly reducing some of the risks inherent to international trade, like counter-party risk.

Ripple focuses on international transfers of value because it is a space where blockchain technology can thrive: blockchains are secure, they keep impeccable records, they prevent double-spending which happens in international payments often, they can settle accounts far quicker than the traditional system can, and they bring trust systems into transactions where trust may be difficult to establish.

Because Ripple uses some centralized databases and trusted parties, it is not trustless the way some other decentralized blockchains are. Other blockchains do not require nodes to trust other individual nodes since the system is run on consensus from random decentralized nodes. Ripple smooths out a path between senders and receivers that use only intermediaries that the parties trust, and only when necessary. By creating a protocol that interfaces with all of the intermediary ledgers in the process simultaneously, Ripple is able to put holds on the required funds at each node in the pathway for a few seconds and clear the entire transaction in another few seconds. Either everything works and the payment succeeds instantaneously, or the entire transaction is canceled. It is not uncommon, even in this day and age, for a company’s liquidity to be significantly damaged due to capital being tied up at a financial institution at another country, where it arrived just before failed transactions.

Ripple also removes the need to bestow any trust in a foreign company or government: the built-in currency exchange in the Ripple protocol reduces the need to pay intermediaries for conversions, and the escrow feature also reduces the need for third-party intermediaries to help counter-parties settle transactions. Ripple knew what they were doing when they designed the software: trillions of dollars flow through the international banking and settlement system every day, and if XRP becomes the standard protocol for such transactions, they stand to make a lot of money. Already, Ripple is the settlement option for a new major interbank association in Japan and is also working with some of the largest banks in the world such as Bank of America. This coin may be a niche product that has found its footing.

Keywords: interbank market, cross-border payments, liquidity problems in international business,