Ripple Payment Protocol - Overview

Since the early days of Bitcoin, a large number of alternative cryptocurrencies have emerged, including Ethereum, Litecoin, and Ripple. These altcoins, short for alternative coins, are based on the Bitcoin blockchain, aiming to address Bitcoin’s shortcomings. For instance, Litecoin facilitates payments approximately four times faster than Bitcoin at a fraction of the cost. While most of the digital currencies are running on Bitcoin or Ethereum blockchains, Ripple has evolved largely on its own paradigm.

What is Ripple?

Ripple is a universal real-time gross settlement (RTGS) payment protocol founded in 2012 to enable the fastest and most cost effective peer-to-peer payment system for international payments. It aims to make payments as easy and quick as sending an email. Ripple’s protocol is being increasingly adopted as settlement infrastructure technology among various Top 50 global banks, mainly due to the benefits of the distributed ledger (blockchain) technology powering it.

How Does Ripple Work?

Suppose Tom from Canada wants to send 500 euros to his friend Angela in the France. The two banks use a correspondent bank to transfer the payment. First, Ripple’s translation layer receives a message and collects the required information to start the payment process. Next runs the pre-transaction validation to ensure the accounts meet the screening criteria. Banks already have the necessary data to verify and pre-validate the payments before the money is sent. The ILP Ledger uses the Interledger protocol to coordinate fund movements between the three institutions to settle the payment. The Canadian Bank has an account with the correspondent bank, and the German bank is connecting to the correspondent bank through a third party. Next ripple holds the funds across the three ledgers. Cryptographic signatures are created to verify that the funds are not double spent. The funds are then subsequently released to the ledgers. Finally, a confirmation message is sent to all counterparties confirming the success of the transaction.

The overall transaction from beginning to end takes only several seconds and makes Ripple a good alternative for traditional interbank fund transfer systems, ideal for international remittances. For comparison, domestic interbank transactions on the ACH network in the U.S. of the BACS network in the UK could take up to two to five days to settle. International money transfers could take even longer, given there is no unified solution that’s also offering it at a low fee; typically MoneyGram or the Western Union charge much higher fees.

Competitive Advantages

Ripple operates very differently than some of the other payment networks or cryptocurrencies. Instead of competing with financial institutions, Ripple’s technology uses them to facilitate the payments. Also, Ripple doesn’t aim to dominate other currencies but instead supports multiple digital currencies, including fiat currencies. Therefore members are not required to convert local currency into Ripples (XRP). Worth noting that Ripple protocol is designed to sit on top of the bank’s existing technology infrastructure and complies with risk, privacy, and regulatory compliance requirements. Ripple’s protocol successfully mitigates the settlement risk – the payment either goes through or fails.

Investors and Partners

In late 2016 Ripple Labs finalized the financing of an additional $55M in a Series B funding round to support the growth and development of ripple, making it one of the largest funded blockchain-based projects in the industry. Ripple’s Investors include globally recognized venture capital firms and strategic investors such as Andreessen Horowitz and Google Ventures among others.

Selected Investors:

In the next post, we will dive deeper into Ripple’s digital currency, XRP.