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Core Report Overview

It is important to state that XRP and Ripple (AKA Ripple Labs, Inc.) are not the same, although they are consistently and erroneously used interchangeably. The Ripple network is a protocol to provide liquidity to global markets for fast, cross-border payments with minimal fees. XRP tokens are the accounting units used within the XRP Ledger open-source database and serve as a bridge currency between banks. The ledger stores and preserves XRP transactions and account balances.

Ripple Labs, Inc. is a private, for-profit company that sells the closed-source banking software RippleNet which was previously split into three separate products: xCurrent, xRapid, and xVia. It is important to note that only the xRapid product utilizes actual XRP. The other products can be used independently of XRP or any cryptocurrency. This optionality or lack of necessity for banks to transact in XRP within the Ripple network is the main point of contention when it comes to ascertaining XRP’s underlying value.

Primary Use Case

The Ripple network is a protocol to provide liquidity to global markets for fast, cross-border payments with minimal fees. For example, one bank can send a payment to another bank in one form of fiat currency (e.g., USD). The other bank can receive the payment in another fiat currency (e.g., Japanese yen). These transactions can be costly and time-consuming if there is little market liquidity for a particular trading pair. Cross-border payment flows were over $150 trillion in 2022. Using the RippleNet network, global payments are settled in a few seconds with extremely small transaction fees of less than a penny per transaction. This is accomplished via the use of gateways referred to in the Ripple network as either xRapid (now “On-demand Liquidity”), xVia, and xCurrent individually or RippleNet as a collective. XRP, the ticker symbol and actual cryptocurrency for the Ripple network, serves as a bridge currency between banks if no direct exchange is possible. 

For example, when a U.S.bank and a Canadian bank are converting between U.S.and Canadian dollars, the U.S.bank can utilize on-demand liquidity by exchanging USD for XRP, send the transaction, and then the Canadian bank can convert the XRP to Canadian dollars. In this manner, the U.S.bank sends a payment in the equivalent of USD to the Canadian bank, but the Canadian bank receives Canadian dollars. However, XRP has not been widely used as a bridge currency. 

Ripple Labs Inc, the company that operates the Ripple network, is responsible for creating the asset XRP, which is used as the medium of exchange and to pay transaction fees. Ripple was created in November 2012 by Chris Larsen, Arthur Britto, and Jed McCaleb. The project eventually rebranded several times until ultimately settling on Ripple Labs Inc in September 2013. Ripple premined and minted XRP in 2012. 

As described above, XRP is but one option to use as a bridge currency and is not required to use the Ripple network. This optionality, coupled with the legacy financial system’s unfamiliarity with non-sovereign digital currencies, has led to somewhat suppressed adoption among banks and financial institutions. While financial adoption has been sparse (especially due to the SEC vs. Ripple lawsuit), an estimated 15% of all crypto users have exposure to XRP.  It is also important to recognize that XRP differs significantly from other cryptocurrencies such as Bitcoin and Ethereum. Bitcoin and Ether are designed for maximum censorship resistance, security, and non-sovereign, peer-to-peer transfers of value. 

By contrast, XRP was never intended to be censorship-resistant or used for peer-to-peer payments. Instead, the Ripple network aims to improve international bank payments by increasing global liquidity, reducing friction in remittances, and providing a fast and cheap bridge currency for the world.

Other Use Cases

The XRP Ledger (XRPL) currently offers a limited set of functionalities, including a token standard and a decentralized exchange (DEX). This DEX, exclusive to the XRPL, facilitates the exchange of fungible tokens and non-fungible tokens (NFTs). It operates as a public infrastructure, serving as a unified liquidity layer for "gateways" that provide average users with interfaces to the exchange. While the DEX currently operates on an order book model, there are plans to introduce an automated market maker (AMM) that would enable users to earn fees by passively providing liquidity to pools.

However, unlike Ethereum and Solana, which are Turing-complete smart contract blockchains, the XRPL does not support smart contracts. This limitation restricts the chain's ability to support crypto activities beyond swaps through the native DEX. XRPL Labs, a software developer for the XRPL, is working to introduce smart contract-like functionality to the XRPL through a feature known as "hooks." Although these hooks are not Turing complete and cannot process arbitrary logic, they will enhance the XRPL's programmability by allowing conditions and triggers to be attached to transactions.

The potential applications of hooks include auto-savings hooks for automatic transfer of a specified amount of XRP into a separate savings account, carbon-offset hooks that could charge a transfer fee on each transaction and send it to an NGO's account, and firewall hooks that could restrict a wallet's interactions with a known blacklist of spam accounts or impose account spending limits.

Despite the limited use cases unlocked by hooks, the XRPL prioritizes minimizing complexity, making it challenging to introduce further smart contract-like functionality at the Layer 1 (L1) level. To address this challenge, several teams in the XRP ecosystem are developing side chains to enhance the network's functionality. For instance, Peersyst is developing an Ethereum Virtual Machine (EVM) sidechain as a proof of concept for bringing smart contracts to the XRPL ecosystem.

Ripple Labs, a major contributor to the XRPL's technical success, promotes the use of its crypto-enabled solutions tailored for institutions and governments. However, this activity is facilitated through RippleNet, a closed network of banks and financial institutions, rather than the public XRPL. RippleNet supports cross-border payments and provides liquidity on crypto assets through a feature called "On-Demand Liquidity," which uses XRP as a bridge currency for transactions.

Ripple claims to have engaged with over 20 countries since early March 2023 on their Central Bank Digital Currency (CBDC) plans. However, it's important to note that while the CBDC platform is based on the XRPL, it does not require XRP to operate. Despite Ripple's numerous partnerships and efforts to promote the benefits of blockchain technology, its technology has yet to see significant real-world adoption.

The recent U.S. Court ruling that XRP is not an investment contract may open the door for Ripple Labs' U.S. banking partners to further implement XRP into their systems. However, considering the lack of adoption by international entities, the prospects of this happening remain uncertain. The ongoing lawsuit from the Securities and Exchange Commission (SEC) and the potential for XRP to be classified as a security in the United States are not likely to influence the decisions of a central bank outside the jurisdiction of the American legal system seeking to implement a CBDC system.

In conclusion, while the XRPL is making strides towards enhancing its functionality and expanding its use cases, it still has a long way to go before it can compete with fully-fledged smart contract platforms like Ethereum and Solana. The future of XRP and its potential for widespread adoption remains uncertain, and investors should carefully consider these factors when making investment decisions.