Understanding the Differences Between XRP and Ripple

People sometimes confuse and misuse "companies" and "their digital assets." A common misconception in crypto is the difference between XRP and Ripple. You might wonder if XRP and Ripple are the same, as some people even refer to XRP as "Ripple." However, that is not the case. This article explains this confusion, showing the differences and interrelations of the XRP vs Ripple terms within the crypto ecosystem.

What is Ripple?

Ripple is a top digital currency by market capitalization that aims to use blockchain technology to facilitate international payments. It is a financial technology company and what it does is to assist financial organizations in making and receiving payments efficiently. 

Ripple started in 2004 in Vancouver, Canada, created by Ryan Fugger. He wanted to create a secure global payment network, and he then founded RipplePay. In 2012, he sold the company to Jed McCaleb, Arthur Britto, and David Schwartz. It was then renamed to OpenCoin, concentrating only on digital currency. In 2013, Jed McCaleb split Ripple to form Stellar. They renamed the company to Ripple Labs that year and shortened it to Ripple in 2015. Since then, banks all over the world have engaged with Ripple.

RippleNet

RippleNet is the company's main payment network. It aims to modernize and simplify international transactions. It gives any financial institution a fast, real-time gross settlement system. It can also exchange currencies and remit money efficiently. RippleNet uses blockchain and unique liquidity solutions. It solves the issue in traditional cross-border payments and connects banks, payment services, and financial institutions on a decentralized network. It allows for the secure and instant transfer of funds. RippleNet is different from traditional systems like SWIFT. SWIFT uses many banks to process transactions, while rippleNet enables direct, quick settlements between users. 

RippleNet functions around three core solutions, including:

• xCurrent: A simple way to describe xCurrent is that it is a messaging and settlement system for real-time bank payments.
• xRapid: It uses XRP as a bridge currency. It sources liquidity instantly without pre-funding accounts. 
• xVia: A simple API for businesses and payment providers. It connects them to RippleNet services.

Key Features of RippleNet

• Fast transaction speeds: Ripple payments take 3 to 5 seconds, while traditional systems take several days. The XRPL, which supports RippleNet, can support 1,500 TPS.
• Low transaction costs: XRP transactions are cheap and much cheaper than banks.
• Liquidity on demand: RippleNet lets banks use XRP as a bridge currency, eliminating the need for pre-funded accounts in multiple currencies.

The Centralized Nature of Ripple

Ripple uses blockchain technology, not like decentralized cryptocurrencies, such as Bitcoin and Ethereum. It differs in control and governance. Unlike Bitcoin, which allows its network participants to mine transactions, RippleNet and the XRP Ledger use a Unique Node List for consensus. A set of trusted nodes, called validators, validates XRP Ledger account transactions. Ripple and other approved entities mainly choose these nodes. Ripple controls the network's development. This includes updates to its consensus protocol and system improvements. Many see this as proof that RippleNet is not decentralized. Ripple Labs still controls the network's basic direction.

What is XRP?

XRP is the traditional cryptocurrency of the XRP Ledger. It is a decentralized blockchain that does fast and efficient financial transactions and payments. Ripple Labs, in 2012, created XRP. Their goal was to improve payments between borders and bank liquidity. Ripple made XRP to improve global payments and make currency exchange and remittances easier. It mainly serves as an intermediate currency. This helps institutions transfer value across borders without needing correspondent banking.

The key features of XRP include: 

• Pre-mined supply: XRP was designed with a fixed supply of 100 billion tokens. It also doesn’t generate new coins. This means that no one will ever create a new XRP, ultimately preventing inflation.
• Divisibility: XRP is very divisible. It has great potential for microtransactions in future finance, enabling precise payments and extremely low transaction fees.
• High Speed and Scalability: XRP transactions settle in 3–5 seconds. Bitcoin takes longer, which is sometimes 10 minutes to an hour, and Ethereum uses more than 15 seconds for a transaction. Another speed feature related to its speed is that XRPL can scale up to 1,500 transactions per second, which is very unlikely among most blockchains.

The Differences Between Ripple and XRP

Breaking down the differences between XRP and Ripple, see how it is best explained: 

Definition

XRP: XRP is a digital asset. This asset then works with what is known as XRP Ledger, which is a blockchain. It makes users and businesses conduct fast and inexpensive international transactions. To transfer value between two currencies, XRP is your best bet because it is a fast, liquid way to do so. This then helps to provide liquidity for banks and other financial institutions.

Ripple: Ripple, on the other hand, is a finance and technology firm. It creates products for banks to manage and operate their payments. RippleNet is one of its products that makes use of blockchain technology for payments. So, the simple way to define it is that Ripole designs and promotes the technology, while XRP is an asset used within that operation.

Purpose

XRP: XRP is an intermediate currency that helps banks make quick and low-cost international payments. It is a bridge for deals between two fiat currencies without needing accounts in both, which massively cuts down on time and the cost of international money transfers.

Ripple: Ripple wants to provide infrastructure for global payment networks. It aims to help banks and financial firms upgrade their payment systems. It uses RippleNet as a solution to achieve this. 

Control

XRP: XRP operates a distributed ledger that is decentralized by XRP Ledger. This ledger is maintained by a network of unique validators. These validators reach a consensus on transactions. No central authority oversees this network. XRP is decentralized, so it is very different from other cryptocurrencies. For example, Bitcoin heavily depends on how you mine it.

Ripple: Ripple keeps XRP centralized. It controls network protocols and software development. Also, most early users were validator nodes. Ripple has been working to decentralize the network. They are adding independent validators to the XRP Ledger. However, ripple's influence on the network's development and validator selection is clear.

Supply

XRP: The XRP token's price maximum supply caps at 100 billion tokens. Since developers pre-mined XRP, they will not mine any new tokens. The supply at the creation time was pre-determined, and Ripple Labs held most of it. Much of the XRP supply is in escrow. This is to prevent flooding the market and keep supply stable.

Ripple: 60% of the total supply of 100 billion XRP tokens, or most of the supply, is owned by Ripple. It sold XRP slowly from its escrow to avoid disrupting the market. However, its currency ownership raised concerns about centralized manipulation of its value and supply. The fact that it can release a bulk amount of XRP from the escrow keeps the market wary of Ripple.

How XRP and Ripple Work Together

1. Acts as a Currency Bridge for International Payments: You already know that many cross-border payments usually use many intermediaries and take a long time before the transaction is successful. Banks must keep pre-funded accounts in multiple countries to facilitate transactions. This ties up capital and raises costs. With XRP, there is no more need for pre-funded accounts because it is already acting as the bridge between two currencies. 
2. No More Nostro/Vostro Accounts: Financial institutions can use XRP as a bridge currency. This means they don't need to pre-fund accounts in other countries. This is described as removing the need to hold nostro/vostro accounts, which, conventionally, a bank needs to hold funds in foreign currencies to settle its payments. This is important for transferring global liquidity. It had become illiquid earlier for small or emerging market currencies.

XRP Ledger (XRPL)

The XRP Ledger is a decentralized blockchain that allows XRP to act as the backbone for all transactions of Ripple, thus allowing a secure, fast, low-cost value transfer between the sender and the receiver. It is different from many native blockchains, like Bitcoin. Whereas Bitcoin uses proof-of-work to confirm transactions, the XRP Ledger uses its method. It uses a unique consensus mechanism, the  Ripple Protocol Consensus Algorithm, RPCA.

RPCA allows quicker transaction confirmation. It does this by using a network of independent validators. They agree on the ledger's transaction history, not on mining for validation. It chooses a set of validators for their reliability. They independently verify each transaction's correctness. Usually, once 80% of the supermajority of validators agrees on the transaction, it automatically gets added to the ledger. This is why XRP and XRP Ledger, are a fast and cheap solution for every cross-border payment.

Pros and Cons of XRP and Ripple

In cryptocurrency and all global payments, these terms both have their good and bad sides. We’ll highlight some of these advantages and disadvantages for you below:

Pros of XRP

• XRP stands out for its high transaction speed, giving it a significant scalability edge. When making a transaction, you could be done in just about 3-5 seconds. In a way, this makes XRP perfect for all cross-border financial transactions.
• Transaction Fees are Quite Low: You should know that XRP has very low transaction fees, sometimes, it’s not even up to a cent. This makes XRP great for all kinds of remittances and microtransactions.
• Energy Efficiency: Compared to Bitcoin and Ethereum, XRP is honestly more efficient. This is because it utilizes the Ripple Consensus Ledger and is not mining-based at all, unlike Proof of Work.

Disadvantages of XRP

• Centralization Concerns: Centrality is one such criticism XRP faces. The criticism began due to Ripple Labs' control over the total supply and price of XRP by a huge 60%. This happens because of the many fears regarding market manipulation. Now, because of this, it is very easy for Ripple to change the supply of XRP. They can do this by releasing tokens from their escrow accounts. They could also decide not to release it.
• Regulatory Problems: Another major downside of XRP is that some of its regulations are too strict. Recently, the US SEC debated whether XRP remained either a security or a commodity. Now, because of this lawsuit filed, there have been some questions being asked about the future of XRP in some markets.

Advantages of Ripple

• Global Trust and Adoption: Ripple is trusted by many global financial institutions and is a top provider of blockchain payment tech. It offers fast, scalable, and efficient ways to settle and make payments. 
• Integration of Multiple Currencies: The good thing about Ripple is that it can share or pair with more than one currency. They could even include fiat currencies, for example, USD, EUR, and JPY, and even cryptocurrencies. Cross-currency compatibility makes RippleNet a versatile payment platform for many users.

Cons of Ripple

• Decentralization Issues: RippleNet has very little core network decentralization. The company has strong central control over the Ripple network protocol development and validator selection. 

Legal Status of XRP

Recently, there has been a debate in the United States that started in December 2020. It is related to the nature of XRP, where Ripple Labs was fighting against the allegations from the Securities and Exchange Commission (SEC). Now, on July 14, 2023, a U.S. court ruling was held to explain the legal status of XRP and what was truly going on. The court drew a line in terms of the two main types of sales or transactions of XRP:

• XRP as a Security for Institutional Sales: The first thing that the court ruled was that XRP is a security in sales to all institutional investors and over-the-counter trades. They include large-scale buys made by banks, hedge funds, and other financial institutions. During the ruling, the court used the Howey Test to decide and determine if an asset is truly a security. It found that institutional buyers expected a profit from Ripple Labs' efforts. This means Ripple might face scrutiny over securities regulations. This concerns sales to institutions and related registration and disclosure requirements. 
• XRP for Retail Investors as Not Being Classified as a Security: From that meeting, the court also ruled and decided that XRP is not a security if it has already been sold to retail investors on exchanges like Binance or Coinbase and for on-demand liquidity transactions. The main reason for this was because there was no expectation of profit from Ripple's actions and these retail buyers had no direct contact with Ripple Labs. The retail buys of XRP were for trading, remittances, and holding. They were not for investing in Ripple itself.

Implications for Ripple Labs and Institutional Sales

The decision complicated regulations for Ripple's institutional sales. It relieved retail investors and exchanges. For Ripple Labs, it means a greater regulatory load. The thing is that Ripple might have no choice but to register XRP as a security for institutional sales, and they’ll have to follow the SEC's regulations. For selling XRP to institutional investors before registering it as a security, there is a big chance that they could also face fines and penalties. Also, these legal and compliance problems could make major financial institutions reluctant to use XRP. However, this ruling doesn't bar institutions' complete usage of XRP; they might use them, but they'll have to comply with the increased regulatory demands.

Implications for Retail Investors and Crypto Exchanges

However, retail investors' feelings were glad that XRP was ruled not to be a security in its programmatic sales. For retail investors, this would mean: 

• No security regulation restriction on XRP trading
• More market confidence refers to an improvement in retail adoption.
• No delisting on major exchanges like Coinbase and Binance 

Also, the ruling has wider effects on U.S. regulation of cryptocurrencies. This sets a precedent for how regulators can classify cryptocurrencies:

• Security vs. Utility: Depending on the transaction, digital assets could be an investment (security) or a utility token.
• Regulatory clarity: The ruling indicated how digital assets could be regulated. However, uncertainties still exist since the SEC is still suing other crypto projects. 

Ripple's ability to meet new regulations while boosting cross-border payment adoption will determine if large financial firms adopt XRP-based liquidity solutions. However, the legal battle intensified when both Ripple and the SEC filed appeals on October 3, 2024. The appeals process moved to the Second Circuit Court of Appeals, adding more uncertainties for the cryptocurrency market.

Use Cases Beyond Payments

XRP and Ripple are known for improving cross-border payments. But, their use goes beyond just faster, cheaper transactions. Some of their use cases include:

Smart Contracts and dApps on XRPL

XRP is not a smart-contract-centric cryptocurrency like Ethereum. Recent changes, like the Hooks amendment, affect the XRP Ledger's ability to host dApps and smart contracts. Also, the Evernode project offers a layer 2 smart contract solution for the XRPL. Hooks lets developers run their code before and after transactions on XRPL. This enables automated financial services, governance systems, and decentralized protocols.

Tokenization of Assets: Real Estate, Commodities, and More

A key use of XRP and its Ledger is tokenizing real-world assets. This means that all assets are represented as tokens on a blockchain. This enables fractional ownership, better liquidity, and easy transfers. XRPL allows for custom tokens created by businesses and people to represent assets.

Use Cases for Ripple

Partnerships with Banks and Financial Institutions

Ripple's main business model is selling blockchain payment solutions. It targets banks, financial institutions, and payment providers. RippleNet lets these institutions transfer money internationally. It's faster, cheaper, and settles in real time.

Liquidity Management

Ripple's ODL gives banks on-demand liquidity. It uses XRP as a bridge currency. This removes the need for banks to pre-fund nostro accounts, thus dramatically reducing capital requirements.

Cross-Border Settlement

Ripple's tech lets banks and remittance firms transfer funds across borders in seconds, boosting global trade and economic activity.

Conclusion

Anyone interested in digital assets must be able to differentiate XRP vs Ripple. It is key to understanding blockchain-based financial solutions. Ripple is a fintech company that helps banks and institutions with payment infrastructure. XRP, on the other hand, is a digital asset. It is made for quick and low-cost transactions on the XRP Ledger. XRP and Ripple will shape finance's future as the crypto world changes; one as a technology company changing the face of payments and the other as a digital asset that makes seamless transactions possible in an increasingly digital world.