Most recent update: [June 30, 2023]
What is XRP?
XRP — informally known as “Ripple” — is a digital asset that operates on the XRPL Ledger, an open-source blockchain technology created in 2012. Designed for fast and low-cost international money transfers, it aims to streamline the process of cross-border transactions by providing a decentralized network that enables real-time settlement. Unlike Proof-of-Work cryptocurrencies like Bitcoin, XRP does not rely on mining; instead, all XRP tokens were pre-mined at inception.
One of the key features of XRP is its use of a consensus algorithm called the Byzantine Fault Tolerant Consensus Mechanism, which ensures that the network can continue to process transactions in challenging circumstances but to also fail as gracefully as possible in the event where 20% of network validators or more begin to act maliciously.
Overall, XRP has gained attention from financial institutions and banks due to its potential to revolutionize cross-border payments. Its fast settlement times, low transaction fees, and scalability make it an attractive option for institutions looking to improve their international remittance services.
Who is behind XRP?
In June of 2012, XRP was created simultaneously with the XRP Ledger by three engineers: David Schwartz, Jed McCaleb, and Arthur Britto. After studying Bitcoin and its limitations, they devised to create an improved version that would be more sustainable and built specifically for payments purposes.
In September of that year, Chris Larsen joined the trio to form a company called NewCoin that would eventually be rebranded to OpenCoin and now Ripple. Of the 100 billion of XRP pre-mined at inception, the XRPL founders gifted80% to Ripple, the majority of which was placed in escrow. Therefore, from a chronological perspective, the digital asset XRP was created before the company Ripple, and the initial distribution of the tokens was conducted as a gift transaction rather than a sale.
Today, David Schwartz is the Chief Technology Officer (CTO) at Ripple, and boasts of a strong background: he filed a patent (US5025369A) for a multilevel distributed computer system back in 1988, and at one point had consulted for the National Security Agency (NSA). Jed McCaleb is the co-founder and CTO of Stellar, a spinoff of Ripple, while Arthur Britto currently holds the position of co-founder and President of PolySign, an institutional-grade digital asset custodian.
How does it work?
XRP operates on the XRP Ledger, a decentralized blockchain technology that facilitates fast and low-cost cross-border transactions. XRP uses the Ripple Protocol Consensus Algorithm (RPCA) to achieve consensus on the state of the XRPL Ledger. This mechanism relies on a network of trusted validators to agree on the order and validity of transactions.
When a transaction is initiated, XRP tokens are used to facilitate the transfer of value across the network. Within 3-5 seconds, validators communicate with one another to reach a consensus on the order and validity of transactions. Once a consensus is reached, validated transactions are added to the ledger, thus forming a new block. Since the XRP Ledger does not run on Proof-of-Work, it does not need to solve complex mathematical puzzles and therefore can maintain a consistent ledger close time of 3-5 seconds all the whilst being energy-efficient.
Since the XRP Ledger can handle a high volume of transactions per second, it can allow for quick settlement times and thus serve its intended purpose of being a network specifically built for payments.
The XRP Token and Tokenomics
XRP tokens are currently available for sale on multiple exchanges worldwide. The maximum supply is capped at 100,000,000,000 tokens, and as of June 30th 2023, the market cap for XRP amounted to approximately US$24 billion. The circulating supply of XRP tokens is around 52 billion, with the remaining locked in Ripple’s escrow with pre-determined monthly releases that would prevent the company from “dumping” all its holdings on the market even if it wanted to.
The initial distribution for XRP is broken down as follows:
- Retention by Developers: 20%
- Gift to Ripple: 80%
The XRP token is purported to serve as a utility token to pay for transactions on the network and to also be used a liquidity mechanism for value transfers.
The XRP Ledger does not rely on mining nor on staking. As such, throughout the entire life cycle of an XRP transaction, there is no incentive that could encourage wealth concentration or hash-rate monopolies. As explained by David Schwartz, the best incentive is to have no incentives, thus allowing for a distributed system that breeds natural alignment among stakeholders.
Therefore, in contrast to Proof-of-Stake blockchains, XRP Ledger transactions cannot be re-organized nor prioritized based on the number of XRP tokens that any one validator holds. And, unlike with Proof-of-Work blockchains where miners could collude to control said network by amassing 51% of its hash rate, the XRP Ledger requires an 80% consensus from its validators to allow the network to progress, in effect making it a democratic network by design.
Finally, for any amendments to the XRP Ledger to pass, 80% of network validators would have to agree for a continuous period of two weeks. In further demonstration that Ripple does not control the XRP Ledger despite its large holding of XRP tokens, an amendment to the ledger called “CheckCashMakesTrustLine” was passed in 2022 without the company’s approval.
Drawbacks and risks
The initial token distribution of XRP continues to face criticism due to its overwhelming majority being in Ripple’s possession. Some individuals purport it would allow the company to “dump” on the market at any given time, and some argue that such token concentration among one company makes the XRP Ledger a centralized network.
Finally, other criticisms concern the alignment some XRP Ledger validators since a handful of them, although independent of Ripple, have nonetheless chosen to configure themselves to mirror Ripple’s validators.
Before listing XRP on the VirgoCX Platform, VirgoCX performed due diligence on XRP and determined that XRP is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis includes reviewing publicly available information on the following:
- The creation, governance, and location of XRP and/or its primary development team;
- The supply, demand, maturity and liquidity of XRP; and
- Legal and regulatory risks associated with XRP.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30th 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario) and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.
To learn more about the technology behind XRP, check out these in-depth resources here: