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Last week brought great news for Ripple Labs as it achieved a significant court victory in its ongoing battle with the U.S. Securities and Exchange Commission. This win has finally lifted the long-standing regulatory cloud that had loomed over the project for several years.
A prevailing critique throughout history aimed at the XRP Ledger, the core of this case, by blockchain purists, revolves around its perceived centralization in terms of technological design. Nonetheless, this lingering criticism remains a significant aspect.
A descendant of Bitcoin but incorporating concepts dating back to the early 2000s, the XRP Ledger, also known as "XRPL," operates on a distinctive tradeoff. It enables its central transaction-processing mechanism to be governed by a significantly smaller group of "validators" or key operators compared to numerous competing blockchains.
“Ripple basically said, ‘Hey, let's make Bitcoin adoptable by institutions,’ so they created their own version of a decentralized currency that was faster and more consistent and cheaper,” according to a former Ripple Labs employee who asked not to be identified so he could speak more freely without upsetting old colleagues. “But it did come with a trade-off of greater centralization compared to Bitcoin.”
Improved benefits in terms of security, speed, and throughput are evident in centralized networks. However, the trade-off is that these networks become more vulnerable to the influence of dominant entities and are prone to single points of failure.
The XRPL stands as a captivating project in its own regard, having been one of the early pioneers in the blockchain industry. Currently, its native token XRP boasts an impressive market capitalization of $42 billion, ranking as the fourth-largest among the vast array of cryptocurrencies. Notably, it has garnered significant interest from major financial institutions, such as Bank of America, which have become partners in its endeavors.
The XRPL's innovation extends to incorporating NFTs directly into its underlying programming, a feat that only a few emerging competitors are now starting to achieve. Moreover, the platform is continuously advancing, with plans to introduce smart contract-like functionality in the near future. Additionally, third-party sidechains are gaining momentum, further enhancing its potential and scalability.
There are clear potential use cases, such as global remittances, but Ripple harbors distinct ambitions compared to numerous rival blockchain projects. Unlike these projects, where decentralization serves as an organizing principle, Ripple's goals diverge significantly.
‘Bitcoin for Bankers’
In 2004, a Canadian programmer named Ryan Fugger introduced Ripple, which, at its inception, differed from traditional blockchain projects. Remarkably, cryptocurrencies, as we recognize them today, would only emerge four years later. Originally known as "RipplePay," it operated as a peer-to-peer payment network, emphasizing both convenience and security.
In 2011, Fugger made the decision to sell RipplePay to Jed McCaleb, Arthur Britto, and David Schwartz. Together, they embarked on creating a novel payment system, drawing inspiration from Bitcoin, which had emerged a few years prior but had not yet gained widespread recognition.
The trio's mission, which later merged with RipplePay, aimed to create a seamless connection between blockchain technology and traditional finance. They sought to achieve this by facilitating faster transactions, reducing fees, and minimizing energy costs. Their pioneering venture, initially named "OpenCoin," eventually underwent a rebranding, becoming the well-known organization we recognize today as Ripple Labs.
Ripple's standing within the cryptocurrency community was intricate from the very beginning.
“When Ripple was just my project pre-2012, it had a limited, but generally good reputation in the alternative currency/nascent crypto community,” Fugger, who briefly stayed on with Ripple Labs as an advisor but no longer works at the company, said in an email to CoinDesk. “When Jed et al took it on, they were hoping to build on that reputation.”
During the period when RipplePay was taken over by OpenCoin, the nascent blockchain industry was largely monopolized by Bitcoin. Bitcoin had gained significant momentum in the aftermath of the 2008 financial crisis as a means to challenge a corrupt financial system.
Bitcoin's revolutionary achievement was leveraging cryptography to enable secure online transactions without relying on trusted intermediaries.
Driven by a "decentralized" community of miners, bitcoin revolutionized the payment technology, guaranteeing that no single individual or organization could manipulate transactions or impede their speed.
Contrary to Bitcoin, which aimed to disrupt the traditional banking system, Ripple's primary focus lies in making incremental enhancements to the current financial infrastructure.
Not everyone was in agreement. Although Fugger is no longer involved in the blockchain industry and holds the belief that XRP's reputation has improved over the years, he still remembers that during the project's initial phases, “XRP was quite polarizing, and viewed negatively by many in the Bitcoin community -- mining purists, Bitcoin maximalists, etc.”
Ripple's primary purpose for XRP initially revolved around facilitating fast and cost-effective cross-border payments through a feature known as "On-Demand Liquidity" (ODL). This innovation utilized XRP as an intermediary asset, enabling banks and financial institutions to seamlessly transfer funds between different currencies. As time progressed, Ripple Labs broadened its vision to encompass other valuable use cases, such as central bank digital currencies (CBDCs). CBDCs essentially represent digital counterparts of government-issued fiat money.
In the future, Ripple envisions becoming the ultimate successor to SWIFT - the messaging network that currently drives the global payments system.
Crypto purists and bitcoiners disdain Ripple's numerous financial and central bank partnerships, claiming they contradict the fundamental principles of "decentralized" payment networks. On the other hand, the passionate XRP Army, known for their fervent enthusiasm (sometimes displaying mob-like behavior), advocates a contrasting perspective.
“Bitcoin in its white paper is anti-bank, anti-establishment,” a prominent XRP Army member told CoinDesk’s Jeff Wilser earlier this year. “The libertarian in me loves it. The libertarian in me absolutely goes f#$king nuts for it. I’m like, ‘Hell yeah, down with the man!’”
“As an adult, I understand that the legacy firms, and systems, and governments, and central banks of the world aren’t going for any of that shit.”
Centralization concerns
Critics of Ripple frequently raise concerns about the consensus mechanism employed by the XRP Ledger, which is the underlying method utilized to ensure the secure processing of transactions.
In the realm of cryptocurrency, Bitcoin employs the "proof-of-work" system, where individuals have the opportunity to participate in block mining competitions and receive rewards. On the other hand, Ethereum utilizes the "proof-of-stake" mechanism, which allows anyone possessing a sufficient amount of ETH tokens to actively participate in securing the network by staking their currency and earning interest in return.
Ripple's system, known as "proof of association" (PoA), operates in a more closed manner. Each XRPL server operator is obligated to create a list of trusted validators called the "Unique Node List" (UNL), responsible for verifying the state of the blockchain. While anyone can set up a validator, only those deemed "trusted" and included in the UNL are granted the authority to directly process transactions.
Ripple Labs, alongside two closely-linked entities – the XRP Ledger Foundation and Coil – jointly releases a set of endorsed validators for the network. Server operators are strongly encouraged to adopt one of these pre-approved "default" UNLs instead of creating their own list of validators.
PoA serves the dual purpose of cost-effectiveness and energy efficiency. In contrast, Bitcoin mining is renowned for its energy-intensive nature, while Ethereum staking demands substantial initial capital investment. Notably, both Ethereum and, to a greater extent, XRPL, impose considerably higher transaction fees than XRPL.
Nevertheless, XRPL is undoubtedly characterized by a higher degree of centralization in comparison to the raw number of validators that manage its network. The XRP network operates with approximately 100 validators - a significantly smaller quantity when contrasted with Bitcoin, which relies on over 1 million miners (though it is worth noting that Bitcoin's system also grapples with its own concerns regarding concentrated power).
Furthermore, XRPL's most frequently utilized default Unique Node List (UNL) consists of merely approximately 35 validators. This indicates that less than thirty-five entities hold a disproportionately significant responsibility in maintaining the chain's integrity and accuracy. However, if a sufficient number of these operators conspire to undermine the network, they could potentially, at the very least, disrupt the chain's ability to process transactions in real-time (chain's liveness).
PoA is presented as a significantly more secure option for partner institutions, as the blockchain is operated solely by "trusted" entities.
“You can't just come in with a billion dollars and say, ‘I have enough for 1,000 Ethereum validators, I'm gonna run them all; I just bought my way into owning part of Ethereum consensus,’ or ‘I'm gonna buy a bunch of mining hardware, and I have more money than you, so I can get a larger share of Bitcoin protocol consensus than you can,’” explained Red Sheehan, a research analyst at Messari who writes regular reports on XRPL commissioned by Ripple Labs. “That's just not possible with Proof of Association.”
Nevertheless, advocates of decentralization argue that PoA systems fundamentally counteract the essence of distributed ledgers - the concept that trust should be entirely eliminated from the equation.
XRP token
Ripple's detractors primarily focus on the initial distribution of the XRP token. Ripple Labs has been careful to draw a distinction between "Ripple" and "XRP," arguing that the initial allocation of XRP tokens, with 80% going to Ripple Labs and 20% to its founders, was a "gift" from the open-source developers of the XRPL (XRP Ledger). However, critics find it challenging to overlook Ripple Labs' substantial involvement in building and shaping the XRPL.
Over the years, Ripple Labs has gradually reduced a significant portion of its XRP holdings, engaging in various strategies to accomplish this. These approaches have included conducting over-the-counter transactions with institutional investors and facilitating programmatic sales on cryptocurrency exchanges to reach retail investors.
Ripple Labs retains its position as the largest holder of XRP tokens, sparking concerns regarding the potential impact on the asset's price through possible manipulation. Nevertheless, a significant portion of the company's remaining XRP holdings is securely placed in an escrow account, imposing restrictions on Ripple Labs from selling more than 1 billion XRP in any single month.
Smart contracts and sidechains
Apart from XRP's initial distribution and XRPL's consensus mechanism, the XRPL ecosystem has faced challenges in achieving widespread adoption beyond a restricted range of use-cases.
On one hand, Ripple's exclusive suite of products known as "RippleNet," which is built on XRPL (XRP Ledger), has been witnessing a steady surge in adoption by banks. According to Sheehan, “Institutional tools – whether that be on-demand liquidity or whether that be CBDCs – seem ahead, I'd say, of other chains.”
However, Sheehan suggests that the adoption of retail-focused use-cases on the XRPL, such as NFTs, has encountered challenges in gaining similar traction.
One possible reason for XRP's difficulties in gaining user traction could be attributed to the absence of programmable smart contracts on the XRP Ledger. Programmable smart contracts are blockchain-based computer programs widely utilized by modern blockchains such as Ethereum, enabling the functionality of community-driven NFT (Non-Fungible Token) and decentralized finance (DeFi) ecosystems. Due to the XRP Ledger's lack of this feature, it may have hindered its ability to compete effectively in attracting users.
The ex-Ripple Labs employee who spoke to CoinDesk suggests that critiques regarding XRPL's technology should take into account the chain's age: “It’s literally a decade old. It’s easy for the Ethereum community to look at it today and be like ‘Oh my god, you can't even do smart contracts, that's ridiculous.’ But it's older than Ethereum.”
XRP deserves recognition for pioneering one of the first decentralized exchanges (DEX) and being an early home for Non-Fungible Tokens (NFTs). However, compared to newer blockchains, XRPL's DEX and NFT ecosystem lack the depth and versatility, leading to limited adoption.
Fortunately, there is a promising opportunity for the expansion of XRP Ledger's programmability. Various third-party entities are actively developing "sidechains" that enable writing transactions to XRPL while also enhancing its capabilities through advanced features such as smart contracts. One of these sidechains is currently undergoing testing and is built on the Ethereum Virtual Machine, which potentially allows the XRP ecosystem to access a range of applications and smart contracts similar to those found on Ethereum and other comparable blockchains.
An exciting development on the XRPL network is the official proposal to incorporate "hooks." These hooks can be likened to mini smart contracts and are currently undergoing testing. Once implemented, hooks will empower users to include custom code that automatically executes in response to specific types of transactions. This enhancement is poised to bring increased functionality and flexibility to the XRPL ecosystem.
Ripple’s future
In 2012, when Ripple initially entered the market, it stood out as one of the pioneering blockchain projects that fearlessly welcomed the involvement of traditional banks. Additionally, it distinguished itself as one of the earliest blockchains to break away from Bitcoin's conventional mining approach. However, these bold steps were met with disapproval from the crypto community, and this sentiment continues to persist to this day.
Notwithstanding a mixed reputation within certain circles of the crypto community, Ripple's SEC lawsuit has garnered it fresh allies – some reluctantly, while others more enthusiastically.
Many of the shifts in XRP's stance are influenced by political factors – for example, the saying 'the enemy of Gary Gensler is my friend'. However, there are also indications that some are open to re-evaluating Ripple as a whole.
For example, Ryan Selkis, the founder of Messari and once a critic of XRP, has urged the industry to unite in support of the project.
“I've been critical of Ripple in the past (various reasons), but more aligned with them than ever before,” he said in March in a now-deleted tweet. “Ripple should win the overreaching XRP-SEC case, and the XRP Ledger should be afforded the opportunity to compete fairly on digital payments infra globally. Demand is there!” (Selkis appears to have deleted all of his tweets from before May 28, 2023 – not this one in particular.)
Not only has Ripple gained new allies due to the SEC lawsuit.
In 2023, the concept of centralization has evolved into a spectrum, with a noticeable increase in the prevalence of low-fee, "permissioned" blockchain projects compared to the situation in 2012. Ripple's aspirations of being banking-friendly, which diverge significantly from Bitcoin's libertarian and anarchist origins, now appear much more recognizable in today's context than they would have a decade ago.
While Ripple may face challenges in convincing Ethereum and Bitcoin maximalists to embrace its platform, there is undeniably a significant demand for blockchain products that cater to institutional needs, attracting both investors and developers. Provided Ripple Labs successfully navigates the SEC case and XRPL continues to make strides in enhancing its programmability, the project stands a strong chance of capitalizing on a fresh surge of enthusiasm and interest.
Source Coindesk
