What Is Ripple? Full Investment Review

Discussion in 'Ripple (XRP)' started by SimoCoin, Dec 23, 2017.

  1. SimoCoin

    SimoCoin Moderator Staff Member

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    1. WHAT IS RIPPLE?
    In Their Words

    Ripple is a global real-time settlement network; its system aims to connect banks around the world to allow for cross-border payment systems.

    In Our Words

    Ripple is a Cryptocurrency which is aiming to work with the banks. As the core premise of Bitcoin and other Cryptocurrencies is to replace banks, Ripple has faced some serious backlash in the Crypto-world for its plans to assist banks Cryptos are aiming to replace banks, Ripple are going against

    2. HOW DOES RIPPLE WORK?
    Central Currency – XRP

    There are 3 elements to the Ripple platform that they regularly discuss (xCurrent, xRapid, xVia). However, for the purpose of this article, we’re only going to be discussing the main area which our readers will be familiar with – allowing banks to send money abroad.

    Ripple works by providing a bridge between currencies:

    Let’s say a bank wished to trade their GBP for an American banks USD. With the current system, this takes several days and can be costly.

    Ripple works by introducing a central currency, XRP.

    In other words, instead of directly trading GBP for USD, the UK bank would trade GBP for XRP and then trade XRP for USD.

    The reverse process would occur from the perspective of the US bank.

    Extra Step?

    While this may actually add an extra step to the process, each trade takes around 5 seconds and incurs a tiny fraction of cost.

    As a result, the banks have now traded GBP for USD in 10 seconds (compared to the old system of several days) and for less than a 0.1% fee.

    Above, we’ve described how the process occurs to use Ripple’s currency, XRP, as a means of speeding up cross-border trade while reducing fees.

    Below, we’re going to describe another advantage that Ripple offers – providing liquidity for smaller currencies.

    Liquidity Pool

    Let’s say:

    • Bank A has South African Rand (ZAR)
    • Bank B has Thai Baht (THB)
    • These two banks would like to trade their currencies.
    • In other words, Bank A would like to send ZAR from South Africa to Thailand and Bank B wants to send THB to South Africa
    Within the current system, this is very difficult to achieve because there is very low liquidity when trading ZAR/THB

    What Does Liquidity Mean?

    Liquidity essentially means the number of buyers and sellers in a market. The more people buying and selling, the higher the liquidity.

    Higher liquidity makes it much easier to buy or sell:

    Imagine you’re in a room with 2 people wanting to buy your currency and 2 people selling it. Now, imagine you’re in a room full of hundreds of people wanting to buy and sell.

    Which room do you think it would easier to make a trade in? The more buyers and sellers, the easier it is to trade.

    Ripple’s Liquidity Solution

    This is one of the reasons that it can be very difficult to trade smaller currencies such as the South African Rand and Thai Baht; because there isn’t enough liquidity to facilitate easy trading.

    Therefore, Ripple will be using their token as liquidity pool. In other words, every currency will first be traded with XRP. This process is identical to the process outlined above so we won’t go further into detail here.

    Instead, we’ll discuss how having a central currency increases liquidity in a market:

    Let’s say the following trades occurred in one day by 3 banks – a UK bank, a US bank and a European bank (ignore the inaccurate conversion rates used for simplicity):

    • £1 Million GBP traded for $1 Million USD
    • £1 Million GBP traded for €1 Million EUR
    • $1 Million USD traded for €1 Million EUR
    If you look at each of these pairs alone, they have a trading volume (liquidity) of 1 Million per day in their respective trading pairs – GBP/USD, GBP/EUR , USD/EUR.

    Introducing XRP

    Now, we’ll look what happens if we introduce a central currency (XRP) and carry out the exact same trades:

    Note: The example above involves 2 Million of each currency being traded per day hence we’ve used those same values below

    • £2 Million GBP traded for XRP
    • $2 Million USD traded for XRP
    • €2 Million EUR traded for XRP

    Hopefully, you can now see from this example that the liquidity of each trading pair (GBP/XRP etc.) has now risen from 1 Million per day up to 2 Million.

    Higher liquidity results in easier trading. For lesser traded currencies such as the Rand and Baht, this provides a huge benefit.



    3. ARE RIPPLE SOLVING REAL MARKET PROBLEMS?
    #1. PROBLEM – Slow Settlement Speeds

    In their current state, cross-border payments require a number of intermediaries to be involved in the process. This means that payments can take anywhere between three and five days to reach completion.

    RIPPLE’S SOLUTION

    The Ripple payment protocol will allow transactions to be completed within 5-10 seconds as opposed to 3-5 days

    #2. PROBLEM – High Operational Costs

    The number of intermediaries involved in the process not only affect settlement speeds but also cause transaction fees to be higher. The current average transaction fee for a $500 payment stands at $5.56.

    RIPPLE’S SOLUTION

    The average transaction fee for a $500 payment is reduced by over 60% to $2.21

    #3. PROBLEM – Payment Failure

    Currently an average of 4% of all cross-border payments fail, a failed payment is of course of no benefit to any party involved.

    RIPPLE’S SOLUTION

    All payments made using Ripple will be trackable on the blockchain

    #4. PROBLEM – Smaller Currencies

    Let’s imagine a bank wanted to send a payment of South African Rand to a another bank and receive Thai Baht in return. As an uncommon trading pair, it may take a significant amount of time for someone to match the trade.

    RIPPLE’S SOLUTION

    Ripple will provide a liquidity pool in order to improve on liquidity issues

    #5. PROBLEM – High Liquidity Costs

    Payments into emerging markets often require pre-funded local currency accounts around the world, as a result liquidity costs are often high.

    RIPPLE’S SOLUTION

    Ripple payments are a fraction of the cost of this
     
  2. SimoCoin

    SimoCoin Moderator Staff Member

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    4. WILL THE RIPPLE TOKEN PRICE INCREASE?
    This is another incredibly important point that people often overlook when investing in Cryptocurrencies – is the token price truly linked to the platform usage?

    Investing in Cryptos is not the same as traditional investing – when you buy shares in a company, you’re buying ownership. As the company makes increased profits, the share price will increase and your investment value will rise also.

    With the majority of Cryptocurrencies, the tokens don’t represent shares.

    Therefore, it’s possible for the company to be successful (i.e the CEO and employees get rich) and yet the token prices may actually fall if they aren’t correctly linked to platform usage.

    The ONLY factor determining token price is supply and demand on exchanges.

    Obviously, supply and demand are affected by many factors but the price all comes down to the combination of these two. Because of this, it is essential to ask yourself the following two questions:

    1. Demand – Will there be token demand on the exchanges?
    2. Supply – Will there be excessive inflation hindering prices?
    Let’s first look at demand:

    What Are The Sources of Demand?

    This section is actually very difficult for us to write as we’ve struggled to find sufficient information.

    It appears online that there is significant confusion surrounding this topic so we’re going to outline the two potential options which could be true:

    1. Banks Must Hold XRP Tokens
    2. Banks Don’t Need To Hold XRP Tokens
    From our research, it’s very unclear whether banks must first buy XRP tokens – to hold for liquidity purposes – or if they are able to use Ripple’s own liquidity pool.

    IMPORTANT: This difference above may not sound too significant but it is absolutely fundamental to determine if XRP is a good investment or not. We would NEVER invest without knowing which of these two options is correct.

    Below, we will explain why this difference is so important by highlighting the demand for tokens with both scenarios:

    Scenario #1. Banks Must Hold XRP Tokens

    This scenario assumes that banks must hold Ripple in their own liquidity pool in order to use the Ripple services.

    Banks are going to be very keen to use Ripple as it provides an incredible improvement on the current Remittances options.

    Therefore, there will be significant demand for XRP tokens.

    It should be noted that banks will be able to XRP directly from Ripple but they have committed to selling a maximum of only 1% of XRP per month (more on that in a second).

    Therefore, if banks wish to buy more XRP tokens than this, they will be forced to buy them on exchanges. As a result, this increased demand on exchanges should drive up token prices.

    If this scenario is correct, we are bullish on Ripple and we would consider adding some to our portfolio – they are providing a solution to a big problem for banks and investors shouldn’t undervalue this.

    However, we cannot commit to an investment as we cannot be sure that this scenario is correct. If scenario 2 is correct instead, we would remain well away from Ripple as an investment.

    Scenario #2. Banks Don’t Need To Hold XRP Tokens

    In this scenario, we’re assuming that banks don’t need to hold XRP tokens. We’ll explain how this is possible through an example.

    Let’s say a bank wants to send GBP abroad and receive USD.

    The UK bank would trade GBP for XRP and then trade XRP for USD.

    It’s clear from this process that XRP needs to bought and sold to facilitate this trade BUT what if a bank is able to use Ripple’s pool of XRP tokens?

    If they were buying XRP tokens from Ripple’s pool, there would be no requirement to ever buy tokens on exchanges.

    With zero demand on exchanges – other than speculation from investors which isn’t sustainable in the long-term – there would be reason for XRP tokens to increase in value.

    Simply put, there would be no demand and tokens would be worth virtually nothing.

    If this scenario is correct, we would never invest in Ripple.

    Throughout the rest of this article, we will continue to analyse other elements of the project as per our usual format. However, we want to be very clear on one aspect:

    If scenario 2 is correct and banks are able to use Ripple’s liquidity pool without purchasing tokens themselves, everything else in this article is irrelevant; it’s a bad investment in our eyes.

    What Is The Likely Inflation Rate?

    Ripple created a limited supply of tokens, (100 billion XRP) meaning a zero inflation rate but this does not mean new tokens won’t enter the market.

    Ripple, themselves, still hold 55 Billion XRP. These were not previously subject to any lockup period which led to the concern that Ripple could flood the market at any point drastically reducing the XRP token price as a result.

    We will cover the news in more detail later but the announcement that these tokens have now been placed in escrow ensures no more than 1 billion XRP will be sold each month. With approximately 38 Billion tokens in circulation, this would represent an inflation rate of around 32% per year and is thus relatively high.

    Obviously, just because 1 Billion XRP tokens can be sold each month, it doesn’t mean that they will and the inflation rate may be far lower.

    Regardless, it’s a concern for us.

    As a comparison, Ripple say that the average amount sold and entering the market during the last 18 months is 300 million XRP per month.

    Conclusion

    The token supply is a concern for us. Furthermore, the token demand is also a concern due to the reasons given above. If we were able to find more information and found scenario 1 to be the truth, we would continue forward with our analysis.
     

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