Ripple is a very well put together software. It only serves one purpose and one only though, which is trading between tokens of value. As far as that goes, it so super sweet. When more people use it the exchange rates will be extremely tight, only take a few seconds to be finalized and in your own personal wallet, and with a transaction fee that is negligible.
That said, the only real reason a person needs to use XRP is to pay fees. And right now for a couple of bucks, you can get more than enough XRP to pay all your transaction fees for the rest of your life. So, there really isn't a reason for the price to be going up so high other than pump. People think of Ripple like a coin like Bitcoin, and it just simply isn't that. It is more of just a service and XRP isn't meant to be a store of value or be used as a currency the way people think about other coins, but instead as an anti-spam fee.
XRP goes beyond anti-spam. It acts as a
bridge/vehicle currency and has zero
counterparty risk. Bitcoin and most alts are also notable for their absence of counterparty risk.
In order to understand Ripple more deeply, let's imagine that the Bitcoin protocol was extended to include:
- Ability for all users to issue currencies from individual wallets
- Ability for all users to exchange issued currencies and Bitcoin via a built-in distributed exchange
Bitcoin gains new potential utility. Let's assume that users on our network have issued the following currencies:
LTC, DOGE, JPY, CNY, DRK---and users want the ability to exchange any issued currency for any other issued currency, as such:
- LTC <---> DOGE
- LTC <---> JPY
- LTC <---> CNY
- LTC <---> DRK
- DOGE <---> JPY
- DOGE <---> CNY
- DOGE <---> DRK
- JPY <---> CNY
- JPY <---> DRK
- CNY <---> DRK
10 markets are needed to support 5 coins. It all sounds simple enough. However, as the number of coins increases, the problem expands.
Coins | Markets |
5 | 10 |
10 | 45 |
25 | 300 |
50 | 1225 |
100 | 4950 |
211 | 22155 |
In the final row, marked in red, I have taken the number of active BTC markets on Cryptsy. 211 is the number of actual currencies. 22155 markets would be needed to allow any currency to be traded against any other. Beyond simply having those markets enabled, they would also all need liquidity/volume to be meaningful. Complexity arises.
Bitcoin can be used to solve for that complexity, in this scenario, if used as a bridge/vehicle currency in the distributed exchange system. Doing so would allow us to generate all 22155 markets on demand, while needing only 1 actual market for each currency (211 total). Each issued currency would be traded against Bitcoin.
In our earlier example with 5 coins, end users would still see these markets:
- LTC <---> DOGE
- LTC <---> JPY
- LTC <---> CNY
- LTC <---> DRK
- DOGE <---> JPY
- DOGE <---> CNY
- DOGE <---> DRK
- JPY <---> CNY
- JPY <---> DRK
- CNY <---> DRK
In reality, they would work like this under the hood:
- LTC <---> BTC <---> DOGE
- LTC <---> BTC <---> JPY
- LTC <---> BTC <---> CNY
- LTC <---> BTC <---> DRK
- DOGE <---> BTC <---> JPY
- DOGE <---> BTC <---> CNY
- DOGE <---> BTC <---> DRK
- JPY <---> BTC <---> CNY
- JPY <---> BTC <---> DRK
- CNY <---> BTC <---> DRK
Requiring the existence of and liquidity within solely these markets:
- LTC <---> BTC
- DOGE <---> BTC
- JPY <---> BTC
- CNY <---> BTC
- DRK <---> BTC
Expanding 211 markets to 22155 is a cool little trick. Bitcoin is essential to making it work, in this scenario, and is well suited to this task due to its absence of counterparty risk. All other currencies are issued from individual wallets, and therefore entail greater risk.
If you hold Bitcoin on the Bitcoin network, then you have certainty it is yours. Behold the beauty of Bitcoin and zero counterparty risk. If you hold fiat in anything other than your hands, then good luck. An issued representation of JPY on the network may not be redeemable. It may be issued by a gateway, family member, bank, exchange, or even application that you trust---but all of those things are subject to faults. In order to minimize risk, you can choose to exchange your JPY for BTC. Bitcoin is a great store of value in this scenario, again, due to its absence of counterparty risk.
Imagine if market makers, traders, FX services, banks, gateways, card services, and payments providers were all using the system described above. Liquidity. Volume. 5 second international cross-currency payments.
![](https://ip.bitcointalk.org/?u=https%3A%2F%2Fi.imgur.com%2FxYCplTw.png&t=665&c=VvcNIrD35PDetA)
XRP exists to deliver this functionality on the Ripple network.
And this is a sliver of the broader protocol functionality.
Learn more
here.