Author: insights4vc Source: substack Translation: Shan Eoba, Jinse Finance
In the past week, the price of XRP has risen by about 60.96%, from $1.46 to $2.35, with a market capitalization exceeding $130 billion. This article will briefly analyze the historical development of Ripple (the company behind XRP), its ecosystem, and the latest progress in the tokenization of real-world assets (RWA) and regulatory engagement.
Ripple was founded in 2013, originally as OpenCoin, and later renamed to Ripple Labs. As a pioneer of blockchain technology, Ripple focuses on cross-border payments and decentralized finance (DeFi). The core of the Ripple ecosystem is the XRP Ledger (XRPL), a distributed ledger developed by David Schwartz, Jed McCaleb, and Arthur Britto in 2011, aimed at providing an efficient, scalable, and secure global payment solution, aligning with Ripple's vision of modernizing financial infrastructure.
Latest Developments in XRPL
• Breakthrough in RWA Tokenization: On November 25, 2024, Ripple announced a collaboration with Archax, the first UK FCA-regulated digital asset exchange, to tokenize Abrdn's £38 billion liquidity fund on the XRPL. This marks the launch of the first money market fund token on the XRPL, further consolidating its leading position in real-asset tokenization.
• Deepening Regulatory Engagement: On December 2, 2024, WisdomTree joined Bitwise, 21Shares, and Canary Capital in filing with the U.S. Securities and Exchange Commission (SEC) to launch a spot XRP exchange-traded fund (ETF). This trend reflects the growing attractiveness of XRP among institutional investors and the widespread adoption of tokenized financial instruments.
XRP Status: Q3 2024 Review
Ripple's quarterly report revealed key developments in XRP and the broader crypto market:
• Legal Status Clarified: The court ruled that XRP is not a security, allowing it to be relisted on U.S. and other international exchanges. The distinction between Ripple and XRP is widely recognized.
• Surging Institutional Interest: Grayscale launched an XRP trust product, while Bitwise, Canary, and 21Shares filed for XRP ETFs, indicating a continued rise in institutional confidence in XRP.
• Macroeconomic Impact: The Federal Reserve's 50-basis-point rate cut led to a rise in risk assets, triggering a rebound in the crypto market. Additionally, the launch of a U.S. Ethereum ETF attracted $552.2 million in inflows.
• Regulatory Environment: The SEC appealed part of the ruling in the Ripple case but acknowledged that XRP itself is not a security. In contrast, countries like Japan, the UAE, and Hong Kong have adopted more crypto-friendly policies, in contrast with the U.S. enforcement actions.
• Global Expansion: Ripple obtained regulatory approval in Dubai and is driving crypto innovation through strategic investments and advocacy efforts.
As crypto ETFs lead market growth and the U.S. presidential election approaches, regulatory clarity and industry maturity will be key to the future development of digital assets.
Core Team Members
• CEO: Brad Garlinghouse
• Co-Founder and Executive Chairman: Chris Larsen
• Chief Technology Officer of the XRP Ledger: David Schwartz
• Co-Founder of the XRP Ledger: Arthur Britto
• Chief Financial Officer (CFO): Jon Bilich
• Chief Legal Officer (CLO): Stuart Alderoty
• Former Co-Founder: Jed McCaleb (currently Co-Founder of Stellar)
Ripple Labs, Inc. (XRP) Funding Overview - Total Funding: $294.5 million
Funding Rounds:
1. Undisclosed Round
Date: April 11, 2013
Funding Amount: Undisclosed
Investors: Andreessen Horowitz (a16z), Lightspeed Venture Partners, Vast Ventures
2. Seed Round
Date: May 14, 2013
Funding Amount: Undisclosed
Partial Investors: GV (Google Ventures), IDG Capital
3. Seed Round
Date: November 12, 2013
Funding Amount: $3.5 million
Partial Investors: Core Innovation Capital, Camp One Ventures, IDG Capital, Hinge Capital
4. Series A
Date: December 3, 2014
Funding Amount: $4 million
Partial Investors: Santander
5. Series A
Date: May 19, 2015
Funding Amount: $28 million
Partial Investors: IDG Capital, Blockchain Capital, Digital Currency Group (DCG), Core Innovation Capital, RRE Ventures, CME Ventures
6. Series A Extension
Date: October 6, 2015
Funding Amount: $4 million
Partial Investors: Santander, CME Ventures, Seagate Technology
7. Series B
Date: September 15, 2016
Funding Amount: $55 million
Partial Investors: SBI Investment, Accenture, Santander, CME Ventures, Seagate Technology, Hinge Capital
8. Series C
Date: December 20, 2019
Company Valuation: $9.8 billion
Funding Amount: $200 million
Partial Investors: Tetragon Financial Group Limited, SBI Investment, Bossanova Investimentos, Route 66 Venture
Token Economics
XRP is the native asset of the XRP Ledger (XRPL), created in 2012 with a fixed total supply of 100 billion, all of which were pre-mined.
• 80 billion were allocated to Ripple Labs, and 20 billion to the founding team.
• To stabilize the market and manage the holdings, Ripple placed 55 billion XRP in escrow, releasing a maximum of 1 billion XRP per month, with an expected release period of 55 months.
• Unused XRP will be re-locked, extending the release timeline. As of December 2024, Ripple still holds approximately 37.24 billion XRP in escrow.
Ripple's Stablecoin RLUSD
Ripple originally planned to launch the stablecoin RLUSD on December 4, 2024, but it has been delayed pending regulatory approval. Ripple is working with the New York Department of Financial Services (NYDFS) to meet strict regulatory requirements and maintain high operational standards.
RLUSD Overview:
• Announcement Date: April 2024
• Asset Backing: Fully backed by U.S. dollar deposits, short-term U.S. Treasuries, and cash equivalents.
• Objective: RLUSD is designed as an enterprise-grade, compliance-first stablecoin to complement Ripple's cross-border payment solutions, operating alongside XRP.
• Market Outlook: With the stablecoin market expected to grow to over $2.8 trillion by 2028, RLUSD is seen as a significant contributor to this rapidly expanding space.
Key Metrics (December 5, 2024)
XRP Ledger: Detailed Overview
Unlike traditional Proof-of-Work (PoW) or Proof-of-Stake (PoS) blockchains, the XRPL employs a federated consensus model, allowing validators to reach consensus on the ledger state without the need for mining or staking. The consensus protocol aims to improve efficiency, reduce latency, and minimize computational overhead, enabling fast transaction finality.
Validator Network and Unique Node List (UNL)
The XRPL network is composed of over 109 validators distributed globally. A subset of these validators constitute the Unique Node List (UNL), which is crucial for achieving consensus. The UNL is composed of 31 trusted validators, including entities such as Arrington XRP Capital, Bifrost Wallet, Ripple Labs, and XRPScan. While any entity can operate a validator and publish a UNL, the default UNL is heavily influenced by Ripple Labs and the XRP Ledger Foundation.
Centralization Concerns:
The reliance on the default UNL curated by influential organizations has raised concerns about centralization. Critics argue that the selection process of trusted validators is not entirely permissionless, potentially undermining the decentralized spirit of blockchain technology. However, supporters emphasize that users can autonomously modify their UNL, allowing for a certain degree of decentralization based on individual trust preferences.
Consensus Process
The consensus process in XRPL is conducted through iterative rounds, where validators propose and agree to include a set of transactions in the next ledger version. The process includes:
Proposal Phase: Validators submit proposed transaction sets.
Voting Phase: Validators adjust their proposals based on the proposals received from their UNL peers.
Consensus: Once a supermajority (typically 80%) agreement is reached, the transaction set is applied to the ledger.
Ledger Validation: Validators publish signed validation messages containing the new ledger hash, confirming the consensus.
This mechanism ensures that all participants agree on the state of the ledger and the order of transactions, without the need for resource-intensive mining activities.
Transaction Speed, Fees, and Account Reserves
Transaction Speed
Different blockchain platforms exhibit significant variations in transaction speed and capacity. XRP processes transactions within 3 to 5 seconds, supporting a throughput of around 1,500 transactions per second (TPS). Solana achieves sub-second transaction speeds with a maximum capacity of up to 65,000 TPS. In comparison, Bitcoin requires over 10 minutes per transaction, processing 5 to 6 TPS, while Ethereum processes transactions at a rate of 13 to 15 TPS.
Transaction Fees
The transaction fees on the XRPL are extremely low, at around 0.00001 XRP per transaction. This low-cost structure makes it economically viable for users to engage in frequent transactions and micropayments, aligning with the ledger's goal of facilitating efficient value transfer.
Trust Lines and Reserve Requirements
A unique aspect of the XRPL is the use of trust lines for token management. To activate a new XRPL account, users must maintain a minimum of 10 XRP. Additionally, each unique token type held in a wallet requires an extra 2 XRP to be held. These reserves serve as an anti-spam measure, preventing ledger inflation and deterring malicious activities.
Trust Line Functionalities:
Bilateral Agreement: Trust lines act as a bilateral credit agreement between two accounts, defining the balances and trust parameters for each token.
Consent-based Token Reception: They ensure that no account can impose tokens on another account without consent, maintaining user control over received assets.
Transaction Control: Trust lines can enable features such as asset freezing, requiring authorization for transfers, and setting a "no-ripple" flag to prevent accidental balance adjustments.
Rippling Mechanism
Rippling in the XRP Ledger (XRPL) can facilitate efficient net settlement by adjusting the token balances between interconnected trust lines, bypassing the need for direct issuer involvement. Users can control this feature:
Enabled: Highly suitable for market makers and intermediaries to enhance liquidity.
Disabled: Recommended for users seeking to prevent accidental balance adjustments.
This flexibility ensures that the network participation can be customized according to user needs.
Hooks for Enhanced Functionality
Hooks are lightweight WebAssembly (WASM) code that can enable programmable features such as transaction automation, compliance checks, or payment modifications. Hooks are deployed on the Xahau network (a sidechain of XRPL), enhancing programmability while maintaining the mainnet's stability.
EVM-Compatible Sidechain
The development of an Ethereum Virtual Machine (EVM)-compatible sidechain aims to:
Attract Ethereum developers and dApps.
Enable cross-chain asset transfers through solutions like Axelar.
Currently in the testing phase, this sidechain uses XRP as gas, positioning the XRPL for broader blockchain interoperability.
Native AMM Integration
The XRPL's built-in Automated Market Maker (AMM) can facilitate decentralized token trading and liquidity provision directly on the ledger, supporting:
Token pair liquidity pools.
Participation in decentralized finance (DeFi) without external dependencies.
This native AMM integration enhances the XRPL's appeal within the DeFi ecosystem.
XRP Ledger Consensus Protocol Explained
The consensus mechanism is the cornerstone of a decentralized payment system, ensuring that all participants agree on the state of the ledger without centralized control. The XRP Ledger Consensus Protocol emphasizes efficiency, security, and resilience to failure modes.
Key Features
Ledger Protocol: Ensures consensus on the latest state and transaction order.
Decentralization: Operates without a central authority, avoiding single points of failure.
Robustness: Able to make progress even with changes or misbehavior by participants.
Security-First: Prioritizes correctness, halting the verification of incorrect transactions when disruptions occur.
Efficiency: Avoids the energy-intensive processes typical of proof-of-work (PoW) systems.
Preventing Double Spend
To prevent double spend, the XRPL orders transactions deterministically. Any conflicting transactions will have only one verified, eliminating the need for centralized dispute resolution.
Ledger Structure
Each ledger version includes:
Current State: Account balances and objects.
Transaction Set: Transactions applied to the previous ledger.
Metadata: Details such as cryptographic hashes and ledger indexes.
This structure creates an immutable historical record, with each ledger containing the complete current state for fast verification.
Trust-Based Validation
Participants form a Unique Node List (UNL), trusting that the validators will not act maliciously. This trust model underpins the system's security: validators can only affect those who trust them.
The consensus process includes:
Proposal: Validators submit transaction sets.
Voting: Validators adjust their proposals based on peer input.
Consensus: Supermajority agreement is applied to the transactions.
Validation: Validators sign and publish the new ledger.
Fault Tolerance and Security
Validator Failures: Handles up to 20% of faulty validators; if failures exceed 20% but are less than 80%, it stops to ensure integrity.
Resistance to Sybil Attacks: The trust-based influence and manual UNL selection limit the impact of fake identities.
Invariant Checks: Reject transactions that violate rules, such as unauthorized XRP creation.
Adaptive Fee Mechanism
Validators dynamically adjust transaction fees and reserve requirements to balance accessibility and network protection. Key parameters include the base transaction fee, account reserve, and owner reserve, with decisions reached through median voting.
Enhancing Liveness: Negative UNL
To maintain progress during disruptions, the Negative UNL temporarily excludes unavailable validators, adjusting the quorum threshold, and reintegrating them upon recovery. This feature ensures continuity without compromising security.
Ripple: Regulatory and Legal Developments
Ripple has faced regulatory challenges throughout its operational history, reflecting the complexity of navigating the evolving legal landscape of blockchain and digital assets.
Key Milestones:
May 5, 2015: Ripple was fined $700,000 by the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) for violating the Bank Secrecy Act, including operating as an unregistered money services business (MSB). Ripple agreed to implement compliance measures and enhance its protocols.
June 13, 2016: Ripple obtained a BitLicense from the New York State Department of Financial Services, becoming the fourth company to receive the license.
September 2017: Blockchain company R3 sued Ripple, seeking to enforce an agreement to purchase 5 billion XRP at $0.0085. Ripple countered that R3 was speculating as the value of XRP soared. The dispute was settled in September 2018 under undisclosed terms.
February 2020: The Financial Times reported that Ripple's key partner MoneyGram received $50 million from Ripple before adopting its XRP-based liquidity tools. Ripple provided these tools for free and gave a total of $89 million in subsidies in Q4 2019. XRP sales were seen as the main driver of Ripple's profitability.
December 22, 2020: The U.S. Securities and Exchange Commission (SEC) charged Ripple and its executives Christian Larsen and Brad Garlinghouse with raising $1.3 billion through an unregistered securities offering involving XRP. Ripple contested the allegations, and the court later restricted the SEC's ability to access the defendants' extensive bank records.
July 2023: A U.S. district court issued a landmark ruling that the sale of XRP on cryptocurrency exchanges in programmatic trading did not constitute a security under the Howey Test. However, institutional sales and financing involving XRP could be viewed as securities. After two years of litigation, Judge Analisa Torres issued this ruling.
October 2023: The SEC withdrew its case against Ripple executives Garlinghouse and Larsen, marking a partial resolution of the case.
June 2024: Ripple revealed that its legal defense against the SEC has exceeded $100 million, highlighting the financial strain of the prolonged regulatory scrutiny.
Conclusion
The recent surge in XRP's market capitalization to $50 billion reflects renewed market interest, but concerns remain about its long-term institutional adoption and regulatory challenges. Ripple's progress, including its tokenization of financial plans and ETF applications, indicates advancements, but it also faces obstacles, particularly in navigating the complex legal and global frameworks. While the SEC's ruling has clarified the status of XRP in certain instances, uncertainties persist, underscoring the need for a cautiously optimistic view of its role in the evolving financial ecosystem.
