What is XRP?


XRP is a crypto-asset created in January 2013 by OpenCoin, Inc. which soon after became Ripple Labs, the company we all know today. One of the co-founders and creators of XRP, Jed McCaleb, has had a large impact on the cryptocurrency ecosystem. Jed was an early Bitcoin miner who also helped found the Mt. Gox exchange in 2010 and later sold it in 2011.

After the sale of Mt. Gox, Jed joined up with the company that would later become Ripple Labs. Together, Jed and fellow co-founders Chris Larsen (current executive chairman of Ripple) and Arthur Britto, created what they initially called Ripple Credits and allocated 80% of the 100 billion credits created to the company and distributed 20% of the 100 billion amongst the co-founders. Ripple Credits would later be renamed XRP, the asset we know today. The Ripple Labs company, under the original agreement, is in charge of developing Ripple software, promoting the network, and giving away & selling XRP.

The XRP asset and ledger has been out in the market for 6 years with a dedicated and enthusiastic community of supporters. Payments made with XRP settle in 4 seconds and transaction throughput is estimated to be around 1,500 transactions per second with very low transaction fees, making XRP one of the fastest, cheapest, and scalable crypto-assets. In comparison, Bitcoin settles transaction in about 10 minutes, has a throughput of 7 transactions per second, and is relatively more expensive to use.

The Case for XRP

XRP is designed to reduce the friction, cost, and settlement time of the existing cross-border payment systems. Ripple and XRP supporters want to bring interoperability to the existing financial system making it more efficient, reliable, inexpensive, and connected.

XRP can be used like any other cryptocurrency, but what is the key area of demand or key use case for XRP? The key demand for BTC might be censorship resistance, or it might come from those that want a hard money alternative. Monero’s key area of demand would come from those that demand private transactions. The broad use case for XRP is cross-border payments, but if you drill down further into Ripple Labs’ plans and the commentary of XRP’s supporters, its use case is more specific.

The existence of XRP and Ripple reduces the need for international banks and payment processors to hold nostro and vostro accounts with each other in exotic markets. In mature markets, currency flows between the Dollar and Yen are pretty efficient, liquid, and cheap. However currency flows between financial institutions in developing economies like Mexico and the Philippines have lower reliability, low liquidity, and are more expensive compared to the fiat currency flows in more developed economies.

Ripple Labs claims that financial institutions trying to send payments into hard to reach places in the global payment system can save up to 70% by using Ripple’s software in conjunction with XRP in lieu of nostro or vostro accounts. So what are these nostro and vostro accounts?

Nostro and Vostro Accounts

Nostro and vostro are Italian words that describe the same account in the international banking system. “Nostro” means ours and “vostro” means yours. For example, Bank A uses the phrase “nostro account” to refer to its account that’s held by Bank B. Nostro means “our.” If a financial institution says it has a nostro account with another financial institution its a way of saying, “we have money that is on deposit at your bank.” Bank B refers to Bank A’s account that it holds as a vostro account and it’s a way of saying, “you have money that is on deposit at our bank.” A vostro account can be either a company’s or an individual’s.

Banks in Japan and the United States often hold vostro accounts on behalf of foreign banks. The vostro account is held in the currency of the country where money is on deposit. These accounts are often used to simplify trade and foreign exchange transactions. Ripple Labs and the XRP community think they can make nostro and vostro accounts unneeded and can make the experience better and cheaper for businesses, financial institutions, and individuals in exotic currency corridors such as currency flows between Colombia and Turkey.


The way the XRP ledger comes to consensus is much different than PoW or PoS based assets like Bitcoin and Ethereum. According to Ripple Labs, the core principle of consensus for the XRP ledger is “a little trust goes a long way”. This is very different than the adversarial environment and trust-less environment networks like Bitcoin are designed to operate in. XRP relies on identity and reputation in ways that networks like Bitcoin try to avoid.

Consensus is all about agreement, and in the case of distributed ledgers or blockchains, it’s all about the network coming to agreement about the order of transactions made on the network. This is an easy problem when there’s a central administrator that decides unilaterally what the order of transactions should be, but in a distributed system this problem is much harder to solve. Satoshi Nakamoto was the first to solve this problem without a central administrator by inventing Bitcoin. Since Nakamoto’s success, many iterations and experiments have been launched to try different ways of coming to consensus in a distributed system.

Consensus in XRP is led by sets of validators with substantial overlap amongst the sets. Individual validators are a part of sets called unique node lists (UNL). Each participant on the network chooses their own trusted set of validators (UNL) but for participants to agree on the order of transactions participants must choose a UNL that is fairly similar to the sets chosen by everyone else. If a participant’s UNL has less than 90% overlap than the rest of the network, it could cause the ledger of the participant to diverge from others on the network. Because of this potential divergence, Ripple publishes a signed list of recommended validators run by Ripple, industry participants, and other trusted validators.

Consensus among the validators is an iterative process in which validators propose a specific order of transactions with other validators, and the other validators propose their own, with the validators reconciling proposals until there is a consensus amongst the validators about the validity and order of transactions.

Steps for XRP Validators:

  1. Determine a set of transactions to apply to the previous ledger (a “ledger” is synonymous to a “block”).
  2. Apply the set in a defined transaction order.
  3. Confirm everyone got the same results.
  1. If everyone got the same results, consensus has been reached.
  2. If not, repeat process until everyone confirms the same results.
    1. This would technically be a consensus failure but it only causes network minor delays. It isn’t fatal.

The XRP ledger needs a supermajority of these validators to declare consensus for the network to move forward. The threshold for a supermajority in the XRP ledger is 80%. If less than 20% of the validators are dishonest or faulty the network can still make progress. If more than 20% of the validators are dishonest or unreliable the network will not make progress.

A 51% attack is not a threat for the XRP ledger like it is in other networks like Bitcoin or Dash. However, if greater than 20% of the XRP validators are malicious, the networks may have trouble making progress. In a more extreme case, if more than 80% of the XRP validators are malicious, an invalid transaction could be processed by the network. In short, as long as at least 80% of the validators are honest the XRP ledger will come to consensus and move forward as a payments network.

Criticisms and Concerns

At the heart of the criticisms and concerns around XRP is its relationship to Ripple Labs, the company. In a space dominated by concepts such as decentralization and central points of failure, the existence of a company heading the development of a distributed ledger is anathema to many in the cryptocurrency space. Those denying that XRP has any relationship to Ripple Labs are rewriting history and are willfully misleading people. However those that call Ripple Labs the sole operator of the ledger are also off base. It is incontrovertible that Ripple has significant influence over the network, but it doesn’t mean that the XRP ledger won’t work in the wake of Ripple’s absence. The network would definitely be hurt by Ripple’s absence, but in theory the network could still come to consensus and process transactions if enough of the other participants thinks its still valuable to keep running the network.

The next criticism revolves around the XRP consensus process which is explicitly identity based. Satoshi, in the Bitcoin whitepaper, wanted to avoid identity as a basis for consensus in the Bitcoin system in order to avoid Sybil attacks. Proof of work (PoW) was proposed specifically as a solution to defend the network against Sybil attacks. Although it’s true that XRP is more vulnerable to a Sybil attack than non-identity based networks, anyone attempting this type of attack would have to convince a lot of different individuals, businesses, and institutions to trust their validators. In theory this is possible but very hard to pull off, much like a 51% attack in a PoW based system in theory is possible but can be difficult to pull off.

Another criticism is the homogeneity of the network. Although anyone can participate and pick their own unique node list (UNL), Ripple themselves does not recommend doing this. Ripple says that if you don’t have enough overlap between your UNL and the dominant nodes on the network, your server may diverge from the rest of the network. Ripple says they are researching ways to improve consensus that allows for a more heterogeneous validator list. So all though in theory you can participate and pick your own list, in practice you shouldn’t and can’t without significant risk. When comparing this fact to other networks, XRP’s relative decentralization is on the low end of the scale in practice.

Depending on your point of view, networks like XRP could be decentralized enough or too centralized. We believe decentralization is incredibly hard to define in a precise manner and isn’t an end in of itself. Hopefully Ripple Labs’ research is fruitful in making their consensus process open to more parties without significant risk of divergence.

The last criticism is the token distribution of XRP. If you recall in the introduction, 100 billion ripple credits (now XRP) were minted at the origin of the network with 80 billion going to the company and 20 billion split amongst the founders with no further token creation set to take place. A lot of XRP has since migrated its way into markets, but most of it is still in control of Ripple and the founders. This makes holders of XRP highly dependent on the behavior of Ripple and XRP’s founders. However, Ripple and the founders have multiple agreements and plans that limit the sale of XRP at any particular point in time. This could be called its inflation rate, but it’s not algorithmic like it is in Litecoin and it is more dependent on human action and the legal system.

Closing Remarks

The XRP ledger has come a long way over the last few years and we’re proud to support the holders and users of XRP in the Edge Wallet. We look forward to the continued development of one of the oldest, fastest, and well known crypto-assets in the space.

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