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Opinions expressed by Forbes Contributors are their own. Crypto & Blockchain I write about blockchain and big data, primarily focusing on XRP. Share to facebook Share to linkedin Getty Zooming in on some of the most common misunderstandings about Ripple’s products, their business model and XRP.
RIPPLE’S PRODUCTS
1. XRP Is Not Needed
Ripple offers two main products for cross border payments: xCurrent and xRapid. The longest available product, and also the most adopted product, is xCurrent.
xCurrent is a global real-time gross settlement system that enables participants to message, clear and settle transactions; and the speed of settlement is disrupting the existing solutions on the market, such as SWIFT with which a payment settles in a few days on average.

This disruption, and the praises from customers, is often interpreted to be “enough”.

When settlement can happen in seconds without XRP, why would it be used at all? Because it is cheaper and faster to settle payments with XRP than FIAT/FIAT exchange pairs.
If two banks have made nostro/vostro arrangements, xCurrent can change balances on both ends in seconds. And since xCurrent is built on top of the Interledger protocol , they can exchange FX rates in real time.
According to Ripple, it is expensive and unsustainable for most organisations to maintain nostro accounts:
According to a 2016 McKinsey Global Payments report, there is approximately $5 trillion dollars sitting dormant in these (red: nostro) accounts around the world  — tying up capital that could be used in more productive ways. They also must be actively managed to ensure balances are commensurate with transaction volume.
The cost and complexity of holding these accounts around the world is one reason why only a handful of banks can process global transactions.

The burden of maintaining nostro accounts worldwide is simply unsustainable for most organizations. Small-to-mid-size banks and payment providers instead pay a fee to use the international transaction systems of their larger brethren. — Ripple Insights
xRapid is made to eliminate the need for these accounts. Instead, it sources liquidity from the market, buying XRP for FIAT at one end of the payment, only to sell it for FIAT at the other end.

This technology opens several new opportunities: further savings on payments, allowing for even smaller international payments with minimal fees sending funds in otherwise illiquid or very expensive corridors (aka. exotic corridors) opening the market for new businesses, eliminating the need to establish nostro/vostro accounts and compete with established players from day one
Furthermore, Ripple’s products are not a “one or the other”-type solution, as xRapid can be used with both the “standard access”-product, xVia, and the “full access”-product, xCurrent:
Both access levels have the ability to settle transactions instantly through XRP, a digital asset, used in Ripple’s xRapid product.

Eliminate pre-funding in foreign accounts and send payments 24/7 using XRP — ripple.com
2. XRP Is Too Volatile; Banks Won’t Hold It
XRP is volatile, as are all other cryptocurrencies. FIAT is volatile too, over longer time periods.

In nostro/vostro relationships, banks are exposed to exchange rate fluctuations over a long period, and in some currencies, the risk is too high for banks even to enter.
There is no need for banks to hold XRP, as xRapid does not work by holding XRP, but by buying and selling it in as short a period of time as possible. An average xRapid payment takes minutes, so the window of volatility is minimal. This short window is made possible by the speed XRP can settle on the XRP ledger that is currently scaling to about 1500 transactions per second, closing a new ledger every 4 seconds.

The only reason for banks to hold XRP would be to participate as an exchange service between XRP and FIAT. This would involve hedging the volatility of XRP. This scenario is not much different from nostros, where they have to manage volatility for FIAT currencies using derivatives.
3.

Stablecoins Are A Better Fit For Cross Border Payments
Stablecoins are most often tokens issued on the Ethereum blockchain where payments typically settle in 10-15 minutes or longer depending on the number of confirmations required and network activity. This extends the volatility window, but since stablecoins are less volatile than XRP (they are pegged to a FIAT currency), this is not the major issue. In fact, in some corridors where the market liquidity is better than XRP in FIAT pairs, it might be a better option than XRP.

XRP, like Bitcoin, Ethereum and others, is not issued by anyone and is not representing any value other than its own. When moving these around, value is moved around. When a stablecoin is moved, value is not moved — only the promise of value.
The issue then comes down to a question of trust. Any pegged currency is always: as volatile as the currency it is pegged to issued by a third party as an IOU for real FIAT
Before Bitcoin, to use digital money, we needed a trusted third-party to keep a ledger of who owned how much. Examples of this trusted third-party are MasterCard, VISA, your bank or your MNO if you use mobile money. So if Alice sent Bob £100, this trusted third-party would debit Alice’s account and credit Bob’s account — they would update their ledger and we all had to trust this ‘trusted’ third-party to do the right thing and be good stewards of our money.

— Tawanda Kembo, Bitcoin Evangelist
One of the great achievements of blockchain, compared to FIAT, is a move from a system based on trust to a trustless environment. If the issuer of a stablecoin is hacked, goes bankrupt, dishonest or is government sanctioned in some way, the promised value of the stablecoin is changed and can leave it worthless.
These fears are met by auditing and increased transparency, but it is not eliminating the trust, only pushing it around.

Still, IOUs serves a great purpose, as they provide some of the benefits of blockchain to FIAT, such as movability and trading with cryptocurrencies. Even the XRP ledger’s built-in decentralised exchange is based on IOUs, but to trade an IOU, a “trustline” has to be established reminding the trader: “do you trust the issuer of this IOU?”
4. There Is No Need For XRP When Central Banks Issue Digital Currencies
A Central Bank Digital Currency is also a stablecoin, but instead of trusting a 3rd party, the trust is placed with the same issuer as the FIAT it is pegged to.
Whether any stablecoin is a good alternative to XRP for settlement, depends on the same parameters as FIAT: is the corridor liquid, or in other words, are there market makers and takers enough on ends of the transaction.

CBDCs will essentially be the same financial model of the current systems.

It is merely a digital equivalent of a paper financial instrument, and the issues highlighted in misunderstanding 1 will be present.
XRP AND THE XRP LEDGER
5. XRP Is Not A Real Cryptocurrency
To even debate whether or not XRP is a real cryptocurrency, we have to establish a definition of cryptocurrency first.
A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.

—Oxford Dictionary
Any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralised system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions. —Merriam-Webster
A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.

Cryptocurrencies use decentralised control as opposed to centralised digital currency and central banking systems. —Wikipedia
We can summarise these definitions in these: Encryption techniques (cryptography) to verify transactions Decentralised system No central issuing or regulating authority
All of these apply to XRP.
The root of this common misconception is probably that where other blockchains use Proof-of-Work/Proof-of-Stake through “mining” to verify transactions and ensure decentralisation of the network by rewards of unlocking new blocks, the XRP ledger is using a Consensus mechanism, and there are no rewards for participants.
6. The XRP Ledger Is Not Decentralised
PoW/PoS relies on calculating hashes to verify transactions and unlocking rewards, and the more participants there is on these blockchains, collectively ensuring enough hashpower to keep transaction times down, the more electricity is also used.
The rewards serve a purpose to attract participants (aka. miners), and thereby incentivise decentralisation, in theory.

Decentralisation serves at least two major purposes: PoW/PoS blockchains are vulnerable by nature, and if one party collectively owns more than 51% of the hashpower, it is possible to “replay” transactions and hence spend the sent amount twice.

This phenomenon is often referred to as “doublespending” and “51% attacks”. Governance — the blockchains are supposed to be open networks with no central authority that can interfere with the network, e.g. rejecting transactions.

The XRP ledger does not rely on PoW or PoS, but Consensus, and this makes it immune to doublespending. So decentralisation serves the purpose of eliminating governance only.

Furthermore, it has the benefit of using far less electricity.
A PoW/PoS network is built to be competitive, as all participants want to get the rewards.

In a consensus network participant competition is non-existing, and the incentive to participate is a reliable system.
Also, see misunderstanding 11.
7. The Consensus Mechanism Makes Forks Easily Possible
The XRP ledger works as a peer-to-peer network of participating nodes. Each node trusts a number of validators, which it defines for itself, but the consistency of the network depends on different servers choosing lists that have a high degree of overlap.
The first part of Consensus is agreeing which transactions to include in the upcoming ledger (those not included will be considered for the next ledger again, see misunderstanding 8).

The second part of Consensus is validation. Each validator validates the transactions independently, resulting in an identifying hash of the ledger.

This hash is used to compare the results amongst the validator, and if consensus is met, the “winning” version of the ledger is used. Disagreeing validators either computes a new correct ledger or retrieves it as needed.
Non-winning ledgers are small temporary “inner forks” that in most cases will be resolved in the next closing ledger. The Consensus model is not perfect — a certain overlap of trusted validators is needed. According to the documentation “ in the worst case, less than about 90% overlap could cause some participants to diverge from each other”. If consensus is not met it “ results in the network losing a few seconds in which it could have made forward progress, but is extremely rare. In this case, the next consensus round is much less likely to fail because disagreements are resolved in the consensus process and only remaining disagreements can cause a failure” .
A new consensus algorithm is being developed, Cobalt , which amongst other benefits lowers the overlap requirements to around 60%.

An XRP Ledger using Cobalt would likely be significantly faster than the XRP Ledger currently is. This wouldn’t significantly affect the number of transactions per second the ledger can handle because that isn’t limited by the consensus algorithm. But it could permit transactions to confirm in less than two seconds rather than the current confirmation time of less than seven seconds.

— David Schwartz
8. XRP Has A Lot Of Hidden Fees (That Is Returned To Ripple)
Using the XRP ledger has a cost (fee), and in most cases, you decide for yourself how big the cost is (above the minimum fee, which is 0.00001 XRP). The size of the fee determines how the transaction is prioritised by the validators, so a higher fee than the minimum will guarantee a faster transaction.
Unlike other blockchains, the fee is neither returned to a central authority or paid as a reward to the validators, but is burned, making XRP a deflationary currency.

Some also refer to a fee for creating accounts on the ledger, but is mistaking “fees” from “reserves”. Both fees and reserves are implemented in the ledger to protect it from spam, malicious use and denial-of-service attacks: reserves is an amount of XRP you lock in return of owning an object on the ledger.
The most common reserve is the base reserve , which is a minimum XRP you have to hold in an account to be able to submit transactions to the network. The base reserve is unrecoverable as accounts cannot be deleted, yet. This is a functionality that is being developed, and if adopted by the network, it will make the base reserves recoverable.
Other reserves are called owner reserves , and like the base reserve is a minimum amount you have to hold in an account. For every object, such as trustlines (see misunderstanding 3), offers on the decentralised exchange, signer list (for multi-signing accounts), the owner reserve is required on top of the base reserve.
At the time of writing the base reserve is 20 XRP, and the owner reserve is 5 XRP, but these can be changed by validators by voting.

And it already has been, as the price of XRP increased: the initial base reserve was 200 XRP and the owner reserve 50 XRP.

It is always possible to see the remaining amount of XRP available, as this is summed and included in every closed ledger.
9. Ripple Created And Is The Issuer Of XRP
In 2004, a developer named Ryan Fugger developed a payment protocol and decentralised platform, Ripplepay, to create a financial network that could work without banks, amongst others by peer-to-peer lending.
In early 2011, Arthur Britto, Jed McCaleb, and David Schwartz formed a team, working on what we know today as the XRP ledger, focusing on creating an alternative system to optimise where they found weaknesses in Bitcoin, e.g.

to eliminate the risk of 51% attacks (see misunderstanding 6).
In August 2012, Chris Larsen joined the team, and after this, they approached Ryan Fugger to use their digital currency with his credit network.

Fugger agreed to support the new effort, and the team founded a new company known as OpenCoin with full control of what was previously known as Ripplepay.
Over the next years roughly $9 million USD funding was secured, and in 2013 they reverted the brand to its “Ripple” origin, Ripple Labs, Inc while also making the source code public to make the project maintainable by the community.
To ensure the sustainability of the company, the founders decided to donate XRP to the company (OpenCoin), while also keeping a share for themselves: Company (OpenCoin): 80 billion XRP Jed McCaleb:9 billion Chris Larsen: 7 billion Other Founders: 4 billion
Remember that this was before ICO’s, where we today see new startups raising millions of USD to support the initial development and first years of business.
Whether Ripple issued XRP is at best a blur. The XRP ledger was developed before the company was formed, but the founders of the company were also the people who developed the ledger. The real question is, what does it matter?
The question is most often raised in a debate of whether XRP is a security or not, presuming that if XRP was created by Ripple, buying XRP is partaking in a never-ending “coin offering”. It also boils down to a question of whether XRP is even a real cryptocurrency (see misunderstanding 5), since it is not “mineable” and hence challenges the premise that a cryptocurrency should have no central issuing or regulating authority.

Looking at the US definition of a security, it is:
…any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing —Section 2(a)(36) of the 1940 Act
Determining whether an asset is classified as an investment contract, is often determined by the Howey test : It is an investment of money There is an expectation of profits from the investment The investment of money is in a common enterprise Any profit comes from the efforts of a promoter or third party
For the case of XRP: Yes, you invest money in the XRP ecosystem.

For the sake of speculative purchases, profit expected, as with any other speculative purchase. For the sake of utility, e.g. buying and selling XRP to pay for goods or transfer money cross borders, there is no profit expectation from XRP.

XRP is not a share in Ripple the company, and there is paid no dividends or similar rewards for holding the asset. Buying XRP is unrelated to Ripple. XRP is an open source decentralised ledger, and anyone can build on top of the ledger. By buying XRP investment is made in the ecosystem of XRP, of which Ripple is the first and the biggest player.

Profit is made if the XRP ecosystem grows, and it is not from the sole effort of Ripple, but by all participants, building products utilising the XRP ledger.
Whether or not XRP is classified as a security in the US is yet to be determined.
10. Ripple Can Print More XRP
Since the XRP ledger first started in January 2013, more than 45 million ledgers have been closed successfully. The ledger was born with 100 billion XRP and is hard-coded into the software.
There are no current methods or functionality to add XRP in the code, so if for any reason new XRP should be printed, it would require a major code change — and adoption on the complete network of XRP validators. Since the ledger is decentralised, no single authority can decide to do this — as with any other decentralised blockchain. I know I said I wouldn’t reply, but this is ridiculous.

pic.twitter.com/mbhe1Ec5j4
— David Schwartz (@JoelKatz) November 26, 2017
The only way to change the amount of XRP on the network, which any user can do, is by using it — every time a transaction is made, a fee is “burned” — and the amount burned will never be available again (see misunderstanding number 8).
The constant burn of XRP lowers the amount of available XRP in the market (at time of writing the remaining total supply is 99.

991 billion XRP) and will over time affect the price of XRP positively, as the currency supply deflates while utility increases.
RIPPLE’S BUSINESS MODEL
11. Ripple Controls The Network And Who Gets To Validate Transactions, Making It A Centralised And Permissioned Blockchain
Each participating node on the XRP ledger network has to trust a number of validators on the network for the Consensus mechanism to work (see misunderstanding 7), hence each node has a Unique Node List (UNL). All nodes are free to select validators they trust, but while the Consensus mechanism requires a certain overlap of nodes to ensure consensus amongst participants, Ripple issues a recommended UNL.
The UNL is recommended , and Ripple updates it periodically to include new validators that are well-maintained and run by the industry, by Ripple themselves, and by the broader XRP community. The UNL is bundled with the software, and in many cases, nodes are not changing it — however, it also leads to a misconception that Ripple controls which validators together can form a supermajority on the network. And even the idea that Ripple has to verify a node before it is a part of the network.

Diverging from the UNL is not recommended by Ripple, as if everyone used it, there would be a 100% overlap of used validators, ensuring no hiccups in the consensus process (see misunderstanding 7).
While Ripple controls the UNL, it is also in their highest interest to ensure decentralisation of the network. As described in a blog post , “more than half of the validators on Ripple’s recommended UNL are operated by people or groups external to the company, and Ripple continues to add even more independent validators to the list. This further demonstrates that Ripple’s validators do not wield meaningful power over the XRP Ledger.”
Of all validators on the XRP ledger, Ripple runs only about 6%. So in an event, where the interests of the industry or the community, and that of Ripple’s, the validators can agree on a separate UNL to exclude Ripple altogether. A current state of the validators can be seen at