Abstract
Blockchain is a software platform for managing digital cryptocurrency transactions which are created and stored in a digital ledger format. The technology aims to build a more connected, efficient and transparent financial system. Both BTC and XRP/RippleNet are deployed using the Blockchain platform. Bitcoin (BTC), allows peer to peer users to transact directly with each other on a distributed ledger without the need for a third-party intermediary (Nakamoto,2008). Ripple XRP is an alternative scalable digital asset which facilitates close to real-time cross border payments anywhere in the world (Ripple,2018). RippleNet is a platform technology that is supplied to participant banks to enable them to the transfer Fiat and digital payments in a more efficient manner when compared to current payment processes. RippleNet integrates banks, payment providers, digital asset exchanges and corporates through providing one institutional network experience (for participant banks) to send money globally. From a review of the Ripple website and whitepaper, it is clear that the currency and platform is being initially targeted at Institutional firms (where some good traction and adoption is already evident). Based on market dynamics, there is, I believe, the potential opportunity to expand the RippleNet technology to the retail market in due course as it is potentially more scalable than Bitcoin. Solving the efficiency problem in the near term will help the brand, the platform and in turn the XRP currency to be more industrialized and accepted in society when compared to Bitcoin. Some commentators are concerned by Ripple essentially being a central intermediary, I believe this will help to de-risk the ongoing regulatory concerns with Bitcoin through being associated with money laundering together with the opaqueness of the currency and its ongoing volatility. This paper analyses the differences between the two cryptocurrencies and their associated technology under a number of criterion.
Keywords—Blockchain, Bitcoin, Ripple, RippleNet, BTC, XRP, Proof of Work, Correctness, Agreement, Utility
I. INTRODUCTION
Business and commerce on the internet has come to rely almost exclusively on financial institutions serving as trusted third parties in processing payments (Nakamoto, 2008). While the traditional banking model has served its purpose over the generations, it is often criticised as being inefficient. Furthermore, having a central authority (or bank) interposed between the sender and the destination parties, often places banks in a conflicted position on both sides of the same transaction. Satoshi Nakamoto argued in his 2008 white paper, entitled, “Bitcoin: A Peer to Peer Electronic System” that an electronic payment system based on cryptographic proof instead of trust, allows any two willing parties to transact directly with each other without the need for a trusted third party. In his white paper, Nakamoto argued (1) that Bitcoin transactions are mathematically impractical to reverse. This protects sellers from fraud with routine escrow mechanisms protecting buyers, and (2) Bitcoin proposes a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. Ripple XRP presents a novel consensus algorithm by utilizing collectively-trusted subnetworks within a larger network. The “trust” required of the subnetworks is minimal and can be further reduced with principled choice of the member nodes. XRP shows that minimal connectivity is required to maintain agreement throughout the whole network achieving the objectives of Correctness, Agreement and Utility (Schwartz, Youngs & Britto, 2014).
Both cryptocurrencies and their associated technology are compared under each heading below.
- Purpose
- Technology & Innovative Rules
- Consensus
- Market Capitalization
- Public Interest
- Community
- Environmental/Societal concerns
- Social considerations
- Privacy
A. Purpose
Bitcoin was developed by Satoshi Nakamoto (widely believed to be a pseudonym). He proposed Bitcoin in 2008, as an e money payment system based on quantitative mathematical proof. The premise of his idea was to produce a means of digital purpose and exchange, independent of any controlling central authority. Transactions effected in the Bitcoin blockchain are at a distributed P2P (end user) level and are secure, verifiable and immutable. Transactions are verified through a use a “proof-of-work” concept – being a computer calculation (called Bitcoin mining). Computer mining (computer CPU, resources and electricity) is required in order to create a new group of transactions in an open source and distributed blockchain (Antonopoulos, A.M., 2014).
Ripple is regarded as the Bitcoin for Banks largely because it is solving the banking industry cross border payments problem around latency. The currency and its’ associated platform, is designed by Ripple Inc. with a very specific purpose – it is modified and adopted by banking participants so as to enable cross-border and inter-bank payments. Ripple seeks to be a replacement for the latent interbank SWIFT network and so seeks to solve the institutional problem around the time taken to process payments (Database, W. 2018. Whitepaper Database -Ripple). Similar to Bitcoin, Ripple uses cryptography to secure its P2P transactions. However, it uses a private blockchain network as opposed to an open source public ledger. It has a network of nodes that validate transactions, but these are not necessarily anonymous P2P nodes, they are participating banks and financial institutions Ripple’s coins, known as Ripple or XRP, are not mined into existence, they are simply pre-mined and issued (Ripple,2018). Banks (on behalf of themselves and their customers) can make payments between and to each other by using authenticated and cryptographically signed transactions. Such transactions are capable of being denominated in either fiat currencies or Ripple’s internal currency (XRP) which supports a potential more scalable solution when compared to Bitcoin. In time, both cryptocurrency objectives might converge, particularly if Ripple is scaled to include retail P2P payments in time.
B. Technology & Innovative Rule
Bitcoins are blocks of validated digital money. To create validation and integrity of blocks, Bitocin works on the premise of “proof of work and timestamping” (Nakamoto, 2008). In the Bitcoin white paper, Nakamoto says that “The proof of work involves scanning for a value that when hashed, such as SHA – 256, the hash begins with a number of zero bits” (Passwordsgenerator.net. 2018. SHA256 Hash Generator Online). Miners who perform checks on the blocks and who expend computer memory, capacity and electricity are rewarded with new Bitcoins for their control and validation work. Bitcoin operates through a distributed blockchain ledger. Bitcoin’s authentication protocol is designed to make mining difficult, meaning that gaining control of a majority of the network (a so-called 51% attack) is extremely expensive. This is an important safety attribute of Bitcoin over Ripple in that due to the highly de-centralised and divisible nature of Bitcoin, the prevalance of threat vectors from a cybersecurity perspective are greatly reduced. Bitcoin’s cryptographic protocols of private and public-private key cryptography are used to give individuals safe, exclusive control of their bitcoin. Unique hash numbers are used to “link” each block in the Bitcoin blockchain, proving an order of events and the integrity of past data (ConsenSys, 2016) .
Ripple aims to provide a neutral utility for financial institutions and their back-end systems. The settlement protocol allows banks and non-bank financial services companies to incorporate the Ripple protocol into their own systems through deploying an application programming interface, thereby allowing participant bank customers to use the service. Current global payment systems are very fragmented networks with significant downstream impacts; primarily, resulting in a marginal experience for cross-border payments. “Without direct connectivity between transacting parties, factors such as traceability and timing are a black box to sending and receiving banks, businesses and consumers. The lack of standardization across networks impacts functionalities such as data transfer – making it unreliable for end users to send critical information with their transaction” (Ripple.com, 2018). RippleNet is categorized into two key categories: (1) network members (banks and payment providers) and (2) network users (corporates, consumers and others). RippleNet derives optimization value through (1) standardisation and powerful technology; (2) a global network of banks and payment providers; and (3) a consistent set of rules, standards and governance structure comprised of a control board of industry leaders (Ripple.com, 2018). The XRP Ledger network runs on an internal blockchain which is called an “Enterprise blockchain” ledger. Unlike Bitcoin, Ripple is centrally controlled by Ripple Inc. which uses a central rule book to control governance and execution. XRP/the platform does not mine transactions similar to Bitcoin.
C. Economic Rules and Incentives
Section 6 of Nakamoto’s white paper sets out the design relies on economic incentives. It describes how nodes are provided “with incentives to support the network and provided a way to distribute coins into circulation”. Miners contribute their hardware and electricity because if they produce new blocks, they are rewarded with amounts of Bitcoin. Economic costs or penalties are part of the security model. The most obvious way to attack the Bitcoin blockchain would be to gain control of a majority of the network’s hashing power — a so-called 51 percent attack — which would let an attacker reliably censor transactions and even change the past state of the Blockchain. But gaining control of hashing power costs money, in the form of hardware and electricity (Ennis, Milano, Higgins, Castillo, and Milano, 2018 -Coindesk).
XRP is the foundational native asset on the Ripple protocol. All other fiat currency funds are deposits in the banks’ accounts (Ripple.com, 2018). XRP is considered the reference common denominator between currencies on the network. This can be particularly useful where less frequently traded peripheral currencies are involved. For such currencies, the sending and receiving bank may opt to use XRP as an interface between the two fiat currencies, creating an efficient netting triangulation of currency offsets. The benefit to banks in using XRP and Fiat currencies on the Ripple platform is the reduction in costs of c 60%, the almost real time settlement of cross border payments and the reduction of currency floats at banks. The key beneficiary is the end customer who pays reduced fees and charges. An emerging important benefit of using Ripple over Bitcoin is the ability of RippleNet to handle KYC and AML management through the RippleNet platform. Given the large cost overhead for banks and customers, this is a welcome benefit.
D. Consensus
Consensus algorithms are designed to achieve reliability in a network involving. Solving that issue — known as the consensus problem – is important in distributed computing and multi-agent systems (Martin and Alvisi, 2006).
Bitcoin uses the proof of work algorithm to ensure security in the network. It uses computing techniques that ensure that the effort of mining is represented within the block submitted by the miner (Nakamoto, 2008). New Bitcoin transactions are broadcast to all nodes.
The software on miners’ computers is used in terms processing capacity to validate and solve transactions. Blocks are encrypted hash (SHA256) proof of works that are created by computer-intensive algorithms. The amount of computing effort required to submit and have fictious transactions submitted and accepted to the blockchain is too great to make it economic for any bogus contributor (a concept known as cryptoeconomics).
With Ripple, the consensus rules work to achieve the conditions of correctness, agreement and utility. (Scwartz, Youngs & Britto, 2014) The nodes on the network share information about possible candidate transactions. Through the consensus process, nodes review and agree on a specific subset of transactions to be the next version of the ledger. The process goes through an iterative process ultimately to a stage where a super majority of nodes agree to the same candidate transactions. Section 3 of the Ripple Protocol Consensus algorithm sets out the iterative round process to ultimately arrive at the aligned objectives of correctness, agreement and utility. The result as described in the white paper is that “Ripple Protocol is able to process secure and reliable transactions in a matter of seconds: the length of time required for one round of consensus to complete” (Section 5, Page 7).
It can be observed that consensus is significantly quicker in Ripple when compared to Bitcoin – being seconds in the case of Ripple and on average at least ten minutes for Bitcoin.
D. Market Capitalisation
At present, the market capitalization of Bitcoin is approximately 5 times that of Ripple (XRP). In quarter 1, 2018, Bitcoin is 48% off from its peak, and Ripple’s XRP is down 72% from its peak (Bloomberg). The supply of Ripple far exceeds Bitcoin total coins– Ripple has 100 Billion coins versus Bitcoin’s 21 Million. Market capitalisation figures are summarized as:
The price of Ripple is heavily influenced by news that relates to banks and their adoption of the technology and the currency. Ripple has made significant progress in achieving banking penetration – many of the large credit card and regional pillar banks have adopted RippleNet. The price of bitcoins on the other hand largely depends on their limited supply versus demand, market volatility and confidence. This means that high demand and low supply often leads to an increase in the price. Volatility is sometimes associated with negative news, particularly regulatory announcements, concerns over money laundering and high- profile comments around the opaqueness of the cryptocurrency (Kim, T. 2018). Of the 100 Billion pre-mined XRP created, the founders of Ripple have retained 20 Billion, with the remaining 80 Billion XRP allocated to Ripple Labs. Of these, only 38 Billion XRP have been released so far (Ripple, 2018).
E. Public Interest
Ripple has simplified and standardised the cross-border payments market. Latency on value dates and currency floats have been virtually eliminated as transactions and payments are executed in a matter of seconds. This has the effect of greatly reducing the cost of transactions, enabling new payment products and facilitating an improved customer experience. Ripple offers banks and their customers a number of immediate benefits- (1) greater payment efficiency at lower costs, (2) real-time cross- border settlement, (3) 365 day access to settlement and (4) Improved transaction monitoring and reconciliation capabilities of currencies. The level of interest in the platform and the currency is at an Institutional level only. According to Ripple, it is working with more than 100 banks to overhaul the way they organize and manage payments for their customers. An important differentiating feature of Ripple over Blockchain is that Ripple offers “The Bitcoin bridge” – a link between the Ripple and bitcoin ecosystems. The bridge makes it possible to pay a bitcoin user straight from a Ripple account without ever needing to hold any of the digital currency.
In contrast, Bitcoin does not rely on trust for financial transactions which is one of the services provided by financial institutions playing the role of intermediaries. Bitcoin prides itself as a single acceptable means of financial transaction that’s not owned or regulated by any government, financial institution or country. This gives financial power to a truly decentralized global network of people who decide what it’s worth.
F. Community
As the word community implies, the Bitcoin community is a group or network of people who use Bitcoin on a regular basis and are interested in the digital currency becoming a popular, widely accepted form of e money. Some of the major hubs where Bitcoin community is present are online forums, such as Bitcointalk and the /r/Bitcoin subreddit.
Given the Institutional nature of the Ripple (XRP) platform, community forums appear not to be as visible or accessible compared to Bitcoin. There is a Ripple forum on the Ripple.com website that users can access with an unofficial XRP Chat forum at https://www.xrpchat.com.
G. Environmental/Society Concerns
Some critics of Bitcoin say it is a fraud and warn of a bubble (Kim, 2018). However, some environmentalists worry about its impact on CO2 climate change. Unlike fiat currencies, cryptocurrencies aren’t tied to a central bank. Bitcoins are “mined” by computers that use large amounts of energy and electricity. Bitcoin uses about 32 terawatts of energy every year, enough to power about three million U.S. households (Digiconomist,2018). Morgan Stanley estimates bitcoin’s electricity consumption in 2018 could exceed that used by Argentina (Worrall, 2018). This has led operators to locate in low cost electricity locations like Iceland or beside hydro – electric stations.
Ripple does not operate using bitcoin-type mining. As such, the currency and platform does not require a lot of computer power and electricity by comparison with Bitcoin. According to Ripple Inc. senior management, Bitcoin mining consumes more electricity than 20 plus European countries. XRP, on the other hand, is designed to settle quickly, in seconds, inexpensive, at fractions of a penny, with minimal energy consumption.
H. Social Considerations
Social consideration is a term which addresses societal issues like social inclusion, poverty, class, mobility, equality of opportunity and access to resources. Regulations and risk combine to ensure that offering services to certain segments of the population is unprofitable. It is estimated that approximately 20 per cent of US households are either ‘unbanked’ or ‘underbanked’ in 2013 (FIDC, 2016) as well as over 130 million unbanked and underbanked adults across Europe (Cairns, 2016). Bitcoin would appear to have social advantages in that it vastly decreases the cost and risk of extending those services to people with low-incomes and poor credit scores. As more and more people invest in cryptocurrencies, regulation is something that will in fact make cryptocurrency a more viable investment. Ripple has built strong banking partnerships. Banking is ripe for disruption and Ripple is the technology that could bring about a significant improvement in efficiency and benefits to both banks and their customers.
I. Privacy
Bitcoin is opaque. It raises a number of privacy concerns due to the fact that all of the transactions that take place are publicly announced in system but no identification is required (Twomey, 2013). All Bitcoin transactions are public, traceable to an IP address and permanently stored in the Bitcoin network. Bitcoin addresses are the only information used to define where bitcoins are allocated and where they are sent. Even though Ripple’s network holds great potential for individuals as well as various financial institutions all over the world, it is vulnerable to de-anonymization attacks. Mixing solutions, which can solve the privacy issues of other cryptocurrencies without relying on smart contracts cannot be implemented on Ripple’s transactions, given that the central server can potentially harvest the coins.
J. Conclusion
Bitcoin has been the trailblazer of cryptocurrencies. While its value over the ten years since its creation has been impressive, there still remains cynicism as to whether it is a vehicle to drive changes in consumer behaviour and that it facilitates money laundering and/or fraud. Its value has largely been its scarcity. Ripple, on the other hand, while initially positioned as an institutional instrument to streamline cross border payments, its’ appeal is the partnerships it has created with banks to assist in building out scale on the Ripple platform and improve cross border payments and costs. This in turn may propagate the development and rollout of the XRP cryptocurrency on a more accepted basis through osmosis. Time will tell!
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