Ripple: how it works, and why it is different than other crypto
Have you ever tried to send money to the other side of the world through the traditional banking system? If so, you will know that these remittances cost a lot of money. On top of that, it will take the money days, sometimes weeks, before it finally arrives. Ripple is one of the oldest crypto companies and is working on faster, cheaper, and overall better remittances around the globe!
Ripple, XRPL, and XRP?
But let’s first clear some things up. You might be confused by the different names we find in the Ripple ecosystem. We have RippleNet, Ripple, XRP, and Ripple Labs. When we untangle this soup of words, we will discover that XRP is the actual cryptocurrency of the system. This cryptocurrency is based upon the XRP Ledger, which you can kind of see as the blockchain of XRP (we will come back to this later). And finally, Ripple is an actual private company working on developing the open-source XRP Ledger and products based on top of that system.
XRP Ledger (XRPL) is not a blockchain in the same form as Bitcoin’s blockchain. A blockchain is a form of distributed ledger technology (DLT); XRPL is also a form of DLT. But again, they work differently. For starters, XRPL doesn’t use a Proof-of-Work (PoW) protocol. Instead, Ripple’s network uses a consensus algorithm that checks the consensus about the ledger with the connected nodes every few seconds. This algorithm is called the Ripple Protocol Consensus Algorithm (RPCA). This algorithm is what makes XRPL so fast and cheap.
Ripple’s system is based on an idea that goes back a couple of ages called the Hawala system. This system heavily relies on trust between different parties. In practice, this looks something like this:
“Maria, who lives in the United States, wants to send $1.000 to Marc, who lives in Germany. Maria goes to her local bank and instructs the bank to transfer said amount to Marc’s bank. Maria’s bank now sends the instructions to Marc’s bank, after which Marc will be able to withdraw the $1.000. Now, the $1.000 didn’t go from Maria’s to Marc’s bank. His bank actually paid the $1.000 out of its own pockets so that Marc could withdraw the money relatively quickly. Maria’s bank now has a debt of $1.000 with Marc’s bank, which will be eliminated during future transactions between the two banks.”
Instead of banks, the XRP Ledger has gateways spread worldwide that transact value with each other. These gateways are businesses, such as banks that transact over the XRP Ledger. Another interesting feature of this system is that when two parties don’t trust each other, a link of trust via other parties can be established. That way, there will always be a route via which trust can be established!
How the technology of the XRP Ledger works
Now it’s time to get to the technology behind XRP Ledger. As mentioned, the XRP Ledger is a type of DLT. Just like any other ledger, the XRP Ledger has pages on which several things are stored. Firstly, there is the Ledger index. This is an identifier that is numbered incrementally. The next identifier is the ledger hash. This can be seen as a digital fingerprint of a ledger version.
This ledger hash comprises a timestamp, new transactions, state data (accounts and balances), a hash of this state data, and a hash of transaction data. Ledger versions consist of more metadata, but these are the most critical parts that make up a ledger version.
How consensus is reached
The XRP Ledger network consists of many servers and client applications. These client applications are, for example, wallets, the earlier-mentioned gateways, and other platforms on which users can send and receive transactions. The servers, however, accept and process these transactions. Once a server receives a transaction, it will share it with the rest of the network. In a perfect world, all servers would receive all transactions that need to be considered for the next ledger version. But as this often is impossible, these servers will at least relay their transactions with the servers they trust.
These servers will change the set of transactions they have based on what their trusted peers have. Does the majority of the servers you trust include the transaction Maria sent to Marc, but you don’t? Then you will add it to your transaction selection as well. Do you have transactions in your selection that the servers you trust don’t have? Then you will delete it (this all happens automatically and split-second). The servers each have a selection of trusted servers. You can see them as sub-networks in the general XRP Ledger network. As these sub-networks overlap each other, eventually, all XRP Ledger servers will agree on which transactions to include in the next Ledger version.
Once the network agrees on which transactions to include in the next ledger version, each server calculates the result as follows:
- The previously validated ledger version is the starting point for all servers.
- Each server places the earlier agreed-upon transactions in the same order (canonical).
- Each selected transaction is processed.
- The ledger header is updated to include the previous ledger version’s hash identifier, hash data of the current ledger, and other required information.
- Once this is done, the final identifying hash can be generated.
- Servers share their results. If a supermajority (at least 80% of the servers) has the same hash key, the new ledger version is accepted and validated.
- Rinse and repeat.
The XRP Ledger has somewhat of a unique way of implementing DLT. Due to the way the network processes transactions and maintains a decentralized ledger, transactions with XRP (XRP) and other currencies via the gateways are rapid and cheap. On top of all that, the XRP Ledger network is known to consume only a fraction of the energy that traditional PoW-networks such as Bitcoin use.
Important to note is that of the time of writing (June 2021), Ripple has been sued by the Securities and Exchange Commission (SEC). They accuse Ripple of selling securities in the form of the XRP currency. This makes XRP, for the time being, a risky altcoin. If the verdict is that Ripple indeed broke the law, XRP might be banned in the USA.