Ripple’s XRP has been trading places back and forth with Ethereum (ETH) as the second largest cryptocurrency (by market cap) in the world. Is one really better than the other? Is it too late to buy into either of them? What do they even do?
On this page you’ll find an in-depth comparison between these two cryptocurrencies: XRP vs ETH. We will start off covering the basics; what are these digital assets, what are they trying to accomplish, and what problems are they dealing with?
Let’s get right into it.
XRP vs ETH: What Are They?
Those unfamiliar with cryptocurrency may be surprised to know that there are thousands of unique digital assets which, ideally, offer their own value proposition. This is certainly the case with the two cryptocurrencies we are going to talk about today; Ripple and Ethereum.
What is Ripple?
Well, that would depend on which “Ripple” you are referring to.
For the sake of clarity its important we make the following distinctions when referencing “Ripple”:
- Ripple Inc: The company responsible for creating Ripple products. Formerly known as Ripple Labs, and OpenCoin before that.
- Ripple: A payment protocol for interbank settlements.
- XRP: The Ripple protocol’s native cryptocurrency. Sometimes (but not often) referred to as Ripples.
This clarification is crucial to understanding the true value of the XRP token.
What Is XRP?
XRP is the cryptocurrency native to the Ripple protocol.
- There are a total of 100 billion XRP, all of which were created at the time the protocol was deployed (pre-mined).
- Ripple Inc currently holds ~62 billion XRP (~62% of total supply); 55 billion of which has been placed in an escrow contract. The contract will release 1 billion XRP each month, for 55 months, to be used by Ripple Inc at its sole discretion.
- XRP is divisible to 6 decimal places, and the smallest unit is called a 1 million drops equals 1 XRP.
- Every account participating on the Ripple network is required to have a small reserve of 20 XRP.
What is Ethereum?
According to the Ethereum website, “Ethereum is a decentralized platform that runs smart contracts.”
Let’s break that sentence down one step further:
- A computing platform is the environment in which a piece of software is executed.
- Decentralization is the process of distributing or dispersing functions, powers, people, or things away from a central location or authority.
- Smart contracts are self-executing contracts written in computer code. Think of “if this, then that” statements. A vending machine is a common example of a smart contract; IF the user inserts $1, THEN a candy bar is released.
Now that the jargon has been deciphered, one more time: Ethereum is a decentralized platform that runs smart contracts.
XRP Vs. ETH: Use Cases, and How They Work
How does Ripple work?
Ripple is a real-time gross settlement system, currency exchange, and remittance network. Put more simply, using Ripple helps banks transfer (and track) assets cheaper and faster.
The easiest way to explain how Ripple works is to first introduce the concept of hawala networks; a traditional offline way to send money in areas where banks can’t (or won’t) operate.
There are three different kinds of actors in a hawala transaction:
- Local hawala agent for each of the former to interact with
In this example Alex wants to send $10 to Beth, who lives in a city far away:
- Alex visits her local hawala agent to make a transaction. She provides the agent with $10 and a password Beth will use to claim the funds.
- Now it’s up to Alex’s hawala agent to make contact with Beth’s local hawala agent, instructing him to release $10 to someone who can provide the password.
- Beth walks into her local agent, says the password, and receives $10 from the agent.
Note that money has transacted from Alex to Beth, but physical notes have not moved.
We are left in a situation where Alex’s agent owes Beth’s agent money. The agents can either settle the debt face-to-face at a later date, or hope that their other clients will want to move money in the opposite direction.
i.e. Beth’s cousin, who uses the same local hawala agent as Beth, sends $10 to his friend, who happens to use Alex’s local agent. This transfer of $10 in the opposite direction as the earlier transaction cancels things out between the hawala agents.
The hawala payment network requires both the sender and the receiver to trust the agents to make the transaction, and for the agents to trust each other to resolve any debts incurred.
Ripple, A Modernized Payment Network
Ripple is a modernized payment network which utilizes blockchain technology to reduce friction.
Instead of hawala agents, Ripple uses gateways. Gateways can be banks, money service businesses, currency exchanges, or any other financial institution.
Transfers made using Ripple take only seconds to process, provide end-to-end visibility for all parties involved in the transaction, and lowers operational costs. These are significant improvements that aim to disrupt a central part of banking that has lacked innovation for a long time.
Here’s what the hawala transaction above would look like with Ripple:
Alex would log on to a Ripple gateway, deposit her $10, and instruct them to release those funds to Beth. Beth is then able to collect $10 from his gateway. This transaction can be completed in seconds.
Features Beyond Hawala
Ripple takes payment networks a step further by being asset agnostic. Using Ripple you can send any currency, precious metal, flower, or Lego structure, so long as both participating gateways are prepared to accept and hand out said asset.
It is also possible to trade between assets (i.e. apples for oranges) with the help of a market maker; someone who offers to buy a balance at one gateway in exchange for a balance at another gateway.
A System of Trust
Payment networks require participants to trust each other because no physical notes are being exchanged. You can sell your basketball to a complete stranger because you trust in the U.S. government issued $5 bill he gives you.
When you issue a transfer through a Ripple gateway or hawala agent, you are essentially passing on an IOU to the corresponding gateway or agent – but what good is an IOU from a stranger? You wouldn’t accept an IOU for your basketball unless you knew the buyer or one of your friends could vouch for them.
Ripple deals with this inherent requirement of trust using trust lines. Trust lines enable transfers between gateways who may not directly trust each other, so long as there are intermediary gateways or ‘friends of friends’, who trust all parties involved.
If the network is unable to find a trust line between two gateways they have the option to deal in XRP. All gateways provide a price in XRP for anything they deal in (USD, gold, legos). Just like cash, XRP transactions are settled immediately and are therefore final and trustless.
How Does Ethereum Work?
ETH is programmable money.
The utility of having programmable money is extremely powerful. Smart contracts make all kinds of existing financial transactions more accessible to everyday people.
A simple example is an escrow contract. Escrow services use a neutral third party to temporarily hold the value being transacted (usually money) until the conditions of the trade are met by both parties.
Escrows are typically reserved for big money transactions, like the sale of an online business or luxury car, and require both transacting parties to trust that the escrow agent will do the right thing.
If escrow functionality was programmed into an Ethereum smart contract, then nobody would need to trust a third party to do the right thing, and fees would be significantly cheaper.
Removing the Middle Man
Ethereum and smart contracts enable us to do business with people we don’t necessarily trust without a middle man subjecting us to counter-party risk.
Today we rely on middle men when we want to transact with people we don’t know.
- When we want to buy concert tickets, we use Ticket Master.
- When we need a driver, we use Uber.
- When we need a room, we use AirBnB.
In exchange for connecting us (the buyer) with people who provide the services we are looking for (the sellers) the middle men charge hefty fees. These fees make the services more expensive for buyers and cut into the profits of sellers.
One of the common uses of Ethereum today is crowd funding. Instead of using Kickstarter or Indiegogo and paying 5% of their raised funds in fees, Ethereum developers are able to write their own crowd funding contract and receive every cent they raise from crowd sales participants.
XRP vs ETH: Common Criticism
It’s too early for anything in the cryptocurrency industry to exist without flaws. Neither of these two digital assets are perfect. Here’s what’s wrong with XRP and ETH:
XRP: Common Criticisms
The most common criticisms involving XRP revolve around the risk of centralization and the lack of value accrued to the XRP token.
Risk of Centralization
Ripple Inc has custody over 60% of the total XRP supply and has complete discretion over the use of these tokens. Ripple claims having those XRP on hand gives Ripple the advantage of being able to incentivise the network to create growth, liquidity and new markets.
In addition to this, Ripple maintains a permissioned network of validators in place of an open proof-of-work blockchain. Transactions are added to the ledger once a supermajority of validators reach agreement.
This method of consensus requires users to pick from a list of unique nodes they trust to validate each ledger. Ripple maintains a curated list of Ripple trusted nodes, which some argue encourages centralization, as users are likely to default to this list when using the network.
Potentially Misleading Press
Ripple boasts an impressive amount of partnerships. They regularly provide updates on the latest big banks experimenting with their products. Naturally, investors in the XRP token are more than happy to spread the news every time a new name is added to the growing list of Ripple’s partnerships.
However, it’s unclear how many (if any) of the big banks listed on Ripple’s website are actually using, or plan to use, the XRP token for anything other than paying the mandatory transaction fees.
Questionable Token Value
As previously mentioned, the use cases for the XRP token within the Ripple network are to prevent spam, and to optionally be used as a settlement currency.
Some have argued that because Ripple’s payment protocol is currency agnostic, users could just as easily use a non-XRP cryptocurrency such as Bitcoin or Ethereum to accomplish virtually the same goal, and that any marginal advantage XRP currently has over those alternatives will fade as the networks mature.
Multicoin Capital, whose XRP analysis was referenced in the creation of this article, concluded their XRP analysis with this:
However, it is important to recognize that a good use of blockchain technology does not always justify the value of a chain’s native token. In the case of XRP, we believe that the token holds little utility beyond payment of negligible fees, and thus is unlikely to maintain and build value in the long term.
While we expect that XRP tokens will continue to see price spikes as Ripple Inc. Makes announcements, we don’t believe that the fundamentals of the protocol will build sustained value for XRP.
An investment in XRP is not an investment in Ripple Inc. The company may do well offering a useful service to banks, but XRP’s value is likely limited. For these reasons, we are bearish on XRP at current prices.
ETH Common Criticisms
Ethereum’s biggest problem is the same one that plagues Bitcoin; scale. But that’s not all.
Ethereum Network vs Kittens (Scalability is a Problem)
How much would you spend on a virtual kitten? When CryptoKitties first opened up shop on the Ethereum blockchain these little fur babies were going for as much as $113,000.
CryptoKitties was an instant hit, much to the dismay of everybody else on the Ethereum network. The game was so popular that it significantly increased transaction times network-wide.
It was already obvious that Ethereum would need to work on scalability at some point in the future, but the sheer ridiculousness of a digital cat breeding game doing the damage surfaced the network’s underlying limitations and made headlines everywhere.
History of Interventionism
Ethereum was billed as a decentralized platform where code was law. Smart contracts were irreversible. Until one was reversed.
Infamously known as the “DAO hack”, 3.6 million ETH was stolen by a hacker who discovered a vulnerability in the code. Vitalik Buterin and his team decided to intervene; rolling the entire Ethereum blockchain back to the before the hack happened.
This is what sparked Ethereum Classic, a fork of Ethereum. Although Buterin and his team recovered $64 million worth of ETH, their actions proved that code was not in fact law.
In addition to the above points it’s no secret has Ethereum has a full plate right now. With talk of moving from a proof-of-work (PoW) consensus to proof-of-stake (PoS), sharding, Casper, zk-SNARKs, Plasma… Only time will tell if this ambition will pay off or spread the team too thin.
The Winner of XRP vs ETH…
The winner of this battle is Ethereum. ETH is a better representation of what cryptocurrency is meant to do: empower the everyday person to do things they once needed permission, money, or a middleman to do.
The Ethereum platform enables developers to make even further progress towards this goal. Although there may have been missteps and the platform still has its problems, it’s still early. There likely isn’t a “finished” product in the cryptocurrency space today that will survive the next five years. Our comparison of Ripple with Cardano reveals more in the debate.
Ripple has made serious progress reaching partnerships with big banks who appear interested in using their products, but there is no sign these banks plan to seriously use the XRP token. Ripple claims banks are looking into XRP, but reporters didn’t find quite the same enthusiasm about XRP when they followed up.
No matter where your personal opinion of the pseudo-decentralized nature of Ripple and XRP lies, the token remains a questionable investment opportunity if banks aren’t actually using the XRP token. If, somehow, a large majority of the partnered banks decided to start using XRP instead of an alternative cryptocurrency, Ripple may be worth revisiting.
Until then, Ethereum looks to be the favorite moving forward.
The above article is not investment advice.
If you want to learn more about the subjects discussed in this article, check out the sources we researched to create it: