The Three Unsolved Mysteries of Ripple

Author: Echo, Chain Catcher

1. How well is Ripple doing in cross-border payments?
   Ripple's prototype was born as early as 2004, when Canadian developer Ryan Fugger founded RipplePay. The initial goal was to create a value network protocol that would allow money to be transmitted quickly over the internet like data following the TCP/IP protocol, but it did not see significant development due to technological limitations.
   As international trade and globalization further expanded, the pain points of low efficiency, high costs, and significant exchange rate risks in cross-border payment scenarios became increasingly prominent, and the emergence of Bitcoin gave many industry professionals hope for solving these issues.
   In 2011, Jed McCaleb, the founder of the Mt. Gox exchange, acquired the RipplePay project from Ryan Fugger after selling the exchange, and in 2012, he co-founded the current Ripple project (then called OpenCoin) with Ryan Fugger, who became the main person in charge of the project after Jed McCaleb left Ripple.
   In the following years, Ripple received investments from well-known institutions such as DCG, Google Ventures, IDG Capital, a16z, and Standard Chartered Bank, with a valuation exceeding $10 billion at its peak. Ripple also further clarified its mission to eliminate barriers in global payments, enabling funds to move instantly in the same way as information today.
   After years of product iterations, Ripple launched a cross-border payment solution called RippleNet, which includes two parts: xCurrent and ODL (On-Demand Liquidity). The official claim is that clients now cover at least 350 financial institutions in over 40 countries, including MoneyGram, Merrill Lynch, Bank of America, Santander Bank, and Standard Chartered Bank.
   Among them, xCurrent is the foundational solution Ripple provides for financial institutions, representing a real-time two-way settlement form between different banks' ledgers. Compared to SWIFT's one-way messaging framework, it features a two-way messaging framework that allows for transaction pre-validation and rich data attachments, significantly improving cross-border payment processing efficiency and reducing payment costs, typically enabling cross-border transfers within minutes.
   However, in the xCurrent solution, these financial institutions still need to pre-fund their overseas accounts, resulting in relatively high capital usage costs. In response to this pain point, Ripple launched an on-demand liquidity solution called xRapid (later renamed ODL) at the end of 2018, encouraging financial institutions to use the XRP token as a medium for cross-border transfers.
   Specifically, one financial institution only needs to convert local fiat currency into XRP, and then the receiving financial institution can convert the received XRP back into the local currency to pay the recipient, which can reduce the liquidity cost of pre-prepared funds. "This partnership will significantly reduce our working capital requirements and generate more revenue and cash flow," said MoneyGram, a Ripple ODL partner, in its financial report.
   However, despite most financial institutions being able to complete XRP transfers within seconds, it does not mean that these banks can immediately sell all of it for fiat currency at market prices; there will inevitably be losses due to price fluctuations. In the same MoneyGram financial report, the company stated that while bringing liquidity to the ODL forex market, Ripple pays the company market development fees each quarter as compensation, totaling $52.3 million so far.
   According to The Block, two other ODL clients of Ripple (PNC Bank and goLance) also reported receiving rewards from Ripple.
   This information implies that Ripple is currently still promoting the use of the ODL solution by subsidizing financial institutions, which primarily benefits Ripple by bringing more liquidity to the XRP trading market. These institutions will purchase large amounts of XRP after using ODL but will soon sell it to other institutions, limiting the value empowerment of XRP.
   The breakthrough may lie in whether financial institutions are willing to hold XRP long-term rather than just buying and selling it as needed, which requires XRP prices to maintain a high level of stability, something Ripple has been striving to achieve given its high control over XRP.
2. Where is the value support for XRP?
   Among mainstream crypto assets, XRP is one of the most held cryptocurrencies by the official entity. This token has not gone through processes like private placements or mining that other mainstream assets have experienced; all circulating XRP has been publicly sold by the official entity. According to public information, a total of 100 billion XRP were issued, with 20 billion allocated to the founding team and 80 billion to Ripple Inc.
   For a long time, Ripple has been selling large amounts of XRP, using methods such as programmatic sales on exchanges and over-the-counter transactions with partners to raise funds for its technology development and ecosystem expansion. Since the fourth quarter of 2016, it has disclosed that it has raised $1.3 billion through XRP sales, with about 57% coming from exchange sales, while team members' addresses have also continuously transferred XRP to exchanges for sale.
   Some media have questioned the amount of XRP transferred to exchange addresses by Ripple, claiming it is far higher than the disclosed sales data. Ripple explained in its third-quarter market report this year that some wallets used for XRP sales also provide short-term rentals to market makers, which are often misunderstood by market participants as sales, but these rented XRP will eventually be returned to Ripple, although there is no actual evidence to support this.
   Under high control, Ripple has the ability to manage the market circulation and price fluctuations of XRP by controlling the amount sold. Crypto analyst Peter Brandt tweeted in March 2019 using the XRP price candlestick chart as an example, stating, "The manipulators' motivation has played a role in this massive descending triangle, indicating that the market is manipulated, and the manipulators have kept the price at a relatively stable level."
   Additionally, since the fourth quarter of last year, Ripple has stopped programmatic sales of XRP on exchanges, only selling XRP over-the-counter to partners, which is an effective measure to reduce market pressure on XRP.
   As a result, XRP has been one of the mainstream cryptocurrencies with the lowest price volatility for most of the past two years, even being jokingly referred to as a "stablecoin." Many investors have complained frequently, but the promotion of Ripple's ODL solution has also achieved initial results. According to Ripple's Vice President of Products Asheesh Birla's tweet in August this year, as of the second quarter, the trading volume of ODL products using XRP accounted for about 25% of the total RippleNet trading volume.
   However, some data shows that the development status of ODL is not optimistic. According to Ripple's official website, the ODL product currently only supports three countries: Mexico, the Philippines, and Australia. At the same time, the amount of XRP sold over-the-counter to institutional clients has also significantly declined this year, with sales in the first three quarters being less than one-third of the same period in 2019.
   Regarding the recent significant rise in XRP prices, which deviated from the previous "stable" trajectory, three direct reasons are generally believed to be behind it: first, Ripple officially added Bank of America to its top member list for RippleNet at the end of November; second, Flare Network announced an airdrop of its tokens for XRP holders; third, the number of active XRP addresses reached a new high. Although these three pieces of information are not major, in a market with heightened sentiment, XRP is widely believed to have significant room for rebound and quickly became a hot topic for market speculation.
   Ripple's official accumulation has also been regarded by some as an important reason for XRP's rise. In October this year, Ripple stated in its third-quarter market report that it purchased a total of $45.55 million worth of XRP during the quarter, marking the first time Ripple publicly purchased XRP from the secondary market. This was seen as a significant positive for the Ripple project, indicating that it was starting to drive up XRP prices. However, further analysis of the data shows that the aforementioned purchasing behavior is actually an additional result of Ripple's newly launched ODL credit product.
   In October this year, Ripple announced that ODL clients could begin testing the use of credit lines to purchase XRP, meaning Ripple would purchase XRP based on the client's credit limit for the client to use, and the client would need to pay a fee for the borrowed assets.
   In other words, the XRP purchasing behavior mentioned in Ripple's third-quarter market report was actually implemented by Ripple on behalf of ODL clients and would be sent to another financial institution by the clients, rather than being an accumulation behavior by Ripple itself. However, this move may also attract more financial institutions to use the ODL solution, increasing market demand for XRP.
   Despite XRP being the third-highest cryptocurrency by market capitalization globally and experiencing a significant rise recently, its value support is still subject to considerable public skepticism. Compared to the value storage, on-chain governance, staking rewards, and gas fees of other mainstream cryptocurrencies, XRP's individual use value is quite limited. Its cross-border payment scenarios are currently primarily used by financial institutions, facing fierce competition from stablecoins like USDT and USDC in personal use cases.
   Although Ripple's cross-border payment solution has been adopted by over 300 institutions, this does not mean that XRP's value will necessarily rise in tandem; there is no anchoring relationship between the two.
   Morgan Creek Capital co-founder Anthony Pompliano has also stated that the XRP token and the software company Ripple are two very different investments. For example, Ripple owns assets like xRapid, xCurrent, and XRP, as well as profits, cash flow, investments in MoneyGram, and other valuation metrics. On the other hand, XRP does not create or drive its value, except through price speculation.
   "Some retail investors believe that by purchasing XRP, they can gain access to Ripple's financial performance. This is clearly incorrect; if Ripple succeeds, it does not necessarily mean XRP will also succeed," said Anthony Pompliano. "I do not want to own an asset that may or may not exist in the future. It has no potential utility or value drivers that I can point to and say I am confident it will last."
   Wang Wei, co-founder and CTO of Youzheng Chain, told Chain Catcher: "Ripple has mixed the transfer and remittance functions with concepts similar to equity, creating a vague imagination space for users. If XRP is merely used as a stablecoin for transfers, there is no logic for its price to rise."
   In response to various accusations from the outside world, Ripple has been trying many ways to create more use cases for XRP over the past few years, including vigorously promoting the ODL solution and making extensive investments. However, these initiatives are also based on the funds obtained from Ripple's large-scale XRP sales. JP Morgan Chase Vice President Tone Vays has commented that compared to startups generating liquidity through legitimate means, Ripple's reliance on continuous coin sales gives it a "ridiculous financial advantage."
   This "financial advantage" enables Ripple to promote the use of the ODL system by subsidizing financial institutions like MoneyGram, increasing the market demand and liquidity for XRP, as detailed in the previous analysis.
   On the other hand, Ripple has launched the Xpring initiative to make extensive external investments. According to The Block, as of June this year, Ripple has invested at least $500 million in 27 projects, most of which are related to expanding XRP's use cases. For example, it invested $100 million in blockchain gaming platform Forte, which will use Xpring's open-source Interledger protocol and open XRP trading pairs; it invested $1.5 million in cryptocurrency ATM network Coinme, allowing XRP to be available at over 2,600 Coinme ATMs; and it acquired decentralized payment platform Logos Network, whose founder was appointed as the "DeFi Product Head" of Xpring to help Ripple build a DeFi ecosystem based on XRP, including derivatives, loans, and futures.
3. Where is Ripple's future?
   However, at present, the actual utility of the projects Ripple has invested in is quite limited and has not significantly enhanced XRP's use value in the cryptocurrency market.
   It is also important to note that most of the main RippleNet clients currently promoted by Ripple are also its investors or investees, such as its investors SBI, Santander Bank, Siam Commercial Bank, Standard Chartered Bank, and investees MoneyGram, Bitso, etc.
   Among them, the cooperation between Ripple and Japanese financial giant SBI is the most typical. SBI has participated in multiple rounds of private financing for Ripple, and the two established a joint venture, SBI Ripple Asia, in 2016 to promote RippleNet solutions in the Asian financial market. They have already achieved cross-border transfers between Japan and Thailand's Siam Commercial Bank (an investor in Ripple) and Vietnam's TPBank (invested by SBI) based on this solution. In July this year, SBI Ripple Asia also stated that it is "conducting limited trials and pilot projects for the ODL system with several companies," aiming to launch by early 2021 at the latest.
   In other words, many of Ripple's current solutions are still being implemented within the scope of its stakeholders, and there are not many pure external clients. "Trust is very important in the financial industry, including trust among ecosystem participants and the public. Although Ripple has some international banks supporting it, which can indeed enhance payment efficiency, Ripple does not have a good reputation in the industry, making it difficult to extend that trust externally," said a senior industry researcher who wished to remain anonymous.
   At the same time, compliance is also one of the barriers to broader applications of XRP, as cryptocurrencies are still considered illegal by many countries and financial institutions. J Young Lee, co-founder of Ripple's South Korean partner Sentbe, stated this year that they had tested using the digital asset XRP as a liquidity settlement solution, but the regulations issued by South Korean regulators did not allow for this, leading the company to use RippleNet to connect to more banks and financial institution networks.
   To further promote the compliance process of cryptocurrencies, Ripple has launched the University Blockchain Research Initiative (UBRI), funding research on blockchain and digital payments at universities such as Stanford University. The first batch of partners has invested $50 million, and the total number of partners has reached 37.
   Charitable actions are also an important initiative for Ripple to establish a good social image. For example, in March 2018, Ripple donated $29 million worth of XRP to support public schools in the U.S. The founding team of Ripple donated $25 million worth of XRP to the San Francisco State University Business School in April 2019, and in October this year, it donated $10 million worth of XRP to Mercy Corps, totaling over $110 million in donations including UBRI.
   At the same time, Ripple has hired many professionals in compliance to join its team, including former New York Department of Financial Services head and BitLicense creator Ben Lawsky, former Bloomberg Global Regulatory Affairs and Public Policy head Michelle Bond, former American Express General Counsel Stuart Alderoty, and former Treasury Department advisor Craig Phillips, making significant contributions to Ripple's government relations and expanding its financial institution client base.
   Based on these actions, Ripple is also continuously promoting the use value of XRP. Ripple CEO Brad Garlinghouse recently tweeted that he believes BTC is an effective tool for hedging against inflation, while XRP has advantages in speed, cost, and scalability, making it a suitable payment method.
   "The development of digital stablecoins has not yet reached a certain level; many small countries do not have credible stablecoins to anchor to, and transfers with these countries cannot be replaced by stablecoins. Moreover, issuing stablecoins requires a large amount of assets to be stored 1:1 in banks, which cannot be used as liquid assets, leading to high costs and low capital utilization. XRP is still hard to replace," pointed out another industry researcher, Ricky Liu.
   In recent years, central banks around the world have announced their digital currency plans, providing Ripple with new narrative space. Ripple stated on its official website that central banks will inevitably adopt different solutions and technologies, and currently, no traditional financial institutions have proposed solutions. RippleNet's ODL service allows financial institutions to use XRP for direct exchanges of various CBDCs, achieving interoperability between CBDCs through open protocols and standards. At the same time, neutral and efficient digital assets like XRP can reduce the hegemonic influence of powerful nations and help ease the competitive environment in international trade payment systems.
   Under high control, it is not surprising how the price fluctuates, but no matter how many stories are told, sufficient actual results and use value are needed to consolidate public trust. Ripple has long been questioned for "selling coins for a living," and XRP is viewed as "air" by many investors. Ripple's various initiatives have not effectively reversed this situation, and current hopes can be considered bleak.