Welcome to our first blog series where we will be covering anything and everything related to altcoins giving you a better understanding of the underlying technology and business use-case to take an informed decision on whether it is fit for a long-term investment or not.

We are starting the series with the popular cryptocurrency “Ripple”. You might be thinking why to start with ripple, why not ethereum, or bitcoin cash which are having more market cap? Well, you might not know but ripplepay as a peer-to-peer payment system was launched way back in 2004 without needing blockchain technology. Also, it is one of the most misunderstood currency as it is so much different from bitcoin.

What is Ripple?

Ripple is both a digital currency (XRP) like bitcoin (BTC), ethereum (ETH), litecoin (LTC) and an open payment network which facilitates the transactions. Though the system is still in beta stage, it has built a lot of excitement for its payment network and has been successful in tying up with popular banks to start using its services.

Ripple aims to build a global payment system which can facilitate inter-bank transfers across the world in a low cost, more accurate and in a trackable and transparent manner.

Global payment infrastructure today

So, let us assume Ram, an Indian-origin software engineer wants to send money from the USA where he is currently working, back to India with his family. To facilitate such transfer, Ram would have to submit the payment request to his US bank which would then send it to his Indian Bank account. Sounds simple, yeah. Not exactly. Let’s see the complete process in detail.

Flow for cross-border payments transfer
  1. U.S. banks make an ACH or RTGS payment to a local correspondent bank who have partnerships with other similar banks for forex transfers
  2. U.S. correspondent bank holds a Nostro account with an Indian correspondent bank and provides FX (transaction cost) for the transaction
  3. Indian correspondent bank debits the U.S. correspondent bank’s Nostro account and credits the beneficiary Indian bank via NEFT/RTGS transfer
  4. This whole mechanism can take anywhere between 1–3 days and more in some cases with very limited visibility to the end user

Drawbacks of the current system

  1. Access: Banks rely on correspondent banks to hold positions around the world to facilitate cross-border payments. As there are only handful of such banks, they charge high fees, limited FX and liquidity making micro-payments non-viable from a business point of view.
  2. Certainity: With many potential points of failures, and lack of visibility leads to frequent errors, highly unpredictable processing times and uncertainty regarding transaction success.
  3. Costs: Lots of intermediaries and processes related to FX and compliance result in huge transaction costs to banks which is transferred to the end user.
  4. Speed: No global standard results in huge difference across different economic corridors regarding processing times. Adding the timezone complexities, the difference in banking hours of the involved parties makes such payments taking up to a week to process.

Ripple way of transfers

Ripple can revolutionize the market of inter-bank transfers on the bank of its digital asset technology powered “XRP” tokens which can be transferred real time across the world with adequate liquidity and reducing costs related to treasury, payments operations, liquidity and compliance. Employing ripple and xrp can help bank eliminate or significantly reduce costs related to:

  1. Liquidity: No need to maintain liquidity in different currencies across multiple nostro accounts. Banks can keep a pool of XRP tokens with them or source them from 3rd party exchanges to facilitate the transfer.
  2. Foreign exchange: No need to worry about the spread between different currency exchanges in the market.
  3. Treasury operations: No need to transfer money to multiple nostro accounts to maintain the sufficient balance.
  4. Payment operations: Less failure points, less manual interventions and thus lesser cost of operations.
  5. Compliance costs: Ripple lowers your bank’s back-office costs through an efficient mechanism to process and settle international payments. This model allows you to estimate the efficiency gains your bank.
Institutional Cost Savings Using Ripple and XRP | Source: https://ripple.com/files/xrp_cost_model_paper.pdf

Taken together, Ripple and XRP minimize settlement risk and eliminate the need for banks to collateralize nostro accounts around the world, resulting in a lower total cost of settlement than ever before.

Conclusion

Ripple and XRP both present a compelling long-term value proposition for all financial institutions seeking global reach. As they enable banks to transact instantly and directly with any other bank partner around the world, optionally sourcing liquidity from a competitive market of third-party liquidity providers, with complete visibility and confirmation of funds transaction.

In the realm of payments, an innovation like Ripple and XRP that makes extraordinary cost-efficiency for cross-border and cross-currency transfers and makes use cases like worldwide distributions, universal money pooling, low-esteem settlements and even miniaturized scale payments not simply conceivable but rather beneficial. It’s these new plans of action that will catalyze improvement of the Internet of Value.

References

https://medium.com/@emresokullu/a-closer-look-at-ripple-the-third-largest-cryptocurrency-2b4315a72b0c

http://altplatform.org/2017/08/03/a-closer-look-at-ripple-the-third-largest-cryptocurrency/

https://www.udemy.com/ripple-coin-cryptocurrency/?couponCode=FRST1A&siteID=i.IXi5qsT7c-FAyRxCcoLgfoa9KpO2S1iQ&LSNPUBID=i*IXi5qsT7c

https://cointelegraph.com/tags/altcoin

https://admiralmarkets.com/education/articles/cryptocurrencies/what-is-ripple

https://www.coindesk.com/ripple-medieval-banking-digital-twist/

https://www.coindesk.com/10-things-you-need-to-know-about-ripple/

https://www.coindesk.com/ripples-xrp-giving-third-largest-cryptocurrency-second-look/

https://www.coindesk.com/downplaying-digital-assets-blockchain-reigns-ripples-swell-event/

Tell us in comments how much it was helpful or if we missed covering any important terms.

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Disclaimer: Trading in cryptocurrencies is subject to market, technical and legal risks. Prices in India vary from international prices due to local demand and supply. This article is for user’s knowledge. Please don’t consider this as an investment advice.