Ripple – Why You Shouldn’t Invest (and Not Because It’s a Scam)

Update

A lot has changed about Ripple since this article was published in May of 2017. Since then, I have updated my thoughts and released them in a blog post for Hackernoon.
Original Post

This morning, I saw a post of r/cryptocurrency warning potential users of a so-called fraudulent coin called Ripple (token XRP).

As many of you have likely noticed, Ripple has skyrocketed in value, becoming the 2nd most valuable cryptocurrency by market cap (reaching close to $9 Billion this morning). However, it seems that many people treat Ripple like any other cryptocurrency, like Bitcoin and Ethereum. This fundamentally misunderstands why Ripple was created and how it should be used.

In this blog post, I want to state how Ripple is different and give a recommendation for future use (spoiler: don’t invest).
Ripple is not an Open Blockchain. Individuals can’t get full access to the Ripple Network.
Unlike Bitcoin, Ethereum, Litecoin and 90% of all cryptocurrency blockchains, Ripple is a relatively closed blockchain. Through some effort, users can go download a wallet and transfer Ripple to it, but you have to create trust lines with other organizations in order to get access. In this way, you can’t just send money to whomever you want, they have to accept you as trustworthy before allowing transactions. And considering most users are banks, they have no reason to accept you.

The reason for this is because Ripple is designed to take real world asset and transfer them to the Ripple Network. This is done through a process known as ‘issuance’, where a bank will create a transaction that adds the real world asset to the Ripple Blockchain. They can then trade these issuances with other Ripple 3rd parties, taking advantage of the low cost of transacting on the blockchain.

The reason for these trust lines is because issuances hold very real value. If I have an issuance for a pound of gold, the other parties trust that I actually have this asset. If a malicious 3rd part creates a fake issuance, it will be treated as real. Even one instance of a fake issuance can break the trust of the system and collapse the network.

Because of this, Ripple is a blockchain for banks, primarily focused on B2B. Normal consumers are not supposed to interact with the system and have better alternatives available.

You can read more about the specifics here.

XRP is not a cryptocurrency in the Traditional Sense
When Bitcoin and Ethereum were originally created, their cryptocurrencies, BTC and ETH, were designed to be stores of value. When you created a transaction, you were sending a store of value to another account (for payment for goods and services). Miners created nodes on the network to process transactions and were compensated with this cryptocurrency, either through fees or mining rewards.

This is not how Ripple works. XRP was mined all at once by the parent company, with a majority of the cryptocurrency held by them. When a transaction is made on the XRP network, there is a fee paid in XRP, but this is not compensation. All transaction fees are ‘irrevocably destroyed’, not being paid to any members.

XRP was created as an anti-spam measure to make it costly for people to spam the network with transactions. All XRP was created to be destroyed and if the network lives long enough, will be destroyed. This is in contrast with BTC and ETH, which are specifically designed to be long-term stores of value.

While XRP does seem to have an incentive around trading (as state here), the ultimate point of XRP is to be burned, not held.

You can read more about transaction fees here.

The Founders of Ripple Recommend Not Investing in Their Currency
From the link above:

Private exchanges and liquidity providers may choose to hold additional XRP for trading. Ripple (the company) does not promote XRP as a speculative investment.

XRP has unique properties and a special use case that does not fit into the traditional cryptocurrency paradigm. The majority of the currency is controlled by the Ripple Foundation and while they absolutely have the option to sell of their share for a quick profit, this goes against the goals of the organization and their mission.

One thing I am not certain of is why the cryptocurrency is allowed in exchanges in the first place. If you have ideas about that, please comment on this post, as I have not found any research explaining that decision one way or another.

Conclusion
This article is not intended to be a defense of Ripple and their practices, but an explanation of why Ripple is different from traditional cryptocurrencies. Because the Ripple organization is such a heavy holder of XRP with unknown goals, it’s highly speculative on how the cryptocurrency is going to be valued in the years to come.

Here’s another way to think about XRP: Ripple owns the vast majority of the XRP (over 60% of the supply). They can decide to cash in on the value, or completely devalue the market by flooding it with cheap XRP. At this point, we don’t know what they’ll do with this high valuation, but regardless, you are at the whim of a powerful 3rd party with uncertain goals. And more importantly, they’re telling you the currency is not good for speculation.

For long-term holding, this is a deal breaker, particularly in a market with so many good options.