Ripple is an internet protocol developed by Ripple Labs to connect all the world’s disparate financial systems to enable secure transfer of funds in any currency in real time. Ripple Labs was co-founded by Chris Larsen and Jed McCaleb. It is based in San Francisco and has received funding from Andreessen Horowitz, Google Ventures, IDG Capital Partners, Digital Currency Group and several other prominent VC firms.
Ripple Transaction Protocol (RTXP)
A protocol is a system of rules that allows messages sent by one system to be decoded by another system. The common protocol used by people on daily basis is the communication protocol, HTTP (Hypertext Transfer Protocol) and the email protocol, SMTP (Simple Mail Transfer Protocol).
The Ripple Transaction Protocol (RTXP) serves to establish a series of rules by which disparate financial systems can communicate among one another, much like HTTP and SMTP. By establishing a universal financial protocol, RTXP serves to create a universal set of rules that each financial institutions could abide instead of having each institution working within the confinement of its own rules and regulations.
Fiat currency balances traded on Ripple protocol are only redeemable at specific “gateway” from which the digital money is issued. Gateway is the place where fiat currency enters and exits the Ripple protocol. Gateway may seem similar to traditional commercial banks in practice, but gateway could be any business that provides access to Ripple protocol including banks, money service businesses, marketplaces, or any other financial institution providing the services of accepting cash deposits, issuing balances into user accounts and accepting users withdrawals on demand. Popular gateways for the Ripple Protocol include SnapSwap, Bitstamp and Gatehub.
Gateways are of utmost importance for Ripple ecosystem because they allow funds to enter the system and to be redeemed outside of it. Gateways enable currency exchanges and transfers for users by backing the funds that enter the Ripple protocol. Each currency on Ripple has its specific issuing gateway, such as: USDsnapswap, BTCbitstamp, CADBluzelle and so on. This system is in place to ensure that gateways are only required to back the amount of currency that they approved of issuing, as opposed to the full amount of a given currency type available on the Ripple protocol.
Users need to understand that by exchanging the fiat currency to Ripple through a gateway, they are exposed to counterparty risk. This holds true for both Ripple as well as the traditional financial system. By holding balances with a specific gateway, the user is at risk of losing the value of its balances if the gateway refuses to honor the balance because a balance is nothing more than a gateway’s promise to repay its liability. Therefore, it is critical for users to only hold balances at creditworthy gateways. Ripple protocol by default assumes that users acknowledge the gateway’s counterparty risk when users hold their balances in a specific gateway.
Consensus and Security
The Ripple protocol does not make use of Proof-of-Work or Proof-of-Stake hashing algorithms. Instead it relies on a consensus algorithm to track accounts and the balances associated to each account. The ledger is continuously and automatically updated by the Ripple Transaction Protocol so that an identical ledger exists on thousands of servers around the world and can be viewed by anyone at any time.
Ripple protocol reaches consensus globally within seconds after changes are being made. The consensus process allows for fast, secure and decentralized transaction settlement on the Ripple protocol by omitting troublesome centralized transaction settlement with limited security guarantee.