Generally, I consider Bitcoin and XRP as completely different ‘animals’: different technologies for a different purpose. However, just like all altcoin companies, Ripple marketing and XRP fans can’t resist to compare them – it’s human that we want to justify our decisions, to confirm our bias, and to compare (often enough, apples with oranges). So just as with all other altcoin projects, we find the good old “my altcoin – once the world realizes how great it is -, will be the new Bitcoin!” claim, the upsides of their coin emphasized while the downsides are left out of the discussion.
So it is intriguing to actually compare both technologies and to see how both of them would do as stores of value and money (which are arguably Bitcoin’s major functions).
But why was XRP even created in 2012, when Bitcoin already existed? Of course (as most altcoin projects say), to ‘improve’ on Bitcoin. According to David Schwartz’s own words, the goal was to speed up transactions and to allow preventing double-spends without the ‘complicated’ and resource-intensive Proof of Work. What altcoin promoters rarely mention though is that according to the scalability trilemma, increased speed and reduced fees come at the price of reduced decentralization and/or security. The ‘trick’ XRP uses in order improve scaling on the base layer is to delegate parts of securing the network to so-called ‘validators’ – basically a set of trusted nodes that get the power to decide on the validity of transactions, thereby creating shortcuts for the process. On top of that, XRP tokens were premined (created without underlying ‘work’ – basically by simply setting a number in the code), so when Ripple marketing displays contempt about the ‘cost’ of mining (which from a Bitcoiner’s perspective is actually a major advantage, as it requires skin in the game – actual ‘work‘ to create the money added to the available supply), they depict this element of the network economy as ‘dispensable’ as well. But if delegating trust and premining are fine – why didn’t Ripple simply create a database? I’ll follow up on that below.
However: the different validation mechanism of XRP is indeed way faster because it neither requires the same amount of decentralization nor the complex process of trust-minimized validation, and it also works with smaller fees (they basically just exist to prevent hostile actors from spamming the ledger). Therefore I would argue that as long as Bitcoin’s Lightning Network and its Liquid sidechain are still getting up to full speed, XRP might be a good alternative for small and micro-payments.
But what are people who prefer XRP over Bitcoin giving up in exchange for increased speed and reduced fees, and why is it even questionable to put XRP in the same category as Bitcoin? This requires a closer look than just a few marketing one-liners.
- There is no reliable monetary policy for XRP – at all: Ripple’s influence and power over XRP could lead to a push to increase the XRP supply ‘because it’s necessary’ (just imagine what would happen when Schwartz or Garlinghouse gave an excited press conference, saying that they need more tokens for purpose X or Y – would a majority of validators really vote against that, potentially risking Ripple abandoning project support?). On the other hand, Ripple can also sell up to 1 billion of tokens per month from their escrow when they feel a need to, which would create notable pressure on the price. So even when Ripple advertises ‘limited supply’, it is factually ‘unlimited’ at least until the escrow has been sold off, which would take 25-30 years at the current pace.
- XRP users usually don’t run validator nodes, therefore, have no influence whatsoever on decisions affecting the XRP ledger.
- Economically disadvantaged people would not even be able to run nodes or become trusted validators. Running an XRPL node and becoming ‘trusted’ requires a) a costly investment in hardware b) fast, permanent Internet connections, particularly if one intends to run a historical node, and c) identification. Regular users will only be able to run truncated (pruned) nodes at best and have to delegate trust to third parties about the rest of the XRPL database, or much more likely, they will run no node at all and have to delegate trust completely. Not even having a realistic choice to ‘be your own bank’ however is in diametral opposition to what ‘electronic money’ was meant to be when ‘Satoshi Nakamoto’ finally achieved this goal by creating Bitcoin.
- It is very unlikely that the marketing claim ‘banks will use XRP‘ will ever materialize on a large scale. Why should a bank buy XRP tokens instead of using stablecoins or CBDC’s? Why should any central bank use a public (XRP) ledger they have no control over, instead of using a private one? They might fork XRP in order to create a private ledger, and use stablecoins to ‘bridge’ the various private ledgers with other central banks – but if, how and to which extent XRP tokens would ever have a role in this is unclear. Considering the massive competition between nation states, political alliances and corporations about their ‘moneys’ it is unlikely that a technology closely associated with 1 particular entity would be touched by their adversaries.
- The ledger itself is actually ‘broken’ as it misses many, many records – which is pretty much the only thing you can NOT have in accounting. For 2 times in XRP’s history so far, ledger states have gone missing: a) The first week of ledger history for XRP is inaccessible – Ledger #32570 is the earliest point on XRP’s blockchain which is completely available. What preceded this point has been lost and, it seems, will never be retrieved, including the genesis block. So in essence, exactly the ledgers containing the most relevant transactions in the history of XRP can’t be audited! b) 20181114 00:17:30 – 20181114 01:09:41 (ca. 52 minutes). What happened during that time? Could something like this happen again? No one knows. Regarding the past: it was proposed to simply ‘think of’ ledger #32570 as the genesis block in a somewhat ‘creative’ approach (think of trying to submit an income tax form starting the year in February). A blockchain without a genesis block remains an anomaly in the entire industry.
- No fair distribution: XRP fans like to claim that Satoshi ‘premined’ Bitcoin, too – wrong. He had to mine them just as everyone else, and he actively invited others to do the same from the very beginning, which has inspired the term of an ‘immaculate conception’ of the Bitcoin network. Several pioneers even contributed coins to public ‘Bitcoin faucets‘ where people could request free Bitcoin for a while. In a way, this fair distribution lasts to this very day: everyone can participate in mining (=receive new Bitcoin), just due to higher demand, the bar in terms of requiring ‘skin in the game’ (electricity cost) has raised since back in the day.
This is in stark contrast to the Fiat-like a) generation of 100,000,000,000 XRP tokens ‘at the press of a button’ and b) their pre-distribution to insiders (9.5 bn to Chris Larsen, 9.5 bn to Jed McCaleb, 1 bn to Arthur Britto, 80 bn to the Ripple corporation). If anything is a showcase example of centralized token predistribution, this is it. People who want to get their hands on XRP tokens have to buy them from one of these parties, which received them for free – thus having an unfair advantage over anyone else in the network. It is arguably essentially a free money-making machine for them.
- “Validators” are under human influence, in other words: XRP is not at all ‘trustless’, as their proponents like to claim. The problem is just that humans, ultimately, always act in their own interest. It would be the first time in history that this little but important weak spot wouldn’t get exploited (but then to the maximum extent!) once the stakes become high enough. Bitcoin’s validation is based purely on mathematics and physics, and can be fully verified by all participating network users (nodes).
- Not battle-proof. XRP never had to prove itself in a severe and constant threat to change monetary policies like Bitcoin did with all its forks and the massive swarm of altcoins constantly trying to damage it or to leech on its success. It is completely unclear what would happen with XRP in such a case. Oh, wait: in 2019, someone developed a software tool to save binary data in the XRP ledger utilizing the ‘memo’ field, which was defined as being ‘Indestructible. Immutable. Infinite File Storage.’ back then. In the real world, however, this could be abused – so the fee system (!) was quickly adjusted and pushed into the code to make further ‘abuse’ impossible.
Many wallets found themselves offline back in December 2021, when so-called “airdrop spam” (isn’t one of the main reasons for the XRP token according to the statements of its developers exactly that: to prevent spam?) froze large parts of the network for hours, another bug forced the rebooting of the just 10 “full history” servers a few days later. At least there were no data losses that have become public so far.
- The XRP ledger is an account-based system – all transactions ever arriving in or leaving one’s wallet (which is easily identifiable after having been used to transfer tokens bought through a centralised exchange) are ‘on record’ – forever. Bitcoin’s ledger records UTXO’s (transaction inputs/outputs) which are not directly associated with individual users, which makes the reconstruction of one’s transaction history a considerably more complex challenge by default. In professional terms, Bitcoin’s fungibility is orders of magnitude better than XRP’s.
- As a consequence of the above, a whole website dedicated to ‘flag accounts‘ was set up: if transactions are considered as ‘illicit’ and/or were reported to/by governmental authorities, these wallets (accounts) will get flagged by the system, comparable to the FBI flagging banking accounts. Needless to say, while such features may sound ‘helpful’ at first sight (particularly in ‘crypto’, where scams are frequent), they usually become highly problematic in countries with authoritarian governments or if someone wants to cause trouble to other XRP users. On top of that, they tend to make users more careless: instead of learning how to act responsibly and to become truly sovereign property owners (iow: to ‘be their own bank’, which is why cryptocurrencies were created in the first place), they are invited to trust third parties to fix their problems.
- Ripple management has a history of dishonesty and lies (FUD against Bitcoin, secretly selling relevant parts of their XRP holdings, accumulating the supposedly ‘worse’ Bitcoin etc. In particular, the SEC complaint of Dec 2020 should have been a painful and concerning read for any rational XRP investor, but Ripple quite successfully redirected public attention to the SEC’s role as ‘holding back innovation’, thereby victimizing themselves.
- Regardless of what Ripple marketing claims (“if Ripple would disappear, the XRP ledger would live on…”), the future of XRP is extremely tied to 2-3 leader entities (Schwartz / Garlinghouse, Ripple Labs as a corporation, stakeholder SBI,…). The lawsuit against Ripple, Garlinghouse and Larsen illustrated and proved the relevance and risks of this centralization vector.
- XRP – despite being in the markets since 2013, only 3 years less than Bitcoin (!) – has a history of not ‘storing value’ very well. We have witnessed year after year of hype, press releases and promises of imminent ‘breakthroughs’ – yet the token has failed to accrue sustainable value against Bitcoin, or to recover from its massive drop and set-back to 2014 prices (!) since it’s all-time-high in 01/2018. Ripple promoted XRP very efficiently, which probably explains why it is still eyed on as an asset and continues to attract ‘new blood’ for their ‘XRP army’, but in terms of hedging against inflation, let alone as a vehicle to accrue more Bitcoin, XRP has been a very bad choice if we look at most timeframes.
- XRP fans, usually either due to a lack of better knowledge or idealism, completely ignore that XRP is actually a step backwards from Bitcoin in terms of solving the most essential problems that electronic money projects (such as Nick Szabo’s BitGold, Wei Dai’s b-money, Adam Back’s HashCash, David Chaum’s eCash, etc.) have always battled with: no trust in third parties should be required, no middlemen, no currency debasement / limited supply, fair issuance through unforgeable costliness in creation, a transparent, strictly math-based issuance policy, and privacy. XRP achieves faster transactions and lower fees by making compromises in all of these areas. But if trust is delegated to third parties, why not simply use a database? Well, ‘haters’ would probably say this would make it completely unnecessary to create tokens which can be sold on the ‘crypto’ market…
- Re-branding to Flare? The appearance of ‘Flare network’ (along with an ‘airdrop’ and a highly complex planned ecosystem that seems to have been designed as a new ‘island of hope’ for XRP holders) raises many questions. Why wasn’t all of this implemented directly on the XRP ledger? Why are so many new token required to fully utilize this system? Is Ripple behind it, or is it a 3rd party trying to capitalize on arguably one of the most uninformed groups of ‘crypto’ speculators (XRP, Doge, Stellar, Litecoin) to give it some traction?
- XRP is not ‘green’ or ‘clean’. Actually, it was designed to be used by the existing financial system, which is the very driver of environmental destruction around our planet. It begins with the massive hardware requirements to run nodes (while citizens can even run fully verifiable Bitcoin nodes on their mobile phones) and ends with XRP and the Ripple corporation actively supporting banks and central banks, which are responsible for reckless money printing, thus incentivizing the production and consumation of wasteful goods. Just because running a database doesn’t require much electricity for 1 single saved record doesn’t mean the ecological footprint the system built around it is clean! It’s dishonest marketing, just like purchasing ‘ESG’ certificates (quite possibly with money made from selling their premined tokens) to allow the claim of having a ‘zero carbon footprint’. Zero carbon emissions can only be achieved by shutting down the economy and living in caves again.
- Buying XRP is effectively a bet on the current system to continue forever – including the adoption of China’s social-credit foundation of CBDC’s. To have a hedge against this, ‘just in case’, one would need Bitcoin exposure. But of course, that might require ‘XRP maximalists’ to be able to act rationally instead of taking a tribalist stance.
Articles and Audibles:
– “The Ripple Story, BitMEX Research (2018)
– “No Consensus in the Ripple Network, the XRP consensus is broken. By Crypto and Data Security Research Group, University of Bern, 2020
– “Sorry Ripple, XRP is not used by banks” by J. Sangalli (2019)
– 2 video analyses even claiming XRP may be a scam: “Is Ripple’s XRP a scam?” by Trader University, and “CryptoScam Ep.6: Ripple” by Tone Vays and Peter Todd
– Shitcoin Insider: “The Ripple Effect” (Audio; podcast episode)
I might have missed a few points, or you may see things differently, feel free to add or answer. Thanks!