Ripple Ecosystem: What Is The Role of XRP?

What Is The Role of XRP In Ripple’s Ecosystem?

Ripple is a blockchain and tech company that provides faster payment solutions for businesses using the XRP Ledger and its native token, XRP. In most cases, XRP is used as a bridge currency for on-demand liquidity outside the U.S.

A bridge currency gives businesses a common currency to use in international and cross-border financial transactions, similar to the way the U.S. dollar has been used. As of May 31, 2024, Ripple uses Tether (USDT) in the U.S. because it will violate security laws if it sells XRP to institutional customers for liquidity purposes.

 Why Ripple Chose XRP

The XRP Ledger was launched in 2012 by three engineers to make a global payment system for enterprise purposes. Ripple (the company) was started shortly after XRPL was launched by the same engineers.

Ripple chose the XRP Ledger and XRP because the founders of the company designed it. The company then began developing a platform that interacted with the XRP Ledger and used XRP as a bridge currency. Because of the way XRPL was designed, this allowed businesses to send payments across borders in a common currency quicker than they had using current cross-border transactions, which happen between siloed technology systems that are not connected.

How Did Ripple Solve the Connectivity Problem?

Ripple uses an interledger protocol, which enables the routing of payments through interconnected ledgers to connect these systems.

Think of it as similar to TCP/IP, the protocol that underpins internet systems and enables disparate computers and systems to talk to each other. The ledgers that constitute this protocol can be a part of the financial institution’s network or be trusted nodes in a network that spans multiple entities. The overall system technology is designed to increase transaction processing speed for cross-border transactions.

As clever and future-forward their technology may be, interledgers still do not solve the problem of pre-funding fiat currencies in accounts for foreign exchange transfers. Known as nostro and vostro accounts, they are managed by financial intermediaries, such as banks and money transfer agencies, at either end of a transaction to ensure liquidity for their foreign exchange transactions.

Enter XRP

Ripple’s products use XRP to ensure quick liquidity. In these products, XRP is a “bridge asset,” or an asset that businesses and financial institutions can use to make a bridge transfer between two different fiat currencies.

In this scenario, a financial institution can purchase an equivalent amount of XRP and send it through Ripple’s network. Ripple states that it is ideal for banks that do not have a corresponding relationship with each other.

Concerns About Ripple

In February 2018, the United States Securities and Exchange Commission (SEC) alleged that Ripple Lab executives Bradley Garlinghouse and Christian Larsen manipulated the XRP price by slowing down or speeding up sales depending on the market. The SEC accused Garlinghouse and Larsen of creating “information asymmetry” that allowed them to continue selling off XRP at a “substantial risk to investors.” The crux of the accusation was whether XRP could be deemed a security offering.

In July 2023, a judge issued a summary judgment declaring that XRP was a security when it was offered to institutional investors but not when it was sold on exchanges in blind transactions. All charges against Larsen and Garlinghouse were dropped in October 2023.

In 2024, Ripple and the SEC continued to battle in court over the $2 billion in fines the Commission is attempting to collect.

The Bottom Line

XRP has an underlying role in Ripple's (the company) blockchain activities and products. XRP serves as a bridge currency to smooth out price fluctuations across borders. Its purpose is for businesses in different countries to be able to transact and minimize transaction costs.

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