Ripple Explained – Chapter 3: How Ripple works (part 1)
Vontobel now offers investors access to the crypto currency «Ripple». But what is Ripple (XRP)? In six chapters, we want to give you high-quality knowledge about the exciting topic of «Ripple».
The concept of Ripple was developed in 2012 by Canadian web developer Ryan Fugger. The company Ripple Labs (formerly «Opencoin») behind it was then founded by Jed McCaleb and Chris Larsen. Ripple has a comprehensive multi-product system. In the «RippleLabs», Ripple's various systems are created and developed further. These include xRapid, xCurrent and xVia.
Source: Vontobel Investment Banking, 2019
The provision of liquidity through «xRapid»
xRapid is designed for payment providers and financial institutions that want to minimize their liquidity costs. Because payments to emerging markets often require pre-financed accounts (so-called nostro and loro accounts) in local currencies around the world, liquidity costs are high. xRapid dramatically reduces capital requirements for liquidity. XRP serves as an intermediary currency between different currencies. The currencies are initially exchanged in XRP and then transferred to the recipient. At the receiving institution, XRP is exchanged back into the corresponding currency. Thus the platform offers a cost saving of up to 70% compared to conventional payment transactions. The traditional international payment processing does not fulfill the requirements regarding price, speed and user friendliness. xRapid is designed to address all these issues simultaneously. xRapid focuses on XRP because it is used to ensure liquidity and therefore low fees for money transfers between international markets.
Banks must hold nostro and loro accounts in any currency in order to have enough liquidity. A nostro account (nostro = «our») is an account of bank A (account holder) with another bank B (account manager). A loro account (loro = «yours») is the same account, but from the point of view of Bank A, which manages the account of Bank B. If Bank A now wants to make a payment between different currency areas, it must instruct Bank B to debit the nostro account accordingly. These accounts are very expensive because large sums are kept in there. Furthermore, nostro accounts must be held in a foreign currency, i.e. the bank is exposed to inflation risk. Ripple would like to solve these problems in international payment transactions. By xRapid the capital requirement on the nostro and loro accounts is drastically minimized since the liquidity can be offered and demanded when required with the help of the XRP Coins. Furthermore, it is no longer necessary for every bank to maintain a nostro account, it is sufficient if someone else does it.
The competitor to SWIFT: xCurrent
xCurrent is Ripple's enterprise software solution that enables banks to process cross-border payments with end-to-end tracking within seconds. Ripple estimates that banks could reduce their payment transaction costs by approximately 33% with xCurrent. Banks can also send messages and immediately validate incoming transactions via xCurrent.
To clarify transactions, the «RippleNet Advisory Board» has developed a set of rules that define the operational and legal framework. xCurrent offers an alternative to SWIFT («Society for Worldwide Interbank Financial Telecommunication»), a messaging system that critics regard as out-of-date.
The application interface «xVia»
xVia is an application interface and the link between xRapid and xCurrent. Using xVia, payment service providers and banks can make cross-border payments from different currency areas efficiently, reliably, transparently and quickly. Furthermore, documents such as invoices or accompanying letters can be attached. The simple API («Application Programming Interface») of xVia does not require any software installation.
After all, xVia is more than just an interface because it wants to standardize transactions across different networks. Banks can use xVia's API to use xCurrent and xRapid. XRP plays a central role in the Ripple system. Although the crypto currency as such is irrelevant for xCurrent and xVia, xCurrent can also use XRP for transactions, while xVia is more of a «front-end solution» than its own payment platform.
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