What is Ripple (XRP)? Simple explanation for beginners =

Ripple (XRP) is not really a cryptocurrency to easily understand and perhaps even more difficult to explain, until I came across this blog. This explains the main insight behind Ripple. On the basis of this blog I will explain what Ripple exactly is. After reading this article, you can explain to everyone why Ripple is seen as a revolutionary system.

It sounds like an understatement that not all money is the same. The dollar is indeed different from the euro. However, the insight behind Ripple goes so far that one 5 euros is not the same as the other 5 euros. The 5 euros you still owe to a friend of yours is not the same as the 5 euros in your bank account or the 5 euros on your credit card.

But how exactly does Ripple work? In fact, Ripple is a system that ensures that all financial institutions communicate with each other in one language. Why can you send an email from your computer to the other side of the world (to another email provider) within a few seconds, while it can take weeks before you can transfer money to your aunt in Morocco? This is because the system behind all email clients (Gmail, Hotmail, etc.) is the same. Ripple is also trying to achieve this.

The main idea behind Ripple

What I just said was a brief summary. In order to really understand Ripple properly, we must first examine how banks communicate with each other now. Perhaps the most important thing to realize here is that the money you have in your bank account is a debt from the bank to you. You have lent this money to the bank and want it back as soon as you ask for it.
Picture Bob and Alice. Alice once borrowed 5 euros from Bob for an ice cream and she has yet to pay Bob back. To keep things simple, Bob and Alice are both at ING.

Alice and Bob are both with ING and trust ING with their money

But now it is important to realize what happened. As soon as Alice transfers the money to Bob, the ING owes Alice 5 euros less and Bob 5 euros more.

  • First, Alice owed Bob 5 euros
  • Now ING has a debt of 5 euros with Bob

(This is also known as the displacement of IOU ( I O we yo U ) called.)

Relocation of Debt (IOU)

The strange thing is that Bob still does not have that 5 euros in his hands. The only thing that has really changed is that something or someone Bob has more confidence in now has a debt to him. So it’s clear that Bob would rather the bank owe him that $5 than Alice do. The 5 euros Alice owes Bob is therefore not the same as the 5 euros the bank owes Bob. This is the whole thinking behind Ripple.

But this thought of Ripple goes a little further than just this simple example. Because what if Bob and Alice are enjoying their ice cream together and it turns out that Bob does not have a checking account at all (this is almost unthinkable in the Netherlands, but almost 30% of the world’s population does not have a checking account). In addition, Alice does not have any cash with her. Then how can Alice pay Bob? Fortunately, Alice did not fall on the back of her mind and she comes up with the genius plan to buy a prepaid card from PrepaidBanking worth 5 euros with her debit card, so that she can give it to Bob. But this is where things go wrong. Because who decides that Bob trusts that prepaid card? Bob has never heard of PrepaidBanking and has no idea if he will get his money with it. So Bob decides he doesn’t want to be paid this way.

Ripple: a chain of trust

Fortunately, Chris, a good friend of Alice, arrives and he also wants an ice cream of 5 euros. Chris only carries cash, but due to robberies in the past, the ice cream man has decided not to accept cash anymore (but does accept prepaid cards from PrepaidBanking). So we now have the following situation:

And if we see it this way, there is of course a very simple solution:

Okay, this example is a big oversimplification of reality and short-sighted (which ice cream vendor doesn’t accept cash, etc.), but the only point I’m trying to make clear is: it doesn’t matter what money you have (Euros, dollars, prepaid cards, credit cards, etc.), it is about the issuer (the one who issues the money, debt instrument or IOU) and in particular who this issuer trusts. We are probably more likely to trust ING with 10,000 euros than our family. But maybe we trust our family more than our friends. The bottom line is that we trust all the different issuers to varying degrees.

billions of transactions

Ripple understood this whole psychology and has come to the conclusion that people or institutions can only pay each other with a form of money that they both trust. For example, things went completely wrong between Bob and Alice, but when Chris happened to drop by, the whole problem could still be solved. And this problem could only be solved because a chain of trust had been created. Alice was confident in PrepaidBanking’s prepaid card, Chris was also confident in prepaidBanking’s prepaid card, and Bob was confident in Chris’s cash. If Alice, Bob and Chris had all been affiliated with Ripple, Chris wouldn’t have happened to drop by, Ripple would have provided this chain of trust.

But this is just a simple example of three people. In the world of finance, this example plays out on a massive scale every day. Imagine you are the ING. In that case you do billions of transactions per year between thousands of different banks and millions of different people all over the world. This also needs to be tracked. If you then consider that a payment between ING and Rabobank already takes a day, then a payment between ING and a bank in Zimbabwe can take more than a week.

Ripple envisions itself as a universally distributed system to radically simplify this entire network for banks by ensuring that there will (almost) always be a chain of trust (making transactions radically faster) and that this is easily tracked with the help from blockchain (which saves a lot of time and money).

But what is the role of XRP then?

Well, this was a fairly extensive explanation of mainly the thinking behind Ripple’s payment system. But what about XRP? What’s the use of that then?

In short, the Ripple network is built to ensure that there will always be a chain of trust between multiple financial institutions. But what if this chain is missing? What if Chris isn’t affiliated with Ripple to make sure Bob can transfer to Alice? In that case, the financial institutions can use XRP. Because the financial institutions are affiliated with Ripple, they by definition already indicate that they have confidence in XRP. In this way, thanks to XRP, a chain of trust can always be created.

At the moment, not all banks use XRP yet. Why they do not do this is not entirely clear. At the moment, the financial institutions still use Ripple’s payment network mainly for moving IOUs. The biggest advantages of XRPs over IOUs are:

  • XRPs are accepted by anyone connected to the Ripple network
  • There are no additional transfer fees or trading fees
  • XRPs have no “counter party risks” (the risk that the counterparty will not honor the contract)

Many XRP fans therefore expect that all banks will use XRPs in the future. What do you think? Let us know in the comments!

In the video below from AllesOverCrypto we tell you more about what Ripple is and how this blockchain works.

How do I buy Ripple?

Buying Ripple on Bitvavo is a piece of cake. Within minutes and for less than a euro you can already be the proud owner of XRP.

  1. Register here for free at Bitvavo
  2. Verify yourself by clicking on your name in the top right corner and then go to ” Verification “.
  3. Transfer money via iDeal. You do this by clicking on ” Deposit Euros “.
  4. Then enter the amount and choose iDeal as payment option so that the money is in your Bitvavo account within a minute. Then click on “Pay”.
  5. If you click on ” Overview ” afterwards, you will see the money.
  6. Find XRP, click on it and then press “Buy”.
  7. Invest the amount you have in mind in XRP.
  8. Congratulations! You bought XRP!
    Don’t forget to save your username and password

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