The Ripple Currency Problem: Why Permissioned Blockchains Will Devalue XRP

Ripple Labs, the organization behind the XRP currency, has a big advantage in the blockchain industry. After launching their blockchain in 2012, Ripple Labs has been working with financial organizations to build one of the largest payment networks in the ecosystem, proving one of the first B2B use cases for the fledgling industry.

Cryptocurrency enthusiasts have used this as a sign that XRP will be very valuable in the future. In order for these financial institutions to run any operation on the blockchain, they need to spend a small amount of XRP to complete the transaction. And according to the market, this means high value for XRP:

Just this year, the value of XRP has grown from below $.01 per token to it’s currency price of $.25, a 25X jump that rivals even the growth of BTC.

So why would someone believe that XRP wouldn’t be worth very much in the future? In this article, I’m going to make the case that despite Ripple Labs impressive growth and strong partnership network, XRP has already become obsolete due to the emergence of permissioned blockchains in their market.

What is Ripple?

Before we can understand the problem, we need to understand what the Ripple does. Ripple is an open-source, semi-permissioned blockchain run by Ripple labs. On the surface, there’s a lot that Ripple offers that’s not too different form other blockchain applications: It has a distributed ledger, a variety of wallet applications and a native asset, XRP.

Where Ripple decided to differentiate itself from blockchains like Bitcoin is in it’s use of gateways, issuance and trust lines. Here is a basic overview of these features:

• A blockchain gateway is feature to allow for transfer of non-native assets (blockchain or otherwise) onto a particular blockchain. This includes a bank being able to lock USD, Yen, or even another blockchain asset like BTC/LTC and be able to transact with it on the Ripple Network.
• An issuance is a method for an individual account holder on the blockchain to ‘lock’ a particular asset (let’s say Gold) on the blockchain ledger. Similar to a gateway, after an issuance is made to the blockchain, you can then send it to other accounts, thus taking advantage of Ripple low fees.
• Trust lines are Ripple’s way of securing issuance transactions between individual parties. As opposed to XRP, which can be sent to anyone, an issuance can only be sent to parties who both agree to open a line of communication. So while I can send and receive XRP from anyone in the world, I can only send the gold I claim to have to accounts that actually trust my word.

These three features are special, because they gave Ripple the momentum to move into the financial world in a big way. By allowing banks to create their own network of partners and allow them to transact assets on the blockchain, they introduced a new way to cut transaction costs.

This is the secret sauce behind Ripple’s success: by being able to create low cost transactions on the network, financial institutions were able to take advantage of the blockchain. And by using XRP to secure every transaction, Ripple gave a powerful incentive for these institutions to use XRP.

Who Is Ripple’s Competition?

In the emerging blockchain industry, every value driver is creating a small industry. Monero and Zcash are leading the way for the privacy focused cryptocurrencies. Ethereum, NEM, Waves and a plethora of other blockhains are competing to be the top platform blockchain. Bitcoin, Bitcoin Cash and Bitcoin Gold are competing to be the ‘top’ cryptocurrency overall. There are other markets forming as well.

When you look at the market for Ripple and try to find their competitors, something odd jumps out. Despite being one of the oldest cryptocurrencies with the clearest use case, there are surprising lack of direct competitors for financial payments… at least financial payments for large corporate banks. Platforms easily have 20+ blockchains all competing for Ethereum’s place, but Ripple only seems to be competing with the Stellar Network and few other organizations. For as mature as Ripple is in the ecosystem, you would expect more. So where are Ripple’s competitors?

It turns out that Ripple has very stiff competition… but you’re not going to find them on CryptoMarketCap. Ripple’s chief competition today is coming from the new class of cryptocurrencies called ‘permissioned blockchains’. As opposed to permission-less system, where anyone globally can join, permissioned blockchains require an invitation from an organization before you’re allowed to join.

Today, there are a handful of permissioned blockchains that are offering similar services that Ripple offers. These organizations include R3 Corda, Hyperledger, the Ethereum Enterprise Alliance (EEA) and SWIFT(Ripple’s chief rival, at least according to Ripple CTO Stefan Thomas). These businesses are creating products similar enough to Ripple’s feature set and partnership network that these organizations constitute the financial payment network market.

Why Ripple’s Market Matters for XRP

If you accept that Ripple’s competitors are permissioned blockchains, then it’s useful to compare their features to understand how, say, SWIFT’s blockchain payment network might be more useful than Ripple. One thing that jumps out immediately about every permissioned blockchain is that these networks don’t have native assets, despite offering the same basic services that Ripple can offer.

Here’s a statement about SWIFT and considering native asset:

One area SWIFT will not be considering is generating its own digital assets, or cryptocurrency, Grainger said. This is at odds with other cross-border payment services, notably Ripple, whose digital currency XRP is used to conduct payments over its distributed ledger network.

Here’s another analysis from Philipp Sandner, comparing Hyperledger, Corda and Ethereum:

Even Ethereum through the EEA are creating permissioned blockchains (such as JP Morgan’s Quorum) that do not require the need for native assets.

If part of the market was split, and only half the market had native assets, this might be less odd. Diesel engines were still produced even after alternatives appeared on the market. But that fact that every major competitor has opted out of having a native asset, one that has allowed Ripple to control billions in value through XRP, signals a change in the market.

What A Lack Of Native Assets Mean

Let’s think about the implications of this: strong competition has appeared in the market, as to be expected. But instead of creating a native asset to secure the network, these competitors have decided to use another method (Native Identity Management, in this case) that secures the network. These blockchains can offer similar features without the need for an XRP-like component.

We can argue whether SWIFT, R3 Corda or Hyperledger really have a better set of features than Ripple, but that is beside the point. What these projects have shown by universally disregarding native assets is that that component of Ripple is no longer required to provide value. It’s an obsolete component of Ripple’s blockchain. In the same way that CD drives were slowly eliminated from new PC’s after flash drives became more common, native assets for blockchain payment networks have a better alternative.

Even if Ripple remains the best payment network for financial institutions, XRP remains a vestige of what Ripple Labs thought the market would become. But the market changed. Ripple’s competitors will get better and strong, and financial institutions will start considering alternatives, with XRP sticking out as a sore thumb. Even if Ripple is the best, it is not because XRP offers some great advantage. If anything, it’s an additional cost that none of their competitors will have.

How Does This Affect XRP?

Ripple still has a better partnership network, a more mature product line and strong leadership. But with competitors like IBM and R3 Corda entering the industry, it is only a matter of time before the competition will get stronger. In this race, XRP offers no competitive advantage and only represents an additional cost.

At the end of the day, Ripple Labs is valuable because of their ability to provide great value to financial institution. But if an organization like SWIFT begins to win the market, Ripple Labs will be forced to respond. As Ripple already owns 55% of all XRP, it would be easy for their organization to either sell XRP as a market discount, or give it away entirely to new organizations who want to join their network. Increasing the price of XRP does not strengthen their position in winning the financial institutions market. When competition get intense, XRP will be one of the first factors to be eliminated, either through devaluing XRP significantly or giving it away entirely.

This is ultimately the fate of XRP is: at best, a potential incentive to have new organizations join their business, at worst, an additional cost that is completely eliminated by giving away XRP (or close to it). In either case, the value of XRP is simply not supported by it’s use case and will be unlikely to retain it’s value.