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What are the disadvantages of Ripple (XRP) as a cryptocurrency?

Basics of Ripple and XRPs

Ripple is a cryptocurrency 2.0 system launched in late 2012. It is based on a protocol predating bitcoin by a few years, known as Ripplepay. As any good crypto 2.0 network, Ripple allows its users to issue and transact in any currency. It also supports its own native currency – ripples, or XRPs.
XRPs have a few key uses on the ripple network. They are used to pay transaction fees, and are required as reserves for any address using the network and creating trust lines. All in all, it serves as an anti-spam measure for the network. Moreover, since every account on the Ripple network can accept XRPs, it is also promoted as a bridge currency.

Criticism of XRPs

The main criticism levelled at XRPs, and thus also against the Ripple network, is the way the XRPs were distributed. Ripple Labs, the creators of Ripple, created the network with 100bn XRPs in it, and no new XRPs have been created since the its inception. This is not an unknown practice in the crypto space – a lot of networks ‘pre-mine’ their tokens.
However, the network creators usually only keep a fraction of the tokens for themselves, pre-selling the rest to anyone that wishes to buy some. Ripple, however, still owns about 60% of the originally issued tokens. This raises a few issues.
First, the company could try cashing out and potentially crash the market. It is unlikely, however. Ripple has recently taken steps to promote its XRP market and put the majority of their XRPs into an escrow (then again, the escrow is unlocking 1bn XRP every month for the next ~4.5 years, so it could be better).
Secondly, since the network fees are paid through ‘burning’ XRPs, they essentially enrich everyone in proportion to the amount of XRPs they hold (if 1% of the tokens got burned, the remaining tokens would be worth about 1% more provided the market doesn’t change). This means Ripple Labs is essentially earning 60% of all network fees on the network. This probably doesn’t amount to much at the current time, but it may be more important in the future.
Lastly, the amount of XRPs owned by one company gives it a negative reputation. A lot of people in the crypto space dismiss Ripple outright as a ‘pre-mined scamcoin’ just because of the amount of coins owned by Ripple.
All in all, that isn’t too damning, really. Ripple appears to be reputable enough not to try cashing out of what appears to be their golden goose. However, they are not the only major players around…
The founders of Ripple, Jed McCaleb, Chris Larsen and Arthur Britto, gave themselves 20bn XRPs early on. This later came to bite Ripple. McCaleb left the team to start his own version of Ripple called Stellar, and decided to sell his XRP stash, resulting in a legal kerfuffle, a settlement and a schedule for how those coins may be sold.
If those numbers are correct, McCaleb is still cashing out $20,000 per week, and come ~2019, he will be able to cash out 750m XRP (worth ~$256m at today’s price of $0.34 USD/XRP). Not an ideal situation if the money from your network will be going to a former employee building your direct competitor to the tune of a quarter of billion dollars. While some of those funds might go to charity, that’s still not an ideal outcome.
Now that we’ve dealt with most of the issues XRPs have had to face, let’s have a look at how they fare on their own network.

XRPs vs IOUs

While Ripple, the network, has to compete with bitcoin, ethereum and other cryptocurrency networks, XRPs, the currency, have another important competitor – the rest of the assets on the Ripple network. Some networks, like NXT or Counterparty, ensure their native token is at the centre of every trade – you can’t trade IOUs for one another on those networks.
In Ripple, you can transact purely in IOUs all day, every day, without touching XRPs for anything else than the fees. This ties to the central value proposition of XRPs – being the universal medium of exchange.
The following graph is meant to illustrate how a distributed currency network compares to XRP as medium of exchange.
In short, the problem is as follows. If you have many different currencies on the network, you can have potentially a very large number of markets between those currencies (mathematically, twice as many markets as there are currencies).
This means you would have to have a lot of market makers providing liquidity to every market. However, if everyone agreed to use XRPs as the common currency, you would only need to make one market per currency – between that currency and XRP.
At the moment, it looks like that is the case – the major markets on the Ripple network are all trading XRPs for the various currencies issued on the network.
The main advantages given for XRPs being better than IOUs are:
  • XRPs are acceptable by anyone on the Ripple network
  • There are no extra transfer or trade fees on XRPs
  • XRPs have no counterparty risk.
However, there are also some drawbacks to XRPs, even not counting the coin distribution and centralization. Just because someone can receive XRPs, doesn’t mean they’ll want to settle in XRPs. The network just essentially forces everyone to have an unlimited trust line to XRPs, even if they wouldn’t want to hold them.
XRPs might be a decent universal currency for people that want to hold XRPs, but that might not be ideal for banks or big institutions.
That’s why we see networks like Corda, or even Interledger Protocol (also developed by Ripple Labs), that don’t rely on a native cryptocurrency gaining traction, while the best example of a real-world application relying on a crypto token in the middle is Abra. Creating a universal, international settlement currency was the idea behind bitcoin, and you don’t really see banks using it for that cause.

Openness Allows Vulnerabilities

The openness with which the Ripple network operates has,  also allowed for vulnerabilities to develop. Researchers at Purdue University have found that, although the core of the network remains highly liquid, that the structure also allows for attacks on certain nodes within the network to cripple some users’ access to funds. In fact, some 50,000 wallets may be immediately at risk if such an attack were to occur. However, the researchers suggest that the fact that they have been able to detect weaknesses in Ripple’s system is actually a good thing, as the conventional world of banking often lacks transparency in this regard. Having identified those weaknesses, Ripple’s developers may be able to work to correct them.

Conclusion

Besides these problems with Ripple (premined, centralized, etc.), there are a few more. Ripple works closely with banks, which repels all those interested in investing in and supporting technology in order to dismantle the current financial system. Ripple is also very weak on anonymity & it’s openness is also an issue (although are making efforts to change that).

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