Ripple and its associated digital asset XRP are frequently discussed in the same breath, leading to widespread confusion among investors. While Ripple's partnerships and product updates often influence the token's market value, this correlation is not always direct. To gain a clearer understanding of the relationship between the company's successes and the asset's price, we conducted an interview with a Ripple employee.
Major announcements from Ripple can trigger immediate price reactions in XRP markets. For instance, Ripple's partnership with MoneyGram caused the asset's price to surge by 6.28 percent following the news. Despite this, the connection between the demand for the token and the adoption of Ripple's institutional payment solutions remains ambiguous.
CryptoSlate contacted a Ripple employee to shed light on this complex issue. The individual agreed to speak only on the condition of anonymity due to the risk of corporate reprisal.
“Yes, it's true that recent partnerships and announcements from Ripple seem to affect the price of XRP. The company maintains that it is distinct from XRP, and legally, that is the case.”
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“But it's strange how people equate Ripple's partnerships and progress with reasons why XRP's price should increase. Most of the time, those two things aren't related. In my view, the vast majority of developments at Ripple have no impact on the price of XRP,” the employee stated.
XRP was originally conceived in January 2013 by Chris Larsen, Jed McCaleb, and Arthur Britto. Larsen and McCaleb would later go on to found Ripple.
A total of 100 billion tokens were created at inception. Of this supply, 80 billion were allocated to Ripple, while the remaining 20 billion were distributed among the founders.
The founders' allocation was as follows: current Ripple Executive Chairman Chris Larsen received 9.5 billion; Jed McCaleb, now CTO of Stellar, received 9.5 billion; and Arthur Britto received 1 billion.
In principle, XRP is deflationary. Its total supply is fixed, and the overall supply diminishes over time through account fees and transaction costs. However, the circulating supply of XRP is effectively inflationary due to Ripple's programmatic sales of tokens from its escrow holdings on the open market. Ripple's current holdings are approximately 55 billion XRP.
Throughout 2018, Ripple sold a total of 535.6 million XRP—valued at $213.4 million at a price of $0.40 per token—representing a 1.27 percent increase in the coin's circulating supply. For context, Bitcoin's circulating supply grew by 3.76 percent in 2018 through mining rewards.
XRP's circulating supply has the potential to increase by a maximum of 135 percent based on company and executive holdings. In contrast, Bitcoin's supply can only increase by a maximum of 18 percent once its 21 million BTC cap is reached. Ethereum, currently, has no maximum supply limit.
The technical purpose of XRP is to function as a source of liquidity for Ripple's payment technology, RippleNet. Ripple's XRP-powered liquidity solution on RippleNet is called On-Demand Liquidity (ODL), formerly known as xRapid.
“XRP is not trying to be Bitcoin. Its primary purpose is to facilitate ODL and international transfers. It isn't intended to be a decentralized store of value like Bitcoin. XRP was created for utility,” the source explained.
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“XRP essentially has two functions: providing liquidity for ODL and funding growth for Ripple. Beyond that, XRP and Ripple as a company are otherwise completely separate,” the source continued.
There are 180 global currencies, creating over 16,000 possible currency pairs. Without an intermediary, many of these pairs would be thinly traded, lacking the volume and liquidity needed to make exchange viable. An example is an exotic pair like the Saudi riyal (SAR) against the Mexican peso (MXN). In the foreign exchange (Forex) market, liquidity refers to a currency pair's ability to be bought and sold without significantly impacting its exchange rate.
Currently, the U.S. dollar serves as the primary intermediary currency for liquidity. It is often more cost-effective for most currency pairs to first be converted into USD before being exchanged for the target currency.
In the aforementioned example, the Saudi riyal would first be converted to U.S. dollars and then to Mexican pesos:
SAR→USD→MXN
Or expressed as trading pairs:
USD/SAR→USD/MXN
Let's examine Ripple's claims concerning ODL (xRapid):
“Existing payment networks depend on significant capital requirements in the form of nostro account funding, a cost that currently ties up trillions of dollars globally. RippleNet makes accessing on-demand liquidity simple, reducing capital costs,” stated Ripple.
Nostro accounts are institutional accounts held by a domestic bank in a foreign currency at another bank.
The argument is that nostro accounts tie up substantial capital. If exotic currency pairs had greater liquidity, banks wouldn't need to hold as much foreign currency in these accounts. ODL aims to make these pairs more liquid by using XRP (instead of USD), alongside Ripple's proprietary technology stack, as the intermediary.
However, using XRP as an intermediary also introduces several points of friction.
“For customers who choose it, on-demand liquidity using digital assets eliminates the need to pre-fund foreign accounts. To enable this, the source currency is converted to XRP on a domestic digital asset exchange, sent across the XRP Ledger, and then converted back to fiat at an exchange in the destination country—all in a matter of seconds.”
Today, the example transaction would look like this: SAR→XRP→MXN.
Again, expressed as trading pairs:
SAR/XRP→MXN/XRP
This raises questions because the XRP transfer depends on the cooperation of low-cost domestic digital asset exchanges in both countries with sufficient liquidity in the respective currencies. For such exotic pairs, it's unlikely these markets are developed enough to support low-cost exchanges. Moreover, the spread between the bid and ask price in these thin markets represents a real and material cost for transactions of any size.
While trading volume and liquidity are not identical, genuine trading volume is highly correlated with liquidity in the cryptocurrency market. As noted by Investopedia, “Higher trading volumes for a given security mean higher liquidity, better order execution, and a more active market for connecting a buyer and seller.”
It is questionable whether there is adequate volume in most XRP trading pairs for it to be useful as a bridge currency. Within the last 24 hours, major exchanges show high volume for XRP pairs against BTC and USDT, but volume for XRP to fiat pairs, particularly in emerging market currencies, is significantly lower. In contrast, the Forex market trades approximately $5 trillion in daily volume, a scale that far exceeds crypto markets. Consequently, USD fiat pairs almost certainly have more liquidity than their XRP counterparts.
Furthermore, trading fees on crypto exchanges add another layer of cost. A successful transaction using XRP requires two conversions, meaning the total transaction fees could be around 3 basis points or more, depending on the exchange.
While RippleNet is undoubtedly faster than legacy banking systems like SWIFT, banks are not required to use XRP to benefit from Ripple's technology. The primary incentive to use XRP is for sourcing cheaper liquidity. Based on the observations above, it is uncertain—and debatable—that sourcing liquidity via ODL is cheaper than USD-based alternatives. Nevertheless, this may be irrelevant, as Ripple is investing heavily to incentivize platforms to use XRP, likely for the positive effect on the token's price driven by retail investor sentiment.
Another intriguing relationship is ODL's potential effect on XRP scarcity. Banks are not incentivized to hold XRP for using ODL. Even if banks were to adopt ODL at scale, it might not have a direct impact on the asset's price from institutional-driven demand.
“Financial institutions that use ODL don't need to hold XRP for an extended period. Moreover, XRP settles in three to five seconds, which means financial institutions are exposed to minimal volatility during the transaction [emphasis added],” according to an official XRP FAQ.
Consequently, the widespread adoption of ODL may not have a direct effect on the price.
“Even if every bank in the world used xRapid, the price of XRP wouldn't necessarily go up. The thing that drives the price of XRP is people's perception of adoption, which probably would affect the price,” the source said.
Ultimately, as the largest holder of XRP, Ripple is incentivized to forge partnerships and promote the use of the token by banks, as long as purchasers continue to believe these activities will positively impact XRP's price.
