1. What Is Ripple?
Ripple is a distributed payment protocol that functions as a payment system, remittance network and currency exchange. It supports anything of value, it can work with tokens that represent fiat currencies, cryptocurrencies, commodities or any other unit of value.
Ripple uses a shared public ledger or database that facilitates transactions on its protocol, and has a consensus process that enables changes to be made to the ledger. Ripple’s functionality is mostly associated with its financial use. It can empower the global financial settlement system for banks and payment networks by reducing the cost of settlement. This is done by enabling parties to transact directly and instantaneously with one another. Currently, cross-border payments require the involvement of multiple banking intermediaries, this increases both the cost and time needed to transfer money across borders. Ripple makes the process of cross-border transactions a more efficient one by directly connecting banks involved in the transfer.
2. Framework Of The Ripple Network
Gateways are entities that act as a medium to allow for the flow of money and other forms of value in and out of the Ripple ledger.
Gateways can largely operate as one of the following three models:
An Issuing Gateway: This model allows for the receiving of money or any other asset of value outside of the ledger. This acts as a mechanism that enables customers to move money in and out of the ledger directly.
A Private Exchange: The private exchange model holds XRP and allows customers to buy and sell the XRP held in its system.
Merchant Model: This empowers merchants to accept payment within the ledger in exchange for various goods and services.
XRP is the native cryptocurrency of the Ripple network. XRP can move freely between ledger addresses without having to use a gateway as an intermediary. This is in contrast to other non-XRP currencies that do require the use of gateways. Users are also charged a fee when transacting using non-XRP currencies. This feature exists as an anti-spam measure, to protect the network from being flooded by making attacks too expensive to carry out.
A trust line represents the level of a user’s willingness to be exposed to a gateway’s counterparty risk. The user can set a quantitative limit on their level of trust for a gateway. If a payment goes over the user’s set trust limit, then the network will not allow the execution of the payment.
3. Ripple As A Bridge Currency
Ripple can act as a bridge currency and enable its users to conduct cross-currency transactions. For example, if Bob requested payment in the form of Bitcoin, for having performed a service for Alice, Alice need not necessarily have Bitcoins. Alice can send local fiat currency through her gateway as payment. The protocol will seek out the fastest and cheapest path in converting Alice’s local fiat currency to Bitcoins, which would then arrive in Bob’s gateway, thus completing the transaction.