XRP Ledger (XRPL), which has been operational for more than ten years, provides quick, energy-efficient, cross-currency, and cross-border payments. XRPL offers native Issued Currencies, a decentralized exchange (DEX), escrow functionality, and token management. Although not supporting smart contracts, XRPL can do many of the same operations as other networks thanks to its natural capabilities. For optimum security and stability, arbitrary smart contracts are not enabled on the base layer by design.

By market capitalization, XRP, the native token on XRPL, is the sixth-largest cryptocurrency with a value of approximately $19 billion. XRPL can accommodate up to 1,500 transactions per second, although on average only handles about 15. In XRPL, costs for transactions are deterministic, with the majority of transaction types costing 10 drops. A drop is a millionth of an XRP, which is now worth $0.56, or a mere fraction of a penny.

With the backing of Ripple, XRPL Foundation, XRPL Labs, and other international developers, XRPL seeks to expand on existing networks' confined concentration on peer-to-peer transactions. It offers a digital payment infrastructure for current financial institutions like central banks as well as for individuals.

What is XRP Ledger?

XRP Ledger is a Proof-of-Association (PoA) blockchain ledger. When Ryan Fugger developed RipplePay, a decentralized payment system, XRP Ledger was already in existence in some form at that time. This system was not a blockchain ledger prior to the introduction of Bitcoin since it lacked a decentralized asset. Fugger gave the initiative to Jed McCaleb in 2011, and together with Chris Larsen and Arthur Britto, they co-founded Ripple in September 2012. The XRP token was introduced and given to Ripple and the founders in December 2012, following the debut of XRPL in June 2012 by McCaleb, David Schwartz, and Britto.

The founders of XRP Ledger believed that Proof-of-Work (PoW) was inefficient and only really effective for early distribution and resolving double-spend. The primary creators of Bitcoin concluded that the actual appeal of the currency was not the PoW consensus method, but rather the transparency of transactions and state. As a result, they built XRPL to compete with PoW as an energy-efficient alternative.

In 2013, XRPL was made open-source, and in 2014, XRP for the first time overtook XRPL as the second-largest cryptocurrency by market capitalization.

U.S. regulatory authorities, notably FinCEN, penalized Ripple in 2015 for selling virtual currency without being registered with FinCEN. Afterward, Ripple paid the penalty, completed the necessary paperwork, established the essential controls, and put them into effect. The SEC accused Ripple of holding an unregistered security offering in 2020 for the XRP coin. As of March 2023, the legal conflict is still going on. The ledger has been operational for more than ten years and has handled more than 78 million ledgers and 2.6 billion transactions, despite external pressure. Now, Ripple was led by Brad Garlinghouse, Monica Long, David Schwartz, and other individuals.

XRP Ledger technology

Consensus mechanism

The Federated Byzantine Consensus Protocol was the previous name for the PoA consensus method that XRPL employs. Each node must create a list of trustworthy nodes that it will use to establish consensus to comply with PoA. The term "unique node list" (UNL) refers to this collection of trusted nodes. In order to participate in the consensus process, a validator must first earn the trust of other nodes and cannot just rely on financial resources.

When setting their trusted nodes, many nodes utilize one of the preset UNLs. The UNLs that are used by default are lists of nodes that the XRPL Foundation, Ripple, and Coil all suggest as reliable, while any node is free to select its list of validators.

Nodes

The identical rippling-free and open-source software is used by all nodes, sometimes referred to as servers, on XRPL.

Validators are nodes that participate in consensus building and voting on improvement requests, commonly referred to amendments. In PoA, there are no benefits for validators. Their primary motivation is to assist the network's decentralization, acting more like a complete node for Ethereum or Bitcoin than a validator or miner.

Stock nodes process transactions and receive relays. For however much of the ledger history they keep, they permit API calls. Developers who need to broadcast or reference the network frequently use these nodes. They abstain from voting or reaching a consensus.

To complete the state, nodes rely on their UNL. With this procedure, a new block, also known as a ledger on XRPL, is produced every 3 to 5 seconds. Consensus and validation are the two processes involved in the addition of a new ledger.

Consensus

Consensus makes certain that all nodes carry out identical transactions and, in the end, concur on a single ledger that contains them. Federated consensus is used by XRPL. Unlike many previous consensus implementations where a single party is arbitrarily picked to submit a block of transactions, under this consensus method, no single party proposes or dictates what is legitimate.

Nodes converse with one another repeatedly to decide on the candidate transactions to include. To match the proposals of its UNL, each node adds or subtracts transactions from its proposal. A node with no influence in this system has neither earned the trust of other nodes nor been accepted into UNLs. Any non-Byzantine node on the UNL of another won't put that trust in danger by connecting to a hostile node.

A proposal goes to validation when a node detects 80% agreement on it. More than one consensus round can be going on at once.

Validation

To establish a candidate ledger, each node processes a single transaction from the proposal in canonical order. From then, when a proposed block is prepared for validation, XRPL follows a strategy similar to PoW and PoS systems. If there are several concurrent consensus rounds, each round's findings must receive 80% of the network's vote to be considered the validated ledger.

XRPL consensus

An XRP Ledger Server Calculates a Ledger Validation — Each server applies agreed-upon transactions to the previously validated ledger. Validators send their results to the entire network. (Source: XRP Ledger)

The candidate ledger hashes of validators can only be exchanged amongst validators. Although several candidate ledgers may be put forth, only one is chosen to become the new ledger. These hashes could differ as a result of calculation errors or a high transaction velocity.

It is recognized as the new ledger version if the candidate ledger is shared by 80% or more of a node's UNL. If not, the consensus-building process is repeated. 80% of the criteria are necessary for both validation and consensus. The interval between ledgers may lengthen during periods of intense activity as the procedure is repeated.

XRP Ledger consensus

Ledger is Validated When Supermajority of Peers Calculate the Same Result — Each server compares its calculated ledger with the hashes received from its chosen validators. If not in agreement, the server must recalculate or retrieve the correct ledger. (Source: XRP Ledger)

Proof of Association

PoA has advantages over Proof-of-Work (PoW) and Proof-of-Stake (PoS), including:

Validators are less expensive to operate than PoW miners due to lower hardware requirements that reduce the expenses of electricity and overhead.
As opposed to PoS, block production is not directly influenced by which actor has the greatest money.
There are no reorgs (changing a block after its validation).

However, there are a few drawbacks of PoA:

PoA would not be able to penalize bad actors as effectively since PoA is not constrained by large external costs and frozen money.
In retaliation, nodes can be removed from UNLs and validator links can be broken, but an attack would not have any financial consequences.
Due to the lack of a reward system, XRPL's PoA implementation is not as decentralized (in terms of block-producing nodes) as the most well-known PoW/PoS chains.

Issued Currencies

XRPL has built-in functionality for multiple assets. The on-chain representations of arbitrary currencies, commodities, units, etc. are known as Issued Currencies, sometimes known as IOUs. Because XRPL lacks arbitrary logic in its smart contracts, it relies on a reliable third party to create currencies like USD or BTC. Issued Currencies have value because holders believe the issuer will fulfill their commitment to repay the original, same as how USDC and USDT do. In contrast to wBTC and other wrapped tokens, this trust scheme places the trust in a smart contract vault or issuer rather than a firm or other entity. Users can also deploy fungible and non-fungible tokens on XRPL using Issued Currencies. NFTs have been required to adhere to a native unified standard since the release of XLS-20 in 2022.

To prevent accounts from receiving unintended tokens, trust lines are holding structures for tokens. Approved Trust Lines also give issuers the option to decide which wallets can connect with their tokens and allow for additional games at the asset level. AML/KYC rules have forced stablecoin issuers like Circle to manually create compliance solutions, therefore Authorized Trust Lines may prove to be a desirable feature for stablecoin issuers on XRPL seeking to maintain compliance.

Native DEX

There is a central limit order book incorporated into XRPL. XRPL's DEX is native, in contrast to other networks where DEXs are created using smart contracts. Instead of the inherent weaknesses of smart contracts, the native DEX has the advantages of fewer trust assumptions and concentrated liquidity.

Marketplaces that serve as user interfaces are called gateways. Users can now access the DEX without explicitly using XRPL APIs or libraries thanks to them. New gateways are developed as front-end interfaces to APIs/libraries rather than smart contracts, and they share liquidity with the current gateways rather than dividing them.

Pathfinding

The DEX's ability to match commands is supported by pathfinding, often known as auto-bridging. Using various assets and all orders on the DEX, it chooses the payment's most effective route. For a transaction to be completed across several currencies, pathfinding entails locating lines of liquidity between the originator and destination. This procedure makes it possible for Issued Currencies with lesser liquidity to support quick and affordable cross-currency payments.

Using open orders between currencies is essential for pathfinding. Every order functions as a link like how reliable recipients serve as a conduit for money in payment channels. Moreover, cross-currency payments are made easier.

Accounts

The accounting methodology used by XRPL is account-based. Accounts on XRPL are unique from those on many other chains, though. Both the amount of users an account can represent and its hierarchy are scalable. Two different keys exist for accounts are:

Master key pairs, which can be disabled but not revoked and can authorize any transaction.
Regular key pairs can be assigned, changed, or canceled but perform almost the same functions as master key pairs. Regular key pairs cannot send key reset transactions or disable master key pairs, which is a significant distinction.

An account becomes unreachable if all keys, including all master keys, are revoked or disabled. By using an account to create anything on-chain and then publicly revoking all of its keys, this functionality might guarantee the immutability of an account.

Signer lists, a native feature of XRPL that is only available through smart contracts on many other networks, are whitelisted key pairs or accounts with the capacity to contribute to multi-signed transactions. For multi-signing, a quorum and weighting for every signer must be established, and signer lists cannot be nested. This threshold cryptography makes use of secp256k1 and ed25519. Certain parts of account abstraction are comparable to these account management features.

A single account can represent various uses/purposes thanks to destination tags. A destination tag, which is a 32-bit signed integer, is also supplied with an account's address to help distinguish amongst accounts with different total values. Users can use the X-address format as a single value instead of referencing two different values (account address and destination tag) to transmit money.

This functionality could be used by companies and exchanges to enable numerous users to deposit money into a single account. Users might distinguish separate deposits made to the same account using destination tags. Due to the system's distinctive presentation of network consumption information, money is kept in a very ordered manner.

Federated and Private Ledgers

For the creation and administration of stablecoins and central bank digital currencies (CBDCs), Ripple developed a private ledger based on the open XRPL. Even though no CBDCs are currently being produced on this platform, many countries are actively investigating CBDCs.

XRP Ledger tokenomics

On the network, there are several applications for the XRP cryptocurrency:

Wallet reserves: To create a new wallet on the ledger, a predetermined quantity of XRP (currently 10 XRP) must be deposited. Upon destroying the wallet, the XRP is freed.
Trust Lines: To construct a Trust Line, a specific amount of XRP (currently 2 XRP) is required.
Transaction fees: On XRPL, transaction costs are paid in XRP.

The Ledger was introduced in 2012, and the XRP token was created at that time with a 100 billion token supply.

80 billion of the original 100 billion XRP were handed to Ripple so that the business could continue to provide services and code to the Ledger.
20 billion were distributed to the three founders with varying lockup arrangements.

Escrow unlocks and burns mechanisms can cause inflationary and deflationary pressures on the amount of XRP in circulation. Due to these forces, the total supply is slightly deflationary as no new XRP will be created but some will still be destroyed via the burn mechanism, while the circulating supply has had an inflationary rate of 5.4% since 2021. XRP's inflation rate changes according to how much of it Ripple distributes:

Ripple put 55 billion of its XRP into escrow in 2017.
The remaining 25 billion XRP from Ripple's initial allotment were either dispersed, traded, or kept.
Ripple receives 1 billion XRP each month to use as they see fit.
Unspent XRP is not rolled over but instead is put back into escrow at the beginning of the following unlock. Due to this system, Ripple can use XRP without worrying about oversaturating the market. It is also the cause of the fluctuating rate of inflation of the money supply.

There are around 50 billion XRP in use as of February 2023. A small amount of XRP is utilized as a transaction fee and destroyed with each transaction on XRPL, creating deflationary pressure. Since its launch, more than 10 million XRP have been burned. The circulating supply will continue to be inflationary even while the total supply is deflationary up until the final XRP is added to circulation via Ripple's escrows and founders' distribution.

Network Activity

Payments transaction on XRPL in 2022 (Source: XRPSCAN)

From 1.5 million in Q4 2021 to 1.2 million in Q4 2022, the average daily transactions decreased by 20%. In the same time frame, daily payments on average decreased by 64%. The first quarter of 2022 appeared strong, with growing QoQ for both indicators, suggesting that the activity drops in the latter half of 2022 were caused by the broader weak market.

29 various transaction categories, including payments, escrow creations, and NFT burns, make up the total transaction metric.

XRPL transactions by type

XRPL transactions by type through 2022 (Source: Messari)

Through 2022, OfferCreate, which places an order to exchange currencies, was the most popular transaction type. Payments, which carry out such orders and transfer money to another account, consistently made up 20–30% of all daily transactions.

XRPL daily active addresses

XRPL daily active addresses (Source: Messari)

On XRPL, addresses have destination tags, which causes the daily active addresses (DAA) metric to be skewed downward. A centralized exchange (CEX) can accept and manage XRP deposits for any number of users using a single address, but to receive other tokens, such as ETH or BTC, each user would need a different address.

Transaction recipients are referred to as daily active addresses (received). Given that the number of active addresses that submitted transactions fluctuated less than the total number of active addresses, this group was in charge of all significant increases in activity. This implies that large-scale token distributions to otherwise inactive receivers by senders are the likely source of network activity surges. This is most likely the result of exchanges and other custody solutions, as they would generate numerous active receiving addresses while only accounting for one (or a small number of) active sender address.

XRPL total accounts and accounts created daily

XRPL total accounts and accounts created daily (Source: Messari)

The Q4 2022 DAA surge is visible in accounts opened but not in daily payments or daily total transactions. The comparatively high volume of daily payments and the failure of the FTX may both be to blame for the spike's disappearance from transaction data.

Many people removed their tokens from CEXs when FTX collapsed. On CEXs, a single wallet can stand in for several users who can be distinguished by their destination tags. However, after those users take self-custody of their XRP, each user has a wallet and contributes to DAA. According to the number of accounts opened, individuals may have switched from CEXs to new self-custody accounts in November.

State of XRP Ledger ecosystem

Developer Ecosystem

XRPL is open-source, however, the majority of its fundamental development is conducted by programmers from Ripple, the XRPL Foundation, and XRPL Labs. Additionally, Ripple supports the growth of ecosystem services, both directly through its initiatives and indirectly by providing grants to ecosystem-related companies. In 2021, XRPL Grants were introduced with 1 billion XRP. Over 100 projects have received XRP valued at over $10 million thus far.

Smart contracts are not natively supported by XRPL. This design decision sacrifices flexibility to increase user safety. It is possible to implement NFTs, DEXs, stablecoins, and other types of programmability natively or through third-party contracts, such as those built on sidechains, layer-2s, or oracles.

Marketplaces

Since its launch in 2012, XRPL's native DEX has been operating and facilitating all network transfers. Sologenic is one of the several markets found in XRPL that serve as gateways and make it easier to access the native DEX. Instead of using external smart contracts for transactions, these marketplaces use the DEX and its pathfinding capability.

A few other well-known marketplaces are onXRP, xrp.cafe, and xpMarket. Some of these marketplaces also offer other services like help with NFT development and fiat transfers.

AMM

For a native automated market maker (AMM) coupled with the native DEX, accessing each other's liquidity, Ripple developers suggested a standard, XLS-30d, in June 2022. The devnet AMM is operational, and the proposal is in draft form.

Similar to how the DEX is already accessible to developers, the AMM capability will be native and available without the need for smart contracts. By auctioning off trading advantages and spreading those earnings among liquidity providers, the AMM standard seeks to allocate arbitrage profits to liquidity providers of AMM instances. Additionally available will be single-sided liquidity. MEV and frontrunning are not possible thanks to the federated consensus and canonical ordering of transactions in the XRPL consensus process.

Issued Currencies

By market capitalization, SOLO, the token from Sologenic, is the largest Issued Currency on XRPL at almost $80 million. With almost 200,000 holders, it also has the most. Because Trust Lines stop users from getting unapproved tokens, metrics are not inflated by spamming tokens, making this holder metric incredibly trustworthy.

The second-largest token is Coreum's CORE, which has a market value of about $63 million. Nearly 75% of all Issued Currencies are dominated by SOLO and CORE together.

With 14.2 million XRP in volume, XPUNKS holds the record for the highest NFT sales volume. The monthly volume of top collections such as XPUNKS and RipplePunks is 200–300,000 XRP, or roughly $100,000 as of March 1, 2023.

Stablecoins

Stablecoins, originally known as IOUs, are widely available on XRPL. Market capitalization for USD stablecoins alone exceeds $10 million, with Bitstamp and Gatehub stablecoins making up the majority of that amount. Averaging between $100,000 and $150,000 daily, trading volume for the Bitstamp and Gatehub USD stablecoins. For other currencies like the euro, stablecoin volumes are a factor of ten smaller.

The tokens' volatility may be caused by lower liquidity in comparison to other networks that support stablecoins. Despite price fluctuations of more than 5% over the years for the aforementioned USD stablecoins, they have largely stabilized since the beginning of 2022. In contrast to larger stablecoins on other networks, like USDC or USDT, they remain more erratic.

Nodes

There are 669 nodes in total on XRPL, spread across six continents, with at least 100 nodes in North America, Europe, and Asia each. Of the 120 validator nodes, 34 are on Ripple's default UNL and are all operated by different organizations. The rippling software is the same across all XRPL nodes, with the current stable version being used by 97% of validators.

Due to their presence on so many nodes' UNLs, the 30–40 validators on the three default UNLs are the entities that have the most influence over consensus and amendments. Notably, voting nodes have approved 46 revisions that have been applied to XRPL, the most recent of which was in January 2023.

Blockchain decentralization can be seen in a variety of ways, including node lenses, block production, geographic distribution, governance, and more. XRPL has never seen a consensus attack, despite having fewer block-producing nodes than the most well-known PoW/PoS networks do. Increased node/validator numbers can have positive or negative impacts, such as slowing consensus, at particular points along the spectrum of decentralization.

Sidechain

EVM developers, who make up over 90% of Web3 developers, will have access to the XRPL ecosystem thanks to Peersyst's EVM sidechain proposal, which is anticipated in Q2 2023. The Cosmos SDK, specifically Ethermint, is being used to build the sidechain, which is linked to XRPL via the XRPL bridge. Using Tendermint, a PoS consensus algorithm, the devnet is currently operational and producing blocks around every five seconds.

The Root Network is a blockchain-based NFT system managed by Futureverse with an emphasis on UX and metaverse. The Root Network will use XRPL, namely XRP, which will be a native currency, Futureverse and Ripple stated in 2022. The Root Network:

Will make XRP the standard gas token.
Will integrate XRPL’s XLS-20 NFT standard.
Is being built from a fork of Substrate.
Will have EVM support for smart contracts.
Will employ a dPoS (delegated Proof of Stake) consensus process.

In February 2023, Ripple engineers suggested the XLS-38d standard as a means of bridging the XRPL mainnet to sidechains. By using this standard, bridges can lock tokens on XRPL to create wrapped tokens on the sidechain, which can then be burned to release the locked tokens' XRPL equivalents. The "witness server" node type will communicate between chains. They are the experts in this multi-sig configuration. This bridge standard will probably be used with the planned EVM sidechain from Peersyst.

B2B Services

With the help of XRPL and XRP, Ripple provides two primary B2B services:

On-Demand Liquidity (ODL): A messaging and settlement layer that enables customers (financial institutions, money transmitters, and enterprises) to leverage XRP to bridge two currencies in seconds. Users can send and receive transactions with their own native currencies in a quick, scalable manner on both ends.
CBDCs: A means by which central banks can issue digital money.

ODL employs XRP as a bridge currency for XRPL transactions. On a separate, federated ledger, CBDCs mint, destroy, and transmit distinctive Issued Currencies, in contrast.

Ripple is utilizing XRPL as a mechanism to offer superior payment rails than any current money transfer service. Existing money transfer companies like Western Union and MoneyGram have a firm hold on international payments. But XRPL does not have to go up against them.

In truth, several of these "competitors" have already integrated with XRPL or have at least looked into doing so. Western Union and Ripple teamed in 2017 to test out XRP for rapid settlement, and MoneyGram and Ripple partnered for two years, from 2019 to 2021. In other words, rather than the financial institutions themselves, the real competitor for XRPL is probably out-of-date infrastructure. In a similar vein, Ripple expects that central banks would view XRPL as a useful infrastructure rather than a rival

XRP Ledger roadmap

Hooks, a smart contract feature integrated into XRPL transactions, is being developed by XRPL Labs to provide additional basic functionality on the base layer. Although Hooks are not Turing complete and do not support arbitrary logic, they do enable the attachment of conditions and triggers to transactions. The EVM sidechain, which Peersyst is currently developing, will change the ecosystem's course and is anticipated in 2023. While Hooks will offer logic akin to scripts on UTXO chains like Bitcoin and Cardano, the EVM sidechain will support computation comparable to that of smart contract-enabled networks (pre-smart contracts) like Ethereum and Solana.

Futureverse's Root Network and Ripple's XLS-30d AMM standard are both scheduled to become amendment votes soon, indicating a change in the XRPL community's course. In contrast to the Root Network, which emphasizes NFTs and the metaverse, the AMM standard emphasizes DeFi and expands the financial options available to liquidity providers. These are not quite the purist definition of cross-border, decentralized money, but the community has embraced and is actively pursuing them.

XRPL is still used by Ripple for its ODL and CBDC products. With regard to ODL, Ripple's primary use case for XRPL, there are now approximately 40 payout marketplaces, up from three in 2018. In its fifth Wave, XRPL grants are still giving out XRP to builders.

Competitive landscape of XRP Ledger

Although there are other cryptocurrencies with comparable objectives to XRPL in terms of settlement and liquidity characteristics, there are also significant variations between them. For instance, XRPL and XRP were forked to create Stellar and its XLM cryptocurrency. But XRPL also seeks to deliver quick, effective cross-border payments for organizations like banks, whereas Stellar is mostly focused on providing efficient peer-to-peer infrastructure.

Additionally, XLM is used considerably less frequently than XRP. In comparison to XRP, which has a market cap of $19.4 billion and a daily trading volume of $1.6 billion, XLM has a cap of $2.2 billion and a daily trading volume of $63 million.

As cross-border payments, stablecoins on smart contract-enabled networks do compete with XRP and other XRPL assets. Market capitalizations for USDC and USDT are $44 billion and $72 billion, respectively. These numbers far exceed those of XRP or any stablecoins on XRPL, yet they are also subject to high gas costs, just like their native token ETH. Other smart contract-enabled networks, like Solana, do not charge the same fees, but their native tokens or stablecoins do not have as much liquidity.

Even though they might not offer the same advantages for quick, energy-efficient settlement, smart contract-enabled networks like Ethereum and Solana do compete with XRPL in terms of asset tokenization and overall liquidity.

There is no direct competition in cryptocurrency for the use case of XRPL, which is to facilitate transfers for big institutions. However, XRPL is well behind the competition in terms of volumes and activity for stablecoins and NFTs. Once sidechain projects like the Root Network and the EVM sidechain are in production, these numbers might get better.

Conclusion

The XRP community is expanding the use cases for XRPL, with an emphasis on payments, DeFi via XLS-30d, smart contract-like functionality via Hooks, NFTs via XLS-20, and metaverse via the Root Network. The continuation of innovation and growth outside of Ripple, XRPL Foundation, and XRPL Labs is ensured by programs like XRPL Grants. For anyone looking for a quick, effective, and secure settlement and liquidity capabilities, both crypto natives and traditional financial companies will find XRPL to be an appealing alternative thanks to its expanding capabilities.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

XRP Ledger: The scalable and sustainable blockchain