Why Ripple Still Faces Centralization Warnings

Author: Sam Kessler, CoinDesk; Compiler: Songxue, Jinse Finance

News broke last week that Ripple Labs had scored a partial court victory in its lawsuit with the U.S. Securities and Exchange Commission, lifting the regulatory cloud that has hung over the project for years.

What follows, however, is an ongoing criticism from blockchain purists of the XRP Ledger project at the heart of the case: its technical design is too centralized.

XRP Ledger or "XRPL" is the continuation of Bitcoin, but the concept of its establishment can be traced back to the early 21st century, and it relies on a key compromise setting-allowing its central transaction processing mechanism to be controlled by a small number of "validators" or encryption. Key operator control, not on many competitor blockchains.

"Ripple basically said, 'Hey, let's get Bitcoin adopted by institutions,' so they created their own version of a decentralized currency that was faster, More consistent and cheaper," said a former Ripple Labs employee, who asked not to be named so as not to upset old colleagues. “But it does come at a greater cost of centralization compared to bitcoin.”

The benefits are security, speed, and throughput, but the downside is that a more centralized network is more vulnerable to major players, or prone to single points of failure.

That's not to say that XRPL isn't an intriguing project in its own right, a pioneer in the blockchain industry whose native token, XRP, currently has a market capitalization of $42 billion, ranking fourth among tens of thousands of cryptocurrencies and attracting Bank of America And other big banks as partners. NFTs are inherently built into the underlying programming of blockchains — something upstart competitors are only now realizing. Currently, smart contract-like functions are being developed, and third-party sidechains have also begun to proliferate.

Potential use cases such as global remittances are obvious. Ripple has very different ambitions than many rival blockchain projects where, for better or worse, decentralization is an organizing principle.

** "The Banker's Bitcoin"**

Released in 2004 by Canadian programmer Ryan Fugger, Ripple was not originally a blockchain project. Cryptocurrencies as we know them won't even be around for four years. Originally known as "RipplePay," it is a peer-to-peer payment network focused on convenience and security.

In 2011, Fugger sold RipplePay to Jed McCaleb, Arthur Britto and David Schwartz. They are building a new payment system inspired by Bitcoin, which was around a few years ago but is far from a household name.

The trio's mission, which was eventually merged with RipplePay, includes bridging blockchain with traditional finance through faster transactions, cheaper fees and lower energy costs. Their new company was called “OpenCoin,” which eventually changed its name to Ripple Labs — the organization we know today.

XRP's reputation in cryptocurrency circles has been complicated from the start.

"Prior to 2012, when Ripple was just my project, it had a limited but generally good reputation in the alt/emerging cryptocurrency community," said Fugger, who briefly stayed at Ripple Labs as an advisor but is no longer with the company Work. "When someone like Jed took on the project, they wanted to cement that reputation."

Around the time of RipplePay's acquisition of OpenCoin, the nascent blockchain industry was entirely dominated by Bitcoin, which thrived after the 2008 financial crisis as a way to combat a corrupt financial system.

Bitcoin's breakthrough was that it used cryptography to allow people to transact over the internet without the need for trusted intermediaries.

Backed by a "decentralized" community of miners, Bitcoin's novel payment technology ensures that no one person or entity can tamper with or slow down transactions.

Unlike Bitcoin, which aims to disrupt traditional banking, Ripple's focus is on iterative improvements to the existing financial system.

Not everyone is on board. Fugger no longer works in the blockchain industry and believes XRP's reputation has improved over the years, but recalls that in the early days of the project, "XRP was pretty polarizing, with many in the Bitcoin community having a negative view of XRP. — mining purists, bitcoin maximalists, etc.”

Ripple's original use case for XRP was fast and cheap cross-border payments — a feature called "On-Demand Liquidity" (ODL), which uses XRP as a bridge asset for banks and financial institutions to transfer between currencies. Over time, Ripple Labs has broadened its focus to include other use cases such as central bank digital currencies (CBDCs) — essentially digital versions of government-issued currencies.

In the future, Ripple sees itself as a full-fledged replacement for SWIFT - the messaging network that powers today's global payment system.

Ripple's numerous financial and central bank partnerships have been scoffed at by cryptocurrency purists and bitcoin supporters, who say they're disgusted by the very nature of a "decentralized" payments network. XRP’s passionate fanbase, the XRP Army, supports a different point of view.

“Bitcoin in the white paper is anti-bank, anti-establishment,” noted one prominent XRP Army member earlier this year. “My inner libertarian loves it. My inner libertarian is absolutely crazy about it. I I was like, 'Oh my god, yeah, knock this man down!'"

"As an adult, I understand that the traditional corporations, systems, governments and central banks of the world are not going to do anything."

centralization problem

Critics of Ripple often take issue with the XRP Ledger's consensus mechanism, the method the chain uses to securely process transactions.

On Bitcoin, which uses a "proof-of-work" system, anyone can compete to "mine" blocks and be rewarded. On Ethereum, which uses "proof-of-stake," anyone with enough ETH tokens can "stake" tokens to help secure the network and earn interest.

Ripple's system, called "Proof of Association" (PoA), is much more closed in comparison. Each XRPL server operator is required to manually compile a list of validators, called the "Unique Node List" (UNL), which it trusts to report the state of the blockchain. Anyone can run a validator, but only "trusted" validators on UNL can process transactions directly.

Ripple Labs and two closely related entities — the XRP Ledger Foundation and Coil — each publish a list of recommended validators and encourage servers to use one of these “default” UNLs instead of building their own validator lists.

PoA is ostensibly a way to make systems cheaper and more energy efficient. In contrast, Bitcoin mining is notoriously energy-intensive, while Ethereum staking requires a significant upfront capital investment. These two chains — Ethereum in particular — generate significantly higher transaction fees than XRPL.

However, it is undeniable that XRPL is more centralized in terms of the raw number of validators running its network. There are about 100 validators on the XRP network, orders of magnitude lower than Bitcoin, which is backed by over 1 million miners (although Bitcoin's system has its own centralization of power issues).

Furthermore, there are only about 35 validators on XRPL's most commonly used default UNL, which means that less than 30% of the entities play a huge role in keeping the blockchain alive and authentic (if enough operators collude to disrupt the network , they can at least, destroy the liveness of the chain).

PoA is also considered more secure for partner institutions, as only "trusted" entities can run the chain.

“You can’t come in with $1 billion and say, ‘I’ve got enough money for 1,000 Ethereum validators, and I’m going to run them; I’m just buying a piece of the Ethereum consensus’, or “I’m going to buy a bunch of mining hardware, and I have more money than you, so I can get a bigger share of the Bitcoin protocol consensus than you,” explained Red Sheehan, a research analyst at Messari who is commissioned by Ripple Labs to write regular XRPL reports. "Association proved impossible to do that."

However, decentralization purists argue that PoA systems defeat the whole point of a distributed ledger — trust should be removed from the equation.

XRP Token

Critics of Ripple specifically target the initial distribution of XRP tokens. Ripple Labs took pains to distinguish "Ripple" from "XRP", claiming that the initial distribution of XRP tokens (80% of which went to Ripple Labs and 20% to its founders) was a "gift" to the open-source developers of XRPL: Although Ripple Labs played a major role in building this blockchain.

Over time, Ripple Labs divested most of its XRP holdings, sometimes selling them over-the-counter to institutional investors and sometimes through cryptocurrency exchanges to retail investors through so-called programmatic sales.

Ripple Labs remains the largest holder of the XRP token, raising concerns that it could damage or manipulate the price of the asset. However, most of the company's remaining XRP is kept in escrow accounts, which limits Ripple Labs from selling more than 1 billion XRP in any given month.

Smart Contracts and Sidechains

XRP's initial distribution and XRPL's consensus mechanism aside, the XRPL ecosystem has struggled to find more use beyond its limited use cases.

On the one hand, Ripple's proprietary XRPL-based "RippleNet" product suite has begun to be increasingly adopted by banks. “I would say that institutional tools — whether it’s on-demand liquidity or a CBDC — seem to be ahead of other blockchains,” Sheehan said.

On the other hand, the adoption of retail-focused XRPL use cases such as NFTs has struggled to find the same footing, Sheehan said.

Part of the reason XRP has struggled to attract users may be that the XRP Ledger lacks programmable smart contracts — most modern blockchains (such as Ethereum) use blockchain-based computer programs to run NFTs and decentralized finance (NFT) for their communities. DeFi) ecosystem powered.

A former Ripple Labs employee said that criticism of XRPL technology should take into account the blockchain's history: "It's actually ten years old. It's easy for the Ethereum community to look at it these days and say 'oh my god, You can’t even do smart contracts, it’s ridiculous.’ But it’s older than Ethereum.”

To its credit, XRP was one of the first decentralized exchanges (DEXs). It's also home to some of the earliest NFTs. However, XRPL's DEX and NFT ecosystem lacked the richness and flexibility of newer blockchains, and thus failed to gain widespread adoption.

Fortunately, the programmability of the XRP Ledger may soon expand. Some third parties are building "sidechains" that write transactions into XRPL but can extend their functionality with more complex features like smart contracts. One sidechain currently being tested is based on the Ethereum Virtual Machine, meaning it could theoretically open up the XRP ecosystem to some of the same applications and smart contracts found on ethereum and similar blockchains.

There is also an official proposal to introduce "hooks" directly into the XRPL network. Similar to mini smart contracts, hooks (currently in beta) will allow people to add code that executes automatically on certain types of transactions.

Future of Ripple

When Ripple first went public in 2012, it was one of the first blockchain projects to unabashedly embrace traditional banking. It was also one of the first blockchains to break away from the Bitcoin mining system. Both moves have sparked disdain in the cryptocurrency community — a sentiment that is prevalent today.

Despite its dismal reputation in certain corners of the cryptocurrency community, Ripple's SEC lawsuit has won it new allies -- some reluctant, others more enthusiastic.

Many XRP shifts stem from politics - eg. "Gary Gensler's enemy is my friend". Still, others expressed a willingness to reevaluate Ripple as a whole.

For example, Messari founder and former XRP critic Ryan Selkis called on the industry to rally behind the project.

“I’ve been critical of Ripple in the past (for various reasons), but I identify with them more than ever,” he said in a now-deleted tweet from March. "Ripple should win the XRP-SEC case, and XRP Ledger should have a chance to level the playing field on the global digital payments infrastructure. The demand is there!" (Selkis appears to have deleted all tweets prior to May 28, 2023, especially this tweet.)

But it's not just the SEC lawsuit that has won Ripple new friends.