Why is Ripple still facing centralization warnings?

Author: Sam Kessler, CoinDesk; Translation: Song Xue, LianGuai

Last week, there was news that Ripple Labs had achieved a partial court victory in its lawsuit with the U.S. Securities and Exchange Commission, lifting the regulatory cloud that had been hanging over the project for years.

However, what followed was continued criticism from blockchain purists of the core project of this case, XRP Ledger: its technical design is too centralized.

XRP Ledger, or “XRPL,” is a continuation of Bitcoin, but its conceptual foundation can be traced back to the early 21st century. It relies on a key compromise setting – allowing a few “validators” or key operators to control the central transaction processing mechanism, rather than on a blockchain with many competitors.

A former employee of Ripple Labs, who wished to remain anonymous, said, “Ripple basically said, ‘Hey, let’s get institutions to adopt Bitcoin,’ so they created their own version of decentralized currency that is faster, more consistent, and cheaper.” Another former employee of Ripple Labs, who asked not to be named, said, “But compared to Bitcoin, it does come with a greater cost of centralization.”

The benefits lie in security, speed, and throughput, but the downside is that a more centralized network is more susceptible to the influence of major participants or prone to single points of failure.

This is not to say that XRPL itself is not an attractive project. It is a pioneer in the blockchain industry, with a current market value of $42 billion for its native token XRP, ranking fourth among thousands of cryptocurrencies, and attracting partnerships with major banks such as Bank of America. NFTs are inherently built into the underlying programming of the blockchain – something that new competitors are only now realizing. Currently, features similar to smart contracts are under development, and third-party sidechains are also increasing.

The potential use cases such as global remittances are obvious. Ripple’s blockchain projects have vastly different ambitions from many competitors, where, for better or worse, decentralization is an organizational principle.

“The Bankers’ Bitcoin”

Ripple was launched in 2004 by Canadian programmer Ryan Fugger and was not initially a blockchain project. The cryptocurrency as we know it today would not even emerge until four years later. It was originally called “RipplePay” and was 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 were building a new payment system inspired by Bitcoin, which had been around for a few years but was still far from being widely known.

The mission of these three individuals eventually merged with RipplePay, including linking blockchain with traditional finance through faster transactions, cheaper fees, and lower energy costs. Their new company was called “OpenCoin,” which eventually became Ripple Labs – the organization we know today.

The reputation of XRP in the cryptocurrency community has been complicated from the beginning.

“Before 2012, when Ripple was just my project, its reputation in the alternative currency/emerging cryptocurrency community was limited but overall good,” said Fugger, who briefly stayed on as an advisor to Ripple Labs but is no longer with the company. “When Jed and others took over the project, they wanted to solidify that reputation.”

Before and after RippleLianGuaiy’s acquisition of OpenCoin, the emerging blockchain industry was completely dominated by Bitcoin, which flourished as a way to counter the corrupt financial system after the 2008 financial crisis.

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

Supported by the “decentralized” mining community, Bitcoin’s novel payment technology ensured that no one could tamper with transactions or slow down transaction speeds.

Unlike Bitcoin, which aimed to disrupt the traditional banking industry, Ripple’s focus was on iterative improvements to the existing financial system.

Not everyone was on board. Fugger is no longer working in the blockchain industry and believes that the reputation of XRP has improved over the years, but he recalls that in the early days of the project, “XRP was quite polarizing, with many in the Bitcoin community having negative views of XRP – mining purists, Bitcoin maximalists, etc.”

The initial use case of Ripple’s XRP was fast and cheap cross-border payments – a feature called “On-Demand Liquidity” (ODL) that uses XRP as a bridge asset for transfers between banks and financial institutions. Over time, Ripple Labs has expanded 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 comprehensive alternative to SWIFT – the messaging network that powers today’s global payment systems.

Crypto purists and Bitcoin supporters scoff at Ripple’s many financial and central bank partnerships, seeing them as antithetical to the essence of a “decentralized” payment network. The passionate fan base of XRP, known as the XRP Army, supports a different view.

“Bitcoin in the whitepaper was anti-bank, anti-establishment,” noted a prominent member of the XRP Army earlier this year. “I, being a libertarian at heart, loved it. I, being a libertarian at heart, absolutely lost my mind over it. I thought, ‘Wow, yes, take this guy down!'”

“As an adult, I understand that traditional companies, systems, governments, and central banks don’t do anything.”

Centralization Concerns

Ripple’s critics often question the consensus mechanism of the XRP Ledger, the method used by the chain to securely process transactions.

In the Bitcoin system that uses the “Proof of Work” mechanism, anyone can compete to “mine” blocks and receive rewards. In the Ethereum system that uses “Proof of Stake”, anyone who has enough ETH tokens can “stake” their tokens to help secure the network and earn interest.

Ripple’s system is called “Proof of Authority” (PoA), which is more closed compared to the others. Each XRPL server operator needs to manually compile a validator list called the “Unique Node List” (UNL), which trusts this list to report the state of the blockchain. Anyone can run a validator, but only validators “trusted” by the UNL can directly process transactions.

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

PoA is ostensibly a cheaper and more energy-efficient method. In contrast, Bitcoin mining is notorious for being energy-intensive, and Ethereum staking requires a significant upfront capital investment. The transaction fees generated by these two chains, especially Ethereum, are significantly higher than those of XRPL.

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

In addition, the most commonly used default UNL on XRPL consists of only about 35 validators, which means that less than a third of entities play a significant role in maintaining the vitality and authenticity of the blockchain (if enough operators collude to disrupt the network, they can at least disrupt the activity of the chain).

PoA is also considered safer for partner institutions, as only “trusted” entities can run this chain.

“You can’t come in with $1 billion and say, ‘I have enough money to run 1,000 Ethereum validators, I’m going to run them; I just bought some 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 larger share of the Bitcoin protocol consensus than you.'” explained Red Sheehan, a research analyst at Messari who is commissioned by Ripple Labs to regularly write XRPL reports. “Proof of Authority doesn’t allow that.”

However, decentralization purists argue that the PoA system undermines the whole point of a distributed ledger – trust should be removed from the equation.

XRP Token

Critics of Ripple particularly target the initial distribution of XRP tokens. Ripple Labs has gone to great lengths to distinguish “Ripple” from “XRP”, claiming that the initial distribution of XRP tokens (where 80% goes to Ripple Labs and 20% goes to its founders) was a “gift” to open-source developers for XRPL, despite Ripple Labs playing a significant role in building the blockchain.

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

Ripple Labs remains the largest holder of XRP tokens, which has raised concerns about its potential to harm or manipulate asset prices. However, the majority of the company’s remaining XRP is held in custodial accounts, limiting Ripple Labs from selling more than 1 billion XRP in any given month.

Smart Contracts and Sidechains

Aside from the initial distribution of XRP and the consensus mechanism of XRPL, the XRPL ecosystem has been striving to find more use cases beyond limited ones.

On one hand, Ripple’s proprietary “RippleNet” suite of products based on XRPL has started to be adopted by banks more and more. Sheehan said, “I would say that institutional tools—whether it’s on-demand liquidity or CBDCs—seem to be leading the pack in terms of other blockchains.”

On the other hand, the adoption of retail-centric XRPL use cases, such as NFTs, has been difficult to find the same footing.

One reason XRP may struggle to attract users is the lack of programmable smart contracts on the XRP Ledger—most modern blockchains, like Ethereum, use blockchain-based computer programs to power their communities’ NFT and decentralized finance (DeFi) ecosystems.

Former employees of Ripple Labs have suggested that criticisms of XRPL technology should take into account the blockchain’s history: “It has actually been around for a decade. Nowadays, the Ethereum community can easily look at it and say, ‘Oh my god, you can’t even do smart contracts, that’s ridiculous.’ But it’s even older than Ethereum.”

It is worth noting that XRP is one of the earliest decentralized exchanges (DEXs). It is also the birthplace of some of the earliest NFTs. However, XRPL’s DEX and NFT ecosystems lack the richness and flexibility of newer blockchains, thus failing to achieve widespread adoption.

Fortunately, the programmability of the XRP Ledger may soon be expanded. Some third parties are building “sidechains” that write transactions to the XRPL but can extend its functionality with more complex features like smart contracts. One sidechain currently being tested is based on the Ethereum Virtual Machine, which means it could theoretically open up the XRP ecosystem to some of the same applications and smart contracts as Ethereum and similar blockchains.

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

The Future of Ripple

When Ripple first launched in 2012, it was one of the earliest blockchain projects to openly embrace traditional banks. It was also one of the earliest blockchains to break away from the Bitcoin mining system. Both of these moves have garnered disdain within the cryptocurrency community, which is still prevalent today.

Despite a poor reputation in certain corners of the cryptocurrency community, Ripple’s SEC lawsuit has won it new allies – some reluctantly, others more enthusiastically.

Many of the shifts in opinion towards XRP have been politically driven – for example, “the enemy of Gary Gensler is my friend”. However, others are willing to reassess Ripple as a whole.

For instance, Ryan Selkis, founder of Messari and former critic of XRP, has called for industry unity in supporting the project.

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

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

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