Ripple is adamant that XRP is decentralized. The evidence disagrees.
XRP is a cryptocurrency aimed at reducing the friction between foreign exchange transactions. Like the oil in a car, it helps banks transfer money by increasing the availability, or liquidity, of seldom-used currency pairs.
By lubricating these gears, Ripple claims that it can help reduce the cash that money transmitters and banks need to have on-hand. This cash is then freed up, allowing the company to invest it or use it for other purposes, saving them money.
Ripple Executives Claim Decentralization
There is, however, substantial controversy around XRP. The main company behind the cryptocurrency, Ripple, claims that it is decentralized.
XRP Ledger is “inherently decentralized,” said Ripple CTO David Schwartz. “By design, the XRP Ledger is also—if not more so—decentralized than both Bitcoin and Ethereum.”
To further emphasize the decentralized nature of its cryptoasset, the company has attempted to distance itself from XRP’s creation. “XRP ledger existed before Ripple the company,” said Ripple CEO Brad Garlinghouse. “We own a lot of XRP. But it’s a little bit like saying, Exxon owns a lot of oil.”
Like Exxon, Ripple is merely the company that is delivering XRP to the financial engines in need of lubrication, or so they claim. Yet, there’s substantial evidence suggesting that XRP is, in fact, almost wholly controlled by Ripple.
Who Created XRP?
Unlike what executives would like investors to believe, Ripple was not “gifted XRP from the people who created it.” XRP and its ledger were launched in 2013 by current Ripple executive chairman Chris Larsen, as well as Jed McCaleb and Arthur Britto, who later split from the project.
The digital asset was initially created under a corporation known as “Newcoin” in 2012. A month later, the company was renamed to “OpenCoin.” Finally, in 2013, the company was renamed again to “Ripple Labs” and incorporated in California.
This was then merged as a subsidiary under a Delaware corporation known as Ripple Labs in 2014, the same Ripple that operates today.
Further evidence that Ripple created XRP is a trademark filed in 2013, roughly six months after the network was launched. Though originally registered by OpenCoin, Ripple is the current owner of the trademark.
Even the company itself has, in the past, said that it created XRP. For all intents and purposes, Ripple appears to have created XRP.
The line of succession is clear. As said by Preston Byrne, an attorney that specializes in blockchain technology: “Yes, Ripple created XRP, they own most of it and it was issued after company formation.”
Who Owns the XRP Supply?
In 2012, Ripple founders Chris Larsen, Jed McCaleb, and Arthur Britto signed an agreement allocating 80% of the total XRP supply to the company while the remaining 20% was split between the three founders.
A few months later XRP Ledger was launched and 100 billion XRP was created and divided between the founders and the company.
These coins were sold over the years to fund the development of the company, secure partnerships, and pay market makers to improve exchange availability. Some seven years later, the company still has control of more than 60 billion of these tokens, more than half the supply. If these were sold at current prices, they’d be worth more than $15 billion.
These coins are sold regularly every quarter, usually to the tune of tens to hundreds of millions of dollars. Ripple, company insiders, and their partners largely control the XRP supply.
Many investors are frustrated that these sales suppress potential price appreciation. And, they’re probably right.
Who Controls XRP Ledger?
The final factor that points to the centralization of the XRP Ledger is how its blockchain operates.
Like Bitcoin, the XRP Ledger is composed of a collection of “nodes,” computers that run the software supporting a blockchain.
However, unlike Bitcoin, XRP does not select blocks of transactions through “proof-of-work,” a lottery where tickets are acquired using computer power. Instead, it uses its own system—the “Ripple Protocol Consensus Algorithm,” or RPCA.
Another feature that sets proof-of-work and RPCA apart is that nodes running RPCA are uncompensated. They’re volunteers that incur thousands of dollars of expenses a year (assuming they’re not one of Ripple’s own nodes).
Out of nearly 1,000 nodes, a group of 33 are selected by the whole group to finalize transactions. This smaller group is called the “Unique Node List,” or UNL. When 80% of these 33 come to an agreement, a transaction is finalized.
But here’s where the problem arises—Ripple, the company, selects the default Unique Node List. When a volunteer spins up a node, these are the ones voted for by default to finalize transactions. Theoretically, different nodes outside of those recommended by Ripple could be selected, but that’s seldom the case.
Since the launch of the ledger, there are few documented cases of nodes outside of the default UNL gaining access to one of the privileged spots. On top of that, Ripple directly controls six of these nodes and indirectly controls at least four more through grants.
What if someone doesn’t like this state of affairs? Schwartz says that someone could fork away from the XRP Ledger should they disagree with the company. That is possible, on paper. But, because of the control Ripple exerts over the ledger this has never happened.
Meanwhile, Bitcoin has had over 100 forks while Ethereum has had at least six forks. These are a testament to the decentralization of the two projects.
Why Does Decentralization Matter?
It’s likely that the answer to whether XRP is decentralized or not could have huge legal ramifications for Ripple (and investors).
If these coins were issued to raise money, then it could attract unwelcome attention from regulators—the Securities Exchange Commission, the Commodity Futures Trading Commission, and the Financial Crimes Enforcement Network.
If the SEC, for example, were to deem XRP a security it could have dire consequences for its usefulness for exchange transactions. In fact, one such case is moving through the California court system right now.
It also has a large impact on investors. If Ripple were to decide one day that it would stop working on XRP, then the token may as well be worthless. In contrast to Bitcoin, because of its many contributors, the loss of any one company would not sink BTC.
In all, these factors point to one conclusion. Ripple experts have enough control over XRP where it would not be considered decentralized.