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What is Ripple?

Developed by the US-based technology company Ripple Labs Inc. in 2012, Ripple is a real-time gross settlement system (RTGS), currency exchange, and remittance network. The most distinguishing feature of Ripple is its build schematics. Mounted on top of a distributed open-source protocol, Ripple supports tokens that represent fiat currency, cryptocurrency, commodities, and other units of value such as frequent flyer miles and mobile minutes. This system aims at the enablement of secure, instant, and nearly free global financial transactions of any size with no transaction charges

ripple logo

Ripple Logo

PS: Ripple as a cryptocurrency is represented as XRP.

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Acting both as a cryptocurrency and as a digital payment network for financial transactions, Ripple uses a common ledger that is managed by a network of independently validating servers that constantly compare transaction records. It works on a shared public database that incorporates a consensus process for decision-making and validating servers to ensure integrity. The servers can belong to anyone from banks to individual users.

The Ripple protocol claims that it can enable the near instant and direct transfer of money between two parties. Any type of currency can be exchanged, from fiat currency to gold to even airline miles, using the Ripple protocol. Although Ripple validates servers and has a consensus mechanism, IT IS NOT A BLOCKCHAIN. Ripple generally uses a Hash Tree to summarize entered data into a single value which is further compared cross its validating servers to reach a consensus.

Fund Transfer in a Ripple System

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To understand how the Ripple system functions, consider a money transfer structure where two parties on either end of the transaction use preferred middlemen to receive money. Say, Mr. X needs to send $100 to Mr. Y who lives in a different city. He gives his local agent the money to send to Mr. Y with a password that David is required to answer correctly to receive the funds. Mr. X’s local agent alerts Mr. Y’s agent of the transaction details—the recipient, funds to be reimbursed, and the password. If Mr. Y gives his local agent the right password, he receives $100. However, the money comes from the agent’s account which means that Mr. X’s agent would owe Mr. Y’s agent $100. Mr. Y’s agent can either record a journal of all Mr. X’s local agent’s debt which the former would pay on an agreed day or make counter transactions for balancing the debt. For example, if Mr. X’s agent was also Mr. Z’s agent and Mr. Z needs to transfer $100 to Mr. Z1 whose agent is Mr. Y’s agent, this would balance out the $100 owed to Mr. X’s agent, since Mr. Z1 will be paid from Mr. X’s local agent’s account.

Ripple improves some major drawbacks that are attributed to traditional banks and conventional banking systems. Transactions are settled within seconds on the Ripple network even though the platform handles millions of transactions regularly. Unlike banks that take days or weeks to complete a wire transfer, Ripple does it in seconds. The fee to conduct transactions on Ripple is minimal, with the minimum transaction cost for a standard transaction being 0.00001 XRP as opposed to the fees charged by banks for conducting cross-border payments.

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