Ripple, Ethereum, and ICOs

So as you’ve probably heard  because the media can’t shut up about it  in 2017, the Ripple currency  otherwise known as XRP shot up in value  across the year by 30,000%.  A lot of that just being in the last couple of weeks.  A lot of this was being driven by a rumor  that was going around the space  about Ripple potentially being added to the Coinbase app.  I actually heard about this rumor a couple of months ago  and there was some fake screenshots and videos going around  which easily could have been put together  in Photoshop or something like that.

But you can never discount the power of a rumor  and the speculative money people  are willing to gamble on something.  So what we’ve seen over the last couple of weeks  is the price shoot through the roof.  As with all things in cryptocurrency though  speculative price increases do not equal utility  and that’s why I wanted to talk a little bit today  about what Ripple is and why  it’s not really decentralized at all.

What is Ripple?

Ripple was created many, many years ago  and I’m not gonna tell the full history story  but it was created by somebody called Jed McCaleb  who is actually the person who created Mt. Gox.  But he then sold it to Mark Karpeles  before all that bad stuff happened.  Then after Ripple, he went on to create something called  Stellar which is another cryptocurrency.  Ripple has been around for a long time  and it’s always kind of hovered  in the top 10 cryptocurrencies  but people haven’t really known what to make of it.  That’s because Ripple mostly targets its marketing  towards banks and big financial institutions  rather than the small guys.

So historically, the people who were against the banks  and against financial institutions  I.e. the people that created BitCoin  they didn’t want any part in Ripple  because they didn’t want to side with these people  who created the economic crash.  But speculation from uneducated investors strikes again.  So the reason you’ll hear some people screaming  Ripple isn’t decentralized  is the fact that Ripple actually only relies  on around 55 validator nodes  and these validator notes, a lot of them  belong to Ripple themselves  they just service somewhere  but a lot of them belong to banks and exchanges  which Ripple, the company, has partnered with.  Most of these people are gateways in the Ripple network  and it’s important to know that XRP  which is the currency that is traded on Ripple  it’s the base currency  is just one of the things you can trade on Ripple.

Ripple is actually supposed to be rails  for these financial institutions  and what that means in a nutshell  is that Ripple is designed to be a new technology stack  for banks and financial institutions  to trade assets, whatever they may be.  They may be USD or Euros  just faster between one another.  So basically these 55-ish validator nodes  they tell each other about all the transactions  that are happening on their independent gateways  and then if they all agree with one another  they keep moving the ledger forward and forward and forward.  As long as they agree on everything, it’s all peachy  but this is really easy to pull off  when there’s only 55 validator nodes in the world  especially if like half of them are owned by one company.

Just to put it in contrast, Ethereum has over 29,000  full nodes validating and BitCoin has around 12,000.  On top of that, Ethereum and BitCoin  also have the proof of work mining  which secures the ledger.  To further compound things, the Stellar protocol  which I mentioned earlier.  they actually started out as a fork of Ripple  they just forked the code base  and changed everything a little bit  but shortly after releasing, they actually discovered  that there were problems in the Ripple protocol  which amounted to them saying Ripple isn’t secure  as a consensus protocol above one node.  So there’s actually a chance that these 55 validator nodes  the banks and the exchanges out there  are all just playing by the rules  and the protocol actually hasn’t been tested at scale  when a bad actor comes into the scene.

The thing is, it’s only these big companies  that are invited to run these validator nodes  so we’ll never really know if there was 1,000  nodes tomorrow by just regular people running them  whether the network protocol and consensus  would actually work.  Stellar actually had to completely re-architect  and redo their consensus protocol  which is now called the Stellar consensus protocol.  I might cover that in the future  but basically, it’s a practical byzantine fault tolerant  consensus protocol and it’s a lot more resilient  against consensus attacks.  But let’s say we forget the consensus protocol stuff  which we shouldn’t, but let’s say we do.

Even if you look at the Ripple money supply  that XRP token, the Ripple company themselves  and their partners own over 50% of the money supply.  That means that they essentially control the market  and I don’t think you have to be an economist  to know it’s bad when a single company  owns 50% of the money supply.  Because there was never any mining in Ripple  it was essentially all pre-mined  and sent to the company themselves  and they were then able to sell it  and distribute it to people as they saw fit.  But on top of this, and this is kind of the real kicker.  The Ripple protocol actually has something in it  called a freeze function and what this essentially does  is it allows gateways to freeze your account  just like a regular bank can freeze your account.  So if one of these gateways doesn’t like what you’re doing  they can then freeze all your funds  which doesn’t really sound that decentralized  or trustless to me.

I think it’s really important to understand these essentials  about what Ripple is.  I’m not necessarily down on Ripple  its just not what I would deem as a cryptocurrency  or something that extends the original vision of  Satoshi and BitCoin.  That original vision was about doing away with the banks  and making sure that people had  control over their own money.  They wanted to get away from centralization  they wanted to decentralize  and make it so that one big company couldn’t  freeze your account or control the whole money supply.

Like I said, I’m not necessarily down on Ripple  it’s a company and software and they can do what they want  but I think a lot of the people that are  pouring their money into the thing right now  are just simply uneducated about what the thing is.  It’s either that or it is the cryptocurrency  people have just said, you know what?  We don’t care about decentralization  or trustless consensus any more.  We’re all in on this centralized thing.  In a way, putting your money into XRP  is like just putting your money into a Venmo account  because there’s a lot of trust  in the people running the network involved.

The only difference is people go and tell  their friends and family, buy this XRP thing  and you’re gonna get rich  and it artificially drives the price up.  It’s literally the definition of a speculative bubble.  If you remember, I said that this whole  kind of sparked off because of a rumor  that Coinbase were gonna add Ripple to their app.  In the last couple of days, Coinbase have come out  and said, we’re not adding any new assets  that was just a rumor.

So the price of Ripple quickly crashed 20%  who knows what it’s doing now, I haven’t really checked.  Ultimately, I hope this is just a case  of people not being educated and they’re gonna go out there  and endeavor to become more educated about this stuff.  People just throwing their money at things  without really knowing what they are  and I just think it’s a sad state of affairs  if that’s what cryptocurrency has become.  People just putting their money into something  regardless of the technical background of the thing.

Why is Ethereum so slow?

So moving on, Ethereum, we’ve seen its price  also go up with the market over the last couple of weeks  I think it’s hovering at around $1,000 right now.  But this increase in price coupled with the fact  that there’s severe scaling issues  with the Ethereum protocol  has meant that the network is really suffering  and it costs a lot of money to  send Ethereum to anybody right now.  Just sending Ethereum to somebody right now  will cost around $2 or $3  and if you’re trying to interact with ERC-20 tokens  those tokens that ICO’s use, it’s gonna cost more than that.

And then you’ve got to wait for the backlog  of these transactions to get picked up by miners  which is taking even longer  and what it ultimately results in  is that token exchanges can take hours  if not days to process.  This is a really big problem  especially for exchanges who have to deal  with people withdrawing their money  and the exchanges have to set the fees accordingly.  In addition, when people are trying  to deposit into exchanges  they’re obviously getting a lot of support emails  saying hey I sent this token two days ago, where is it?  And it’s not really the exchanges fault at all  it’s the Ethereum network itself.  As a result, we’ve actually seen some exchanges  such as Bittrex holt the creation of  new deposit addresses on their exchange.


So if you’re a new user, you basically can’t use Bittrex  for anything Ethereum or ERC related.  Ethereum scaling is a really big challenge  and I’m not sure that something like payment channels  is really a silver bullet that’s gonna solve all of this.  As per our previous cryptocurrency weekly video  I was talking about how fees are another  big problem that we need to address.  With payment channels, you have to open and close them  so those fees aren’t gonna go away.  As the price hikes up and up and up  these fees are gonna go up as well  because the fiat price that people  are exchanging for goes up.

So what might have been a 20 cent fee a couple of weeks ago  might now be $1 fee.  I don’t have a good solutio to this problem  but I’m sure somebody out there is working on it.  On the topic of exchanges  we’ve seen in the last couple of weeks  exchanges picking up the pace  at which they’re delisting certain  ERC-20 tokens on their platforms.  They have a variety of reasons  they deem for delisting a token.  It used to be just about transaction volume  and if enough people weren’t really trading the thing  they would de-list it.  But these days, there’s a whole bunch of other fears  that the exchange’s have about whether the thing  might be deemed as a security in the future  which could put the exchange in hot water.

Just yesterday, several tokens were announced  to be de-listed from Bittrex including some pretty big ones  that people have been excited about  and people are starting to freak out about  whether the tokens that they hold  could just be de-listed tomorrow.  The general rule of thumb here  and this is not legal financial advice at all.  I think if the token can be redeemed  for a tangible good or service  then it’s kind of safe because just like  you were sold an Amazon gift voucher  which you can then redeem for something.  If there isn’t a working platform  or good or service you can redeem that for  and the token’s only use is to send between one another  with no real purpose then that’s a little worrying.

ICO tokens being delisted?

I actually think we’re gonna see a lot more  of this behavior over the next couple of months  with exchanges de-listing tokens  they’re just not sure about  and their lawyers might be freaking out about.  I think we’ll start seeing regulatory bodies  start coming down on these ICO’s that have launched  over the past 12 months and kind of setting a case  and a precedent that they’ll then use moving forward.

This puts exchanges in a really hard spot  because they don’t want to be doing anything illegal  so I think their lawyers are probably  going to tell them to take the safest bet  which is de-listing anything that isn’t 100% legit.  I called this out a while ago on a previous video  but I think the first half of this year, 2018  is gonna be really interesting  when we start seeing the cookie kind of crumble  because we’re at a point where a lot of these ICO‘s  from last year are failing to deliver on their roadmaps  and also, the regulatory bodies had time  to do their homework and kind of take stock  of everything that’s happened.  It’s really just a watch this space for now  but it’s gonna be interesting  and I’ll keep you all up to date  with it through these videos.

Now I know you’re probably thinking  Jackson, do another technical video  I want to promise there are more coming.  I’m probably gonna be doing a video around  just byzantine fault tolerant protocols such as Stellar  and also videos around things like Iota, Cardano  things that these new cutting-edge technologies  which people seem interested in.  I also want to do a Mimblewimble video  because it sounds cool but  it’s also very cool technology.  So that’s it for today.  I hope you found this video helpful.  If you did, please subscribe  and you’ll get weekly updates just like this.  If you learnt something from this video  or just brought you up to date  please click that like button, it really helps.  Until next time, thanks for watching.  See you later.

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