In today’s world, millions of transactions are carried out by financial institutions on a regular basis. These transactions may take place in the form of domestic or international payments. With regards to international payments, most of these transactions take place through a network called SWIFT.
The SWIFT network is a vast messaging system that banks and financial institutions use to transmit and receive information through a system of codes. SWIFT works to communicate and receive payment orders to the accounts of institutions which are parties to transactions.
However, in contrast to domestic transactions, cross-border payments are often complicated, which can lead to them being slow and costly. Transactions can often end up taking days to be completed, especially if the currencies used are less popular. This can prove to be inefficient, especially taking into account that these transactions amount to billions of dollars annually.
Due to these shortcomings in the SWIFT system, a need for disruption was born, and a faster, more efficient and cheaper technology was envisioned, leading to the creation of Ripple in 2012.
Ripple was created by Chris Larsen and Jed McCaleb in 2012. The ticker for the Ripple token is XRP, and the cryptocurrency has the third largest market cap behind Bitcoin and Ethereum.
Ripple uses the distributed ledger technology and a peer-to-peer network. It allows users to carry out international transactions in fiat currency in merely a matter of seconds, and at virtually no cost(transactions fees amount to .00001 XRP).
Ripple operates on the blockchain protocol, just like bitcoin but possesses a few significant differences. For example, Ripple cannot be mined and operates on a more centralized system compared to other cryptocurrencies. Furthermore, it has the fairly unique feature of being a deflationary currency, as transaction fees are burned, thereby reducing the number of coins in circulation.
It is important to note that the primary target markets of Ripple are large banks and financial institutions. Its customer base currently includes over 75 major banks including institutions such as Bank of America, RBC, UBS, etc. In fact, one of the main reasons that Jed McCaleb left Ripple to start Stellar is the fact that McCaleb possessed a passion for helping people in poor countries who do not have access to mainstream financial services.
Stellar was co-founded in 2014 by Joyce Kim and Jed McCaleb. Stellar Lumens trades under the ticker XLM and is the sixth largest cryptocurrency in terms of market cap. It is similar to Ripple in the sense that it uses blockchain and distributed ledger technology and aims to efficiently facilitate transactions. The key differences between Ripple and Stellar are that the latter operates on a more open ledger, is completely decentralized and allows transactions in both fiat and digital currencies.
Stellar is an inflationary currency and does not burn the fees it collects, unlike Ripple. Furthermore, Stellar champions a much more selfless cause by aiming to empower users in impoverished countries by targeting unbanked communities that do not have access to traditional money transfer services. This is carried out with the motive of increasing financial inclusion in these underdeveloped areas and to help combat poverty.
Unlike Ripple, which is heavily involved in marketing and PR, Stellar utilizes third-party developers to distribute its system. This is one of the primary reasons it has less visibility in financial markets.
It is important to note that despite common misconceptions, Stellar is not considered a fork of Ripple and both protocols operate on distinct codes.
The Bottom Line
Both protocols are unique in their own way, and there is no means to directly conclude which is the better one. Each possesses their virtues and can be more beneficial than the other depending on the context. While both currencies have their drawbacks regarding implementation on a large scale in their current states, they are gaining huge traction and could quite possibly be the future of the payment system around the globe due to their speed, cost, and efficiency.
Can Ripple and Stellar disrupt the transaction system and truly replace SWIFT? Will they truly be adopted for mainstream use by all financial institutions? Let us know your thoughts and views on the matter in the comments section below.
Finance student who has a keen interest in securities markets and new technologies.