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Why Ripple is the favourite cryptocurrency for
banks?
Ever since the early days of Bitcoin, community members have been strongly
opposed to centralized forms of cryptocurrencies as they give a disproportionate
amount of power to a select few and that is against the spirit of cryptocurrency.
However, decentralized cryptocurrencies like Bitcoin and Ethereum remain slow
because millions of nodes have to be synchronized in real time to ensure security.
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That is why Ripple is a promising alternative to fully decentralized
cryptocurrencies and will have critical applications in sectors such as finance and
banking. In this article, we take a look at the architecture of Ripple which makes it
a favourite for banks.
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How is Ripple’s Architecture different from
that of bitcoin?
While both Ripple and Bitcoin are blockchain based cryptocurrencies that can be
used to facilitate cross-border payments, there are a few key differences between
the two which make each of them more suitable for different applications. The
primary difference between the two is that Bitcoin is completely permissionless
while Ripple is permissioned.
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It means that any person in the world can join the Bitcoin network and share their
computing resources to become a miner and secure the network, earning rewards
in the process. By contrast, Ripple is a permissioned ledger which uses legal
entities such as banks and universities to validate transactions. Ripple’s validators
include companies such as Microsoft and Consultants to Government and
Industries (CGI) along with universities such as the Massachusetts Institute of
Technology (MIT) which form the basis of transaction processors for the XRP
ledger.
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Ripple’s architecture provides banks with official records of asset ownership and
legally accountable participants and makes more sense for banks since it mimics
the real world of finance. In the real world, all participants in financial banks are
authentic and entities like validators and transmitters require legal identities to
maintain liability. Not only is the network more secure for finance, but it also has a
significant advantage for the throughput of the network. While Bitcoin and
Ethereum can handle 3 to 7 transactions per second,
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Ripple is designed to process over 1500 transactions every second! This huge
leap in throughput comes as a result of fewer resources being diverted to mining
since validators are already trusted entities. Bitcoin’s network has been
susceptible to backlogs and very high fees at times of heavy usage where users
have to wait several hours and pay over $20 in fees for their transactions to go
through.
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Ripple’s collaboration with Banks
Ripple’s main advantage comes down to saving money and time for the banks
when processing international transactions. Bill Gates supported this position and
said that “there’s a lot that bitcoin or Ripple and variants can do to make moving
money, between countries easier and getting fees down pretty dramatically.”
Owing to its efficiency in facilitating exchange and especially cross-border
transfers, Ripple has secured some of the most high profile partnerships with
banks in the world of cryptocurrencies.
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Ripple’s two main services xRapid and xCurrent are being extensively tested and
employed by banks around the world to bring down their SWIFT transfer costs.
xCurrent is competing primarily with SWIFT’s (Society for Worldwide Interbank
Financial Telecommunication) outdated messaging system and allows for a
quicker settlement in cross-border payments but still requires nostro-vostro
accounts to be held by participating banks.
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XRapid is the next step in the field of cross-border payments which utilizes XRP
as a bridge asset between currencies thus eliminating the need for nostro-vostro
accounts while at the same time providing very high liquidity. xRapid allows for
massive savings, with an additional 40% saving for banks by adopting Ripple’s
native token. Some of the largest banks and financial institutions in the world like
PNC Bank in the USA,
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Cargill’s Bank and American Express have successfully concluded their trials with
xCurrent and have integrated the service in their regular operations. They can get
even more out of their partnership with Ripple by switching to the xRapid standard
and making SWIFT transfers obsolete.
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