The time for Crypto Currencies is now. Just as the success of Facebook helped spawn endless clones, Bitcoin’s arrival on the big stage comes with an assortment of digital currencies, known as “altcoins,” riding on Satoshi’s coattails. As the saying goes, a rising tide raises all ships. With Bitcoin up over 10000 percent in the last few years, the altcoin market is booming.
Is there room for more than one sheriff in town? In the case of Facebook, competitors with similar functionality never made it, regardless of apparently advantageous tweaks to the original formula. ConnectU, a direct copy founded by the Winklevii, was short-lived. Diaspora’s focus on privacy failed because people simply didn’t care. Google+ only survives in spite of itself because of, well, Google.
Successful competitors found a way to relevantly differentiate themselves. LinkedIn was for work. Twitter focused on short status updates you could broadcast publicly. Eventually, once Facebook matured, other entrants incrementally improved the social network’s fundamental features. Instagram filtered the photo while Snapchat perfected the selfie. Given bitcoin’s dominance, what will it take for an altcoin to succeed?
Ripple: Everyone’s a bank
Market Cap: $84,830,610,134 USD
Ripple is perhaps the most intriguing contender among the most popular altcoins, if only because it’s the only one that doesn’t resemble Bitcoin, and one that’s already attracted millions in venture capital from prominent firms like Google Ventures, Andreessen Horowitz, Lightspeed Venture, The Bitcoin Opportunity Fund. It’s uniqueness, of course, poses its own problems, in that most people aren’t sure what it exactly is. Rather than competing with Bitcoin directly, Ripple is meant to complement other currencies, both virtual and fiat, by acting as a decentralized payment system and exchange.
Ripple is technically an internet protocol, like HTTP and TCP/IP, which are used to relay websites and data, respectively, in a standardized fashion. Ripple is designed to send and receive payments. A good way to wrap your head around it is to think of email. Using your Gmail account, you can send email to your mom’s Yahoo account or even to that dude still using AOL. Ripple functions in a similar manner. No matter what provider or financial institution you use, you’ll be able to send money using the Ripple protocol.
Here’s where things can get a little confusing. Ripple isn’t just a currency or a payment process. It’s actually a whole slew of things. Ripple is composed of three main parts: a payment network, a distributed exchange, and its own Bitcoin-like currency. The payment network is basically a Facebook for finance, a web of approved friends you can transact with. The distributed exchange is an automated system for currency trades, giving Ripple cross-currency compatibility. That means you can send or receive money using any currency you choose, whether its dollars or bitcoins. Finally, the currency, known as ripples, plays a key role in the system’s overall functionality and security.
So how does it work? At its core, Ripple is built around a distributed public ledger, similar to Bitcoin’s block chain, that records transactions and account balances, but also offers to buy or sell currencies or assets, thus creating the first distributed financial exchange. To achieve this, participants in the network agree to changes in the ledger via a consensus algorithm rather than proof-of-work. (It’s a bit technical, but there’s a video explaining the process.) Consensus is achieved every two to five seconds, eliminating the need for a centralized clearing house. The Ripple currency is then used as a means of preventing network spam and also serves as a bridge currency. Each transaction requires a small fee paid in ripples, which are destroyed once the transaction is made.
Still with me? Because it’s about to get a bit wonkier. Just like the financial system at large, Ripple is built on a system of trust. For instance, if you have $500 in your Chase account, you trust that the bank will have that money available for you when you withdraw it. This is the fundamental concept of the Ripple system and also where the social network comes into play. Except with Ripple, everyone is their own bank and you get to decide which friends to trust and how much money they’re good for. In other words, the ledger is a record of everyone’s debts rather than a balance of money they actually have in the system, just as your bank account balance is actually a record of the amount the bank is indebted to you. So with Ripple, you’re exchanging IOUs instead of cold hard cash, a revolving line of credit between you, your friends, and your friends of friends. Debts are then cleared outside the system. Here’s how it works:
It starts with a social network, in which the relationships between people are defined by lines of credit. For example, I know Stefan and Andreas. I am willing to let them get up to $1000 and $2000 in debt to me, respectively. In turn, they both know Elli. Stefan only recently met her and is only willing to give her $300 of credit. Andreas knows her better, knows she has a stable job etc – he is willing to give her $500 of credit. I have Bitcoins to sell.
Elli would like to purchase some Bitcoins for dollars. She does not know me, but that doesn’t matter. She can instruct her exchange software to purchase coins and receive them from me immediately. By doing so, she becomes in debt to Stefan and Andreas by whatever amounts were necessary to make her desired purchase, and they both become transitively in debt to me. The fact that this debt exists may be a matter of public record for some implementations. For others, only the two actors in each line of credit know the balances. At some later date I will settle up with Stefan and Andreas. We can settle with cash, PayPal, wire transfers, whatever makes the most sense. We can use even quite reversible forms of payment like PayPal because of the pre-existing trust relationships. And of course, Elli will pay both Stefan and Andreas in the same manner.
Hence the name: debt “ripples” through your social graph.
Such a system obviously presents a host of potential problems. For one, every participant is exposed to a certain degree of counterparty risk, and measuring that risk isn’t something most people are good at or have practice doing, which is why they generally leave the practice of lending money to professional bankers. It’s impossible to be sure if or when someone will pay you back, even if they’re a close friend. It should be noted that the Ripple currency itself is not subject to counterparty risk.
Moreover, because transactions ripple through the system, your balances can be affected even if you haven’t personally made a transaction. In other words, you could wake up one day to suddenly find that you owe a friend (or a few friends) a bunch of money. In that sense, everyone is a passive liquidity provider, which inherently puts you at risk even when you have nothing to gain.
The currency itself has also been the target of criticism. Without a self-regulating system of mining, the creators of Ripple conjured up an arbitrary amount to start, exactly 100 billion ripples. They then proceeded to “gift” 80 billion of them to Ripple Labs, a for profit company, which intends to give away 55 billion of them to users of the system. Thus far, only a small fraction of those ripples have been distributed and there’s little transparency or standardization on how that process might work. In early November, the New York Times reported that 7.5 billion ripples had been released into the wild. As a protocol, Ripple itself is owned by no one.
The process of consensus also poses its issues, since the process of validation is distributed but not decentralized. In theory, users can pick and choose their own network of validators to ensure transaction integrity. But Ripple readily admits that “in practice, most people will use the default UNL supplied by their client.” Similar to the state of Ripple currency, this list of validators will be maintained by Ripple Labs, which promises to maintain a diverse selection of validators they can “trust to not collude to defraud us.” Of course, poor management of the validator pool will undermine the entire system, prompting users to flee, but again, it ultimately amounts to a centralized system and power in the hands of a few.
Not only must users trust their selected network of peers, they also have to trust Ripple Labs. Predictably, these revelations have drawn the ire of Bitcoin supporters, who believe the company is trying to “cash in on Bitcoin’s popularity.” As such, the top Google result for a search of “Ripple currency” is the site RippleScam.org. Likewise, Ripple’s centralization and profit potential has made it particularly attractive to Silicon Valley investors.
Still, Ripple’s unique concept as a system of p2p credit is intriguing in and of itself and also has clear benefits. Transaction fees are lower or non-existent, similar to Bitcoin. But transactions are faster, confirmed in seconds rather than a minimum of minutes. It’s also more accessible in that users can use whatever currency they choose. It’s for this reason that Ripple’s creators claim it to be a complement rather than competition.
Indeed, as a decentralized exchange, Ripple might end up being the easiest way to purchase bitcoins or any altcoin for that matter, a process that remains daunting for cryptocurrency newbies. It also provides a practical way to spend your stash of coins, no matter what currency the merchant receives. Consequently, if Ripple ever gains traction, it will be a huge boon for digital currency innovation since new market entrants can join an existing platform. Ripple makes all currencies easy to use.
Which is perhaps what makes Ripple the smartest long term bet, beyond being not-just-another-Bitcoin. Even if the Great Crash happens, as many predict, and Bitcoin goes the way of MySpace, it’s only a matter of time before Facebook eventually arrives. In that sense, it’s protected against a potentially fickle public. It’s not just a bet on Bitcoin or any particular clone, it’s a bet on virtual currencies as a whole. Because if Bitcoin is Facebook, then Ripple is the iPhone. Who’s going to bet against that?
Litecoin: the little brother
Price at time of writing: $217.05 USD
Market Cap: $12,030,392,650
Consistent with its name, Litecoin is essentially Bitcoin-lite and is essentially a Bitcoin Clone with a few changes. It shares nearly all the same features except it has a shorter block rate (every 2.5 minutes versus 10) and a different proof-of-work (scrypt versus SHA2). Shorter block rates mean faster transaction times, which is advantageous, but it’s not a huge change. The use of a separate proof-of-work is. Scrypt was chosen because it theoretically prevents the use of ASICs, those specialized chips that greatly increase mining power and efficiency (though there is debate over the validity of this claim). This is supposed to maintain a sense of egalitarian participation since the arrival of ASIC chips has significantly raised the barriers of entry for mining. If you aren’t already a Bitcoin miner, forget about it. That boat has sailed.
Unlike social networks, Litecoin benefits from its similarities to Bitcoin because of familiarity. All digital currencies have a learning curve, which meant Litecoin’s creators had little explaining to do. They also lucked out with timing. Litecoin popped up right around Bitcoin’s bubble earlier in the year, just as the first ASIC systems started shipping. This made it especially attractive to miners suddenly squeezed out by these powerful entrants. Rather than scrap their now unprofitable mining rigs, all they had to do was download some software to start mining litecoins, which had risen in value from about 50 cents in the fall of 2012 to a few dollars by early 2013. Because why not? They had nothing to lose.
Today, Litecoin maintains its status as a destination for Bitcoin castaways. For those who feel like they missed the boat, with Bitcoin hovering around $900, litecoins are a way to hedge their FOMO at a cost of only $20 each. Of course, you could always just buy a fraction of a bitcoin, but there’s something psychologically satisfying about owning a couple of something rather than 0.05.
All of which keeps Litecoin alive in a Google+ sort of way. It’s Bitcoin, but cheaper and not as popularbut with proactive marketing program and i has a more accessible mining system. It’s there and people use it, but you aren’t really sure it has a purpose. It’s also not nearly as functional. Both Bitcoin and Litecoin have support from a growing number of vendors. But both currencies suffer from slow confirmation times which limits their adoption.
Stellar: Move Money Across Borders Quickly, Reliably, And For Fractions Of A Penny.
Price at time of writing: $0.326326 USD
Market Cap: $6,026,625,684 USD
If Ripple is the Goldman Sachs of crypto, Stellar is its antagonist, Robin Hood, with the latter pointing out that the former is hanging onto to nearly 60% of the originally issued Ripple tokens. Which in my ledger implies they can easily manipulate their own market. For reference, 60% is a towering percentage of founder ownership.
So Wall Street has found their Crypto God and they are lifting their gaze to the blockchain to pray for more prophets.
In contrast, Stellar’s Robin Hood has bequeathed control of their excess supply of tokens to a non-profit called the Stellar Development Foundation which has no stock or profits given to individuals. Moreover, it’s backed by a benefactor, “No one has ever been fired for using IBM’s coin”. Yes, I made some of that up, but Watson ordered me to write it.
Comparing the two competing teams, you’re quickly struck by the difference in their governance. Ripple consists of ex-bankers and an advisory board of global financial institutions, while Stellar casts a group of start-up veterans like WordPress founder Matt Mullenweg Y Combinator President Sam Altman.
Dig a little deeper, and one also realizes that Ripple is funding its own competitor in Jed McCaleb, Co-Founder of Stellar. McCaleb started out as a co-founder of Ripple but has been banished by its Sheriff and the rest of Rippleham. In a fitting twist of fate, McCabe still receives $20,000 per week from Ripple and a huge lump sum due in 2019.
Ripple or Stellar?
The first thing you need to know about both coins is that they’re going to be everywhere. The world’s most powerful banks and one of the most powerful companies are going to be relentlessly shooting their crypto arrows into anything that whiffs of money.
And the market for is huge and both companies are tackling it with superior technology. For example, if someone is looking to trade U.S. dollars for Euros, either network could facilitate the conversion by matching relevant offers and using Ripple or Lumens to quickly execute the trade. Today it can take hours or days.
Ripple and Stellare have very large coin supplies, 100 000 000 000 xrp for Ripple and 104 000 000 000 for Stellar, this means it will be a long time before the prices of these coins hits the same sort of price are bitcoin. Also there is a large chance the Stellar and Ripple both surpass Bitcoin in market cap.
I also predict IBM will leverage blockchain companies like Stellar to leapfrog its competition
My conclusion: Ripple will continue its climb, but Stellar is a $15 billion market cap coin trapped in a $5 billion chest.