Highly Centralized Ripple (XRP) a Contagion not a Cryptocurrency

December 14, 2018 / by Zachary Mashiach

The War On Shitcoins Episode 5: Ripple (XRP). The war on shitcoins is a Crypto.IQ series that targets and shoots down cryptocurrencies that are not worth investing in either due to their being scams, having serious design flaws, being centralized, or in general just being worthless copies of other cryptocurrencies. There are thousands of shitcoins that are ruining the markets, and Crypto.IQ intends to expose all of them. The crypto space needs an exorcism, and we are happy to provide it.

At this time, Ripple (XRP) is ranked as the number two cryptocurrency on CoinMarketCap with a market cap of $12.2 billion. However, when diving into Ripple’s actual technical details, it is clear XRP is not a cryptocurrency. XRP has no blockchain. Rather, it depends on a centralized distributed ledger system known as the Ripple Consensus Protocol. XRP has a built-in account freeze feature that most users are unaware of. The supply of XRP, and therefore the XRP market itself, is highly centralized. Based on all of this, Ripple (XRP) is clearly a shitcoin, and its spot near the top of the CoinMarketCap list is misleading.

For starters, there is a total of 100 billion XRP, with 59 billion XRP under the centralized control of Ripple Labs and 41 billion XRP in circulation. All 41 billion XRP that are in circulation were purchased from Ripple Labs, with a small amount being given away to charity each year, possibly so Ripple Labs does not have to pay its full tax bill. Each month, Ripple Labs sells up to 1 billion XRP, which is released from an escrow contract. This applies constant downward pressure on the XRP market and leads to a much higher than usual inflation rate for XRP versus other cryptocurrencies. This fact alone makes XRP a bad investment choice. There are much better, more decentralized cryptocurrencies to invest in that are not subject to overt market manipulation.

Another way to look at it, which makes the awful XRP market situation quite clear, is that the market cap of XRP is $12.2 billion, but Ripple Labs holds $17.7 billion XRP. Therefore, Ripple Labs holds more than enough XRP to suck the market completely dry. Also, there is no proof that Ripple Labs cannot simply print more XRP.

The centralized market conditions for XRP is a serious issue, but the centralized nature of the Ripple Consensus Protocol is even more concerning. There is no blockchain involved, rather it is a group of servers that validate each other. BitMEX Research deeply investigated this issue and found that Ripple Labs controls the servers. This makes the Ripple platform and XRP 100% centralized, and users must trust Ripple Labs. This is the opposite of the trustless decentralized blockchain that fuels Bitcoin.

Further, the Ripple Consensus Protocol has a powerful account freeze feature, which they built-in for regulatory compliance. This means that Ripple Labs can freeze any Ripple account. This was supposedly done so they would not get in trouble with the government, which is bad enough since that means the government can demand that Ripple Labs freeze user’s accounts. Even worse, Ripple Labs has exercised this power to freeze accounts in at least one case for their own motives, and it ended up being illegal.

One of the children of Ripple’s Co-Founder, Jed McCaleb, sold $1 million of XRP on Bitstamp, in a deal that was organized with Ripple Labs. After the deal was complete and Ripple Labs had acquired the XRP, Ripple Labs proceeded to use this account freeze feature to seize the USD. Bitstamp took this case to court, and it was ruled that Ripple Labs had to unfreeze the money and pay all legal fees. The case was found to be even more greasy than expected since this particular sale of XRP was meant to manipulate the price of XRP by setting the sale price of the XRP too high.

Just to show how centralized XRP is, one of the Founders of Ripple Labs, Jed McCaleb, received 9.5 billion XRP when the currency was first created. McCaleb was basically forced out of the company, and he went on to sell about 2 billion XRP before his account was frozen. A long court battle ensued in which Ripple Labs tried and failed to get the XRP back, and ultimately, it was decided that McCaleb must donate 2 billion XRP to charity and is only able to sell a small amount of his XRP per year.

If one of the primary Founders of Ripple cannot even use his XRP as he wishes, how can anyone else expect to have full control of their XRP? The reality is no one has full control of their XRP holdings since Ripple Labs could freeze their account at any time. This is the equivalent of Satoshi Nakamoto having his Bitcoins frozen after he left the development team, which is fortunately impossible.

It is crystal clear that Ripple (XRP) is not a cryptocurrency, but really just a balance in a centralized ledger system that is 100 percent controlled by Ripple Labs. Since the Ripple Consensus Protocol is run on a centralized set of servers there is no technological barrier to changing the rules. Already, it is profitable enough for Ripple Labs since Ripple Labs controls most of the supply and can freeze anyone’s account. They probably won’t change the rules.

It is absolutely baffling that some cryptocurrency users think Ripple (XRP) is awesome and defend it despite all of its issues. XRP is absolutely set up to fail since it has a single point of failure: Ripple Labs. Currently, Ripple Labs is in an intense court battle over whether XRP is a security, even though it is obviously a security.

The only thing delaying the necessary SEC announcement that XRP is a security is Ripple Lab’s well-paid legal team. When the SEC finally cracks down on Ripple Labs, it could be historically harsh, since the SEC has the ability to retroactively penalize Ripple Labs for all of its unregistered and unsanctioned security issuances since it launched. XRP is the crypto space equivalent of really contagious athlete’s foot that has infected the entire family, and the SEC has a big tube of Lotrimin that they can douse XRP with at any time.