R-I-P-P-L-E — we first started hearing the word in 2017. It was one of those funny words like “Yahoo” or “Google.” What do all these words have in common? They’re the sort of words you don’t understand until ten years later you wish you had invested in them.
Ripple was all over the news last week: “XRP Skyrockets 64% in 24 Hours” “Ripple Passes Ethereum to Become World’s Second Largest Cryptocurrency,” “Will XRP Take Bitcoin’s Place?”etc.
Something seemed strange about the sudden wave of optimism — as though the market was excited to have anything positive to comment on.
From Cryptocurrency to Utility Token
Last Friday, September 21, Ripple announced the future launch of xRapid, a new service using XRP. The change turns XRP into a Utility Token. This has implications for the calculation of XRP’s fair price. So, what is Ripple?
Ripple used blockchain to send money globally in a frictionless way. With Ripple technology, financial institutions can process their customer’s payments anywhere in the world, instantly, reliably and cost-effectively.
Ripple’s global service is called RippleNet. RippleNet is a single, global network of banks that send and receive payment’s via Ripple’s distributed financial technology, providing real time messaging, clearing and settlement of transactions. Ripple’s software connects these siloed networks through an open, neutral protocol — Interledger Protocol (ILP) — that brings new efficiency to financial settlement by enabling real-time settlement. Ripple’s software also includes data-rich messaging between all transacting parties — delivering a real time payment experience to end users.
All members of RippleNet are connected through Ripple’s standardized technology, xCurrent. This is a real-time gross settlement (RTGS) system that enables banks to settle their transactions with increased speed, transparency and efficiency across RippleNet’s global footprint.
Today, Ripple counts within its clientele, names like Santander, Standard Chartered, American Express, and more. Nevertheless, at this stage, all these big institutions only implemented xCurrent and are not using the digital asset XRP. Until now, though XRP is one of the more efficient and attractively priced cryptocurrencies into the market, hardly any businesses have adopted it as a mean of payment.
Friday’s announcement could change that. On Friday, Ripple announced the launch of a new service: xRapid. First, xCurrent solved Global Payment Network issues. Now, Ripple is aiming to minimize liquidity costs for emerging markets transfers. Crucially, this new solution requires the use of the XRP currency, thus turning it into a utility token.
A customer looking to settle an international transaction can instantly exchange dollars for XRP and then settle the trade in the relevant foreign currency. As Chris Larsen, Ripple’s CEO explained,
“This now allows payment providers, banks and their customers to move value in one to two minutes versus days or a process that might mask those days but have to charge for the settlement risk and costs.”
XRP now fills a need for users of RippleNet.
Users vs Traders
In an earlier article, What is the Fair Price of Bitcoin? “Believers” Are the Key, we discussed the need to separate crypto actors into two categories: “Users” and “Traders”
Users: In the case of a utility token, “users” are the people who need to buy the token/currency in order to use it for a given purpose. In the case of xRapid, if a bank starts buying XRP in order to carry out transactions with xRapid then the bank becomes a “user” of XRP. This means that the bank needs to buy a certain volume of XRP every day. The bank becomes a regular bidder of XRP and thus provides a floor for the price of XRP.
More users of xRapid means more demand for available XRP tokens and a higher price dictated by the market.
Traders: These are buyers of XRP that are holding the currency for the sole purpose of making a profit out of their “investment.” This category of actors is not concerned with the token utility. Rather, they are driven purely by price and hopes of future profit.
The main difference is that Traders are not in need of XRP tokens, they are opportunistic rather than regular buyers. Therefore, we can’t include them in the floor price as defined by the “users.” Regular users are the key to defining the fair price.
A Fair Price for Ripple?
Till now, no one has been in need of XRP. This means that volume and price has been defined exclusively by Traders.
Without Traders’ interest the value of XRP would be zero — there is no “guaranteed” daily demand.
So, why did XRP have a value? Simply put, Traders have been anticipating that the token would one day have a utility. Last week’s news proved them right. Traders were betting on the future while Users are writing the present.
If the price of a token represents the number users, we can translate the current price of XRP into a future number of users of XRP.
Today, XRP’s price ($0.5250) translates to 0.4% of SWIFT’s market share. Paying 0.4% of SWIFT’s market share at that stage of the project feels like poor risk-reward. While we believe in the project and its technology we will continue to monitor developments and wait for a more attractive level at which to buy XRP.
— Jonathon Solomon, Enigma Team, Tel Aviv