Concept of ripple

01 Feb 2018 4:04 PM | Ripple
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Ripple's website describes the open-source protocol as "basic infrastructure technology for interbank transactions – a neutral utility for financial institutions and systems." The protocol allows banks and non-bank financial services companies to incorporate the Ripple protocol into their own systems, and therefore allow their customers to use the service.

Currently, Ripple requires two parties for a transaction to occur: first, a regulated financial institution "holds funds and issues balances on behalf of customers." Second, "market makers" such as hedge funds or currency trading desks provide liquidity in the currency they want to trade in. At its core, Ripple is based around a shared, public database or ledger that has its contents decided on by consensus. In addition to balances, the ledger holds information about offers to buy or sell currencies and assets, creating the first distributed exchange. The consensus process allows for payments, exchanges and remittance in a distributed process According to the CGAP in 2015, "Ripple does for payments what SMTP did for email, which is enable the systems of different financial institutions to communicate directly."

In Ripple, users make payments between each other by using cryptographically signed transactions denominated in either fiat currencies or Ripple's internal currency (XRP). For XRP-denominated transactions Ripple can make use of its internal ledger, while for payments denominated in other assets, the Ripple ledger only records the amounts owed, with assets represented as debt obligations. As originally Ripple only kept records in its ledger and has no real-world enforcement power, trust was required.[clarification needed] However, Ripple is now integrated with various user verification protocols and bank services. Users have to specify which other users they trust and to what amount. When a non-XRP payment is made between two users that trust each other, the balance of the mutual credit line is adjusted, subject to limits set by each user. In order to send assets between users that have not directly established a trust relationship, the system tries to find a path between the two users such that each link of the path is between two users that do have a trust relationship. All balances along the path are then adjusted simultaneously and atomically. This mechanism of making payments through a network of trusted associates is named 'rippling'. It has similarities to the age-old hawala system.

Courtesy: Wikipedia

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