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Ripple: Overvalued, Centralized, or the Next Bitcoin?

Ripple_ Overvalued, Centralized, or the Next Bitcoin_

Ripple has, in some form, been around longer than Bitcoin. Yes, it shares a certain peer-to-peer ambition with Bitcoin, but there is no denying that it leans towards centralization and favors big banks in a way that Bitcoin simply does not.

Now central banks and even American Express are getting involved with Ripple, what is it that makes this blockchain payment system so much more appealing to the mainstream financial system, and is its growing popularity sustainable?

The changing technology

Ripple’s first payment system ‘RipplePay’ dates back to a pre-Bitcoin era, launched in 2004 and lasting until 2012. The original payment architecture was based on a peer-to-peer network that allowed individuals to loan to each other, with payments acting as updates to loan balances. Payments required a path of trusted relationships between payer and recipients, which acted as IOUs being passed along the chain.

This original model was critiqued as leaving the system exposed to centralization around several large banks because of the difficulties in authenticating the trust networks as reliable.

When Bitcoin started gaining traction in 2011, much of Ripple’s target demographic shifted towards Bitcoin because of the cryptocurrency’s superior architecture. Both payment networks share a similar ideology, and there has been an overlap between the two even in terms of developers. Early Bitcoin pioneer Jed McCaleb joined Ripple in May 2011, with the technology changing significantly in just a few years after his arrival, although he left the company sometime between 2013 and 2014.

Ripple’s native token XRP was released in January 2013, operating on a public chain of cryptographic signatures as does Bitcoin, meaning the original web of trust was able to be dropped.

Why some claim Ripple is centralized

Ripple is marketed as a decentralized payment system, but the actual consensus protocol has been shown to show something quite different. Researchers from leading exchange desk BitMEX conducted in-house testing of the technology, in which time they found that the company behind Ripple was ”essentially in complete control of moving the ledger forward”, leading them to dub the system centralized.

While the research team noted that there was nothing inherently wrong with centralized systems, saying that indeed they can be easier and more efficient to run, they noted that the actuality of the protocol was at odds with how it was being marketed. ”Some may consider [it] misleading,” they added.

Close ties with central banks

In recent months, Ripple has hit the headlines for its partnership with major banks, facilitating cross-border payments through Ripple-enabled gateways.

In December 2018, the central bank of the middle eastern nation of Kuwait became one such Ripple gateway client, using the network for blockchain-backed direct transfers to the neighboring country of Jordon. Ripple’s “fast remittance service” claims to be quicker and cheaper than the current services, available online 24 hours a day rather than operating with a standard bank’s 9 am to 5 pm service.

Even Bitcoin nemesis American Express has praised Ripple’s cross-border payment system, saying the blockchain system has the potential to revolutionize international payments. It has tested Ripple payments for use by American Express clients and is reportedly leaning in favor of the system for its own blockchain exploration.

Some see Ripple’s close relationships with central banks as a positive indicator for the cryptocurrency market and wider adoption, while critics suggest it is just another indicator of the network’s vulnerability to centralization. Already failing the censorship resistance that Bitcoin boasts, some have suggested it fails to offer any particularly substantial technological innovation also.

Overvalued by billions of dollars?

Ripple has surpassed Ethereum in terms of market cap, taking place as the second largest cryptocurrency by volume. However, a recent report by cryptocurrency analytics firm, Messari, suggests that market capitalization of XRP may be overvalued by around USD 6 billion. The prognosis is based on data retrieved from both cryptocurrency exchanges and third-party cryptocurrency data services in a review of XRP’s ”health and legitimacy”.

Messari suggests there could potentially be an enormous 48% overvaluation of the cryptocurrency’s liquid circulating supply, with the disparity created in large part by ”significant sell-side pressure in the XRP market”. Other discrepancies the research body considered include questions as to whether the XRP 5.9 billion foundation contribution that was made by CEO Chris Larson and XRP 2.5 billion held by RippleWorks are included in the market cap, both of which are technically illiquid assets. Other queries were raised over Ripple assets that face selling restrictions.

Without full disclosure from Ripple, Mesari acknowledges its figures are only estimates. At the time of press, Ripple has yet to disclose its own methodology for calculating the trading volume of XRP.

XRP sales are falling

Ripple’s Q4 2018 report published 24 January 2019 shows that token sales are falling; Q3 boasted sales of USD 163 million, falling to USD 129 million in Q4. Sales in Q4 represent just 0.16% of Ripple’s trading volume.

While the cryptocurrency market as a whole remained in a bear market during this period, it is perhaps unsurprising to see sales fall. Nonetheless, Ripple benefited from growing support from central banks and governments during this period, which should have been an opportunity for XRP to prove its individual strength in a bad environment.

If Ripple’s top strength of receiving support from the mainstream is not enough to convince investors, that is not great news for XRP moving forward, particularly if the cryptocurrency market continues to perform poorly.

Q4 2018 also saw XRP’s volatility decrease in the market, as did BTC at that time. Its daily returns volatility was 5%, marking the lowest quarterly average since Q4 2016.

Many questions remain

Ripple has been adopted by a number of banks and payment networks and is recognized as a secure settlement infrastructure technology, praised for its efficiency.

But there are certain points where the project lacks total transparency.

For one, it is not as decentralized as marketing would imply, and there are a lot of questions remaining over what is exactly going on with XRP’s market cap calculations and restricted assets.

It is no Bitcoin, but it would seem to have found its comfortable place alongside mainstream finance, coming as close a blockchain payment network has got so far. Whether that will be enough for XRP to continue succeeding in the cryptocurrency market is questionable.


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EOS Block Producers Freeze User Accounts, Prompting Anti-Centralization Outcry

EOS block producers have frozen seven accounts in response to concerns from users that their wallets had been compromised due to phishing attacks. This has caused some controversy, likening EOS to centralized banks that freeze money at will. Some commentators believe this defeats the primary goal of cryptocurrency: to function as decentralized money that no centralized organization controls.

There has been a heavy backlash on social media following the block producer’s decision, and price dropped several percentage points when this story broke, shaving USD 300 million off the EOS market cap.

Some randomly elected 3rd party arbitrator is now making “orders” to #EOS block producers. In this case, regarding locking user accounts.

Can’t even make up comedy this good.

— Eric (@econoar) June 19, 2018

EOS recently migrated from the Ethereum blockchain to its own native blockchain, a process that ended up being slower and more difficult than expected. Concern over the centralization of EOS during the transition period, since full control of the network was handed over to a single block producer, caused a 30% price crash. Eventually, EOS went live after 15% of total EOS was staked in a vote, and dozens of block producers began to run the blockchain.

The migration resulted in a major opportunity for phishing scams, which is where the current problem stems from. It was a confusing and complex process for users to transfer their tokens to the EOS MainNet and vote for block producers, and many websites sprung up to help make the process easy. Voting requires the private key, and some of these websites ended up being fake and stole private keys.

A service called EOS 911 was created to report incidents of private key phishing. The block producers decided to protect users who had reported phishing by freezing their accounts indefinitely. The EOSIO Core Arbitration Forum (ECAF) is supposed to be in charge of such decisions, but it isn’t fully set up yet and decided not to rule. The block producers unanimously decided to take action despite this to protect users from losing their coins.

Regardless of the good intent behind the freezing of the accounts, the main concern is that block producers have this power at all. Effectively, EOS appears to exercise power just as a centralized bank would.

Perhaps even worse than freezing accounts, professor Emin Gun Sirer from Cornell University says EOS block producers can reverse transactions. If true, this means EOS transactions are never final, which could result in serious losses for merchants and exchanges down the road depending on block producer’s decision making.

Cryptocurrency generally has intrinsic value in its unique aspects of decentralization and irreversible payments. EOS appears to have eliminated these positive characteristics and has put control over user money into the hands of a small group of block producers.

Theoretically, block producers must act unanimously for accounts to be frozen or transactions reversed, and for the time being all 54 active block producers have been working together in a centralized fashion via conference calls. However, it is possible in the future that block producers will fall into disagreement and stop working with each other like this, which would help increase decentralization.

That being said, block producers are determined via voting which is directly tied to wealth. Someone with enough money could vote for themselves and take over EOS block production and then proceed to steal coins, attack other users without reason, or even go as far as destroying the entire network. The idea of having block producers who can easily modify transactions might be the fatal flaw that negates all the other positive aspects of the EOS platform.


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