Why Bitcoin and Ripple are Not Competitors

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Since the inception of bitcoin there has been a bit of a rivalry between the world’s first major cryptocurrency and Ripple. Bitcoin enthusiasts like to call Ripple a centralized altcoin, while Ripple promoters seem to believe that their system is the mainstream version of bitcoin that will make proof-of-work obsolete. It’s likely that neither of these arguments are correct. The fact of the matter is that bitcoin is a decentralized currency and payments system, while Ripple is a payments innovation for the traditional financial system. In other words, these two systems aren’t actually competitors.

The point of bitcoin is decentralization

Bitcoin is most useful when decentralization is needed at all costs. The digital currency is not all that efficient as a payment system, and the functions of the blockchain could be completed by a centralized server in a much less costly manner. Of course, that centralized server is susceptible to corruption or manipulation from the entity behind the server, which is why bitcoin was created in the first place. Having said that, there are plenty of situations where people are willing to trust a centralized entity to handle their finances. Ironically, many people store their bitcoins in centralized bitcoin exchanges or bitcoin banks. Many people don’t really see the point of moving to a decentralized system if they don’t actually need that decentralization, and you can’t really blame them for that. The real value of bitcoin is as a commodity or currency, and the ability to make censorship-resistant payments is the main basis for that value.

Ripple is a payments innovation

While the bitcoin token is the key to the bitcoin payment system, the same is not true for Ripple. At the end of the day, Ripple is more of a payments innovation built on top of the traditional financial system more than anything else. That means that bitcoin and other cryptocurrencies can also be used with this system, but it probably doesn’t make sense to go that route if decentralization is your main goal. Ripple also has its own currency or token (XRP), but the usefulness of that token is debatable. Ripple Labs CEO Chris Larsen has even stated, “We don’t believe the world needs another currency.” Ripple Labs also basically acts as the central bank behind the token, so it’s not exactly a decentralized currency that is immune from mismanagement from central bankers. In fact, Co-founder Jed McCaleb’s planned exit from Ripple caused a crash in the XRP price last year.

In addition to not having a central banker-proof currency, Ripple’s payment system is also not entirely censorship-resistant — at least not right now. Gateways are the trusted entities used to issue new US dollars, euros, Swiss francs, and other currencies on the Ripple network, and they can also freeze user funds if they notice fraudulent or suspicious activity. The Ripple network is an interesting way to make payments between two gateways (read: banks) in a more timely, low-cost manner, but the gateways in the network are the weak point when it comes to censorship-resistance.

The gateways are essentially the e-gold or Napster in the scenario. You could also say that they’re the Coinbase, Bitstamp, or Changetip of the Ripple ecosystem. Of course, the difference with bitcoin is that you know your money won’t disappear when you withdraw your bitcoins from an exchange or online wallet to a personal bitcoin address. With Ripple, an insolvent or government-attacked gateway could make your Ripple-based dollars or euros worthless overnight.

Both systems can perhaps co-exist

For now, it seems that bitcoin and ripple will coexist over the near term. Ripple can be used to improve the traditional financial system, while bitcoin will continue its role as “gold 2.0” and a censorship-resistant payment system. I hesitate to guess which system will outlast could possibly outlast the other. Having said that, I have a more positive outlook on BTC (bitcoin) than XRP. This is due to the fact that I could see Ripple essentially becoming a platform for bitcoin payments.

If individuals prefer to hold BTC over XRP, then XRP would essentially become an appcoin. This goes back to the point of bitcoin being a currency and Ripple being a network for improving the current financial system. Of course, if XRP did become an appcoin for bitcoin payments, it’s possible that another system without its own token could replace Ripple. Eris Industries, Monetas, and Hyperledger all seem to be working in this area.

Disclosure: Kyle owns a small amount of BTC but no XRP.