Crypto market volatility has markedly increased over the past couple of weeks, creating turbulence for many companies and investors. Ripple has been no exception; XRP has dropped in price from its December highs of over USD$3.00 to around USD$0.70. During this period, Ripple has announced new client acquisitions and partnerships within financial services and has over 100 clients. And yet, XRP has continued to face increased volatility and price movements. It is an interesting paradox, and in many ways illustrates the disconnect between token value and the real businesses that create them.
Ripple’s CTO Stefan Thomas writing for Coindesk offered his predictions for 2018 in December, and his last point I think is highly relevant now:
“Over the course of this article, I’ve argued that general-purpose tokens will replace special-purpose tokens and I’ve also said that special-purpose blockchains will replace general-purpose blockchains. This might seem like a contradiction at first, but as blockchains become more interoperable, blockchains and tokens will simply be less coupled together. This transition will involve more growing pains, so it’s sure to be an interesting year.”
I wonder if Stefan realised just how accurate his prediction would be. Ripple and XRP are decoupling; with XRP’s value increasingly being unrelated to Ripple’s business of providing payment services to clients. XRP was originally created as a currency for use on the Ripple platform to settle cross-border payment transactions without the need for fiat currency and foreign exchange intermediaries such as banks. Today XRP has many uses: as fuel for blockchain, as a means of payment, and as a digital currency traded for profit by speculators.
XRP was also originally divested to founders as equity in the business, outlined in a recently published research report by BitMex Research. Their report raises questions about whether Ripple’s claim of decentralisation is accurate. In BitMex’s test of Ripple, consensus was achieved by five nodes, four of which resided on Ripple.com. Therefore, consensus is controlled by Ripple’s servers, making it centralised, NOT decentralised according to BitMex. Ripple published its plans for node diversification and expansion of the unique node list to increase the number of validators last year. Ripple claimed this would reduce the risk of single point failure and increase enterprise-ready transaction speeds across their network. I cannot verify either BitMex’s test claims or Ripple’s technical architecture for consensus.
I think the saga of Ripple highlights the conundrum around valuation of tokens and their relationship to the projects that created them. Ripple gave birth to XRP – and although its utility to Ripple still exists, XRP has become a digital currency first and a utility token second. Ripple’s business success depends on their ability to deliver their project roadmap and continue to scale without losing transactional speed or increasing the cost of their services. For Ripple, the value of XRP only impacts the cost of transactions on their platform. XRP’s success is determined by its ability to maintain liquidity for transactions and to deliver returns for investors through price growth. Correlations between business and tokens have fuelled investment in these ICO businesses; but what if that relationship is no longer a basis for valuation or investment returns?
By: CeAnn Simpson