Educational Material

Cryptocurrencies, often referred to as crypto, are digital or virtual currencies or assets. Cryptocurrencies are secured by cryptography, hence the term cryptocurrency.

Cryptocurrencies typically function on decentralized networks and use blockchain technologies to keep track of movements of ‘tokens’ or transactions of the cryptocurrency.

Cryptocurrencies, often referred to as crypto, are digital or virtual currencies or assets. Cryptocurrencies are secured by cryptography, hence the term cryptocurrency.

Cryptocurrencies typically function on decentralized networks and use blockchain technologies to keep track of movements of ‘tokens’ or transactions of the cryptocurrency.

The blockchain is a public, immutable ledger of transactions that can be viewed similarly to a database for the cryptocurrency.

The method of adding data to the blockchain depends on whether the cryptocurrency’s consensus for adding data is Proof-of-Work, Proof-of-Stake, or some other variant, but the data is always added in chunks called “blocks.” These blocks of data (often of transactions of the cryptocurrency) are added onto the chain of previous blocks. Hence the name “blockchain.”

Proof-of-Stake (PoS) is a decentralized consensus model for adding blocks onto the blockchain. PoS was developed to solve the inherent problems of Proof-of-Work (PoW). These differences are covered below in “Difference and Pros & Cons of PoW & PoS.”

Instead of miners developing blocks through using computational power, as with PoW, PoS uses the amount of the cryptocurrency that a miner or pool has and is staking to determine the mining power or likelihood of mining a block. This is to say, that if a miner or pool operator own 5% of all of the cryptocurrency or cryptocurrency that is being staked and are staking it, then that miner or pool operator would develop ~5% of the blocks.

PoS uses an algorithm to determine which miner or pools get to develop a block on the blockchain, and in turn, be rewarded (typically with the transaction fees) for developing a block.

There are two main types of wallets to store your cryptocurrencies. There are cold wallets and hot wallets.

Hot Wallets or hot storage wallets are wallets that can be accessed via a website or other site or application of the wallet provider. The most common examples of hot wallets are exchanges where you can deposit, withdraw, sell and trade your cryptocurrencies.

Cold Wallets or cold storage wallets are wallets that have another layer of protection as they are not connected to the internet and are often physically disconnected. The most common cold wallets are paper wallets (piece of paper with the wallet’s private and public keys documented on it) and hardware wallets such as USB drives, Ledgers, and Trezor devices that must be physically plugged into a computer to access the cryptocurrency.

Many advocate for using cold wallets using the phrase, “Not your keys, not your crypto.” This phrase comes from the concept that if you do not own the private and public keys to your wallet, then you do not actually own the crypto. This would mean that, as an example, if you deposit Bitcoin into an exchange, they can decide to freeze your funds as they are holding your Bitcoin.

WIP

Non-fungible token or NFT is a crypto asset on the blockchain that has a unique identification code and metadata, but in lay terms, it is a unique crypto asset that can range from artwork, personal identification, or even representations of real-world items.

The easiest way to differentiate between fungible and non-fungible tokens are through three specific qualities. Non-fungible tokens are non-interchangeable, non-divisible, and unique. While fungible tokens are interchangeable, divisible, and uniform.

The most common examples of a fungible asset or token would be fiat currencies such as the US dollar or Bitcoin. The US $1 bill is interchangeable with any other $1 bill. Just as Bitcoin is also interchangeable with any other Bitcoin. Both the US dollar and Bitcoin are divisible as well as uniform.

The most common examples of a non-fungible tokens would be artwork or deeds to a house. Deeds to different houses are not interchangeable as they represent unique properties. Houses or their deeds are not divisible (or at least not functionally so.)

Decentralized finance (DeFi) is a system of financial functions that are built on technology, typically blockchain technologies, to remove intermediates of the legacy financial system. By doing this, individuals regardless of geographical location, cultural identity, age, or currency used can have access to financial functions and utilities.

In the legacy financial system, there are hubs or central locations where many of these processes occur. These systems are centralized in specific parts of the world, and these systems often require identification and other functions that rely on being born in a specific location or having access to these centralized functions (ex: DMVs, Banks, Brokers, etc.)

Decentralized finance’s purpose is to remove these intermediates and allow individuals more financial freedom by providing these functions outside of the centralized systems.

Decentralized exchanges (DEX) are cryptocurrency exchanges that allow direct transactions, trades, or swaps between peers without the need for an intermediate entity. Decentralized exchanges are a part of decentralized finance (DeFi).

How decentralized exchanges are able to avoid the need for intermediates such as banks or other financial institutions is through the use of smart contracts on the blockchain to mediate the execution of trades.

The benefit of a decentralized exchange is that there is no need to send your cryptocurrency to a custodial wallet of the exchange. This means that a DEX is not as likely to be targeted by hackers to steal funds as there is no central authority to target.

The negative of decentralized exchanges are that there is no central authority to help you out if something goes wrong.

Liquidity pools are foundational part of decentralized finance (DeFi) as a whole and to the automated market maker (AMM) model of decentralized exchanges (DEX).

Liquidity pools are pools or groupings of of funds that are locked in a smart contract. These pools are used to facilitate trading on a decentralized exchange.

For most pools, any individual can provide liquidity to a pool. When liquidity is provided, the liquidity provider (LP) will receive a percentage of all the fees that accumulate, through trades, in the pool that they are providing liquidity for.

The pooled resources, in many liquidity pools, keep a 50/50 balance. This means if one resource grows in value, the pool will adjust to keep the 50/50 balance automatically or through market forces. This ensures that there is enough liquidity to facilitate trading and that the pricing remains accurate.

To make this concept less abstract, we will use an example with a pool that is an Ethereum and DAI (both cryptocurrencies; ETH/DAI) pool. DAI is a stable coin that is $1, and ETH will be equal to $500.

In this pool, a liquidity provider must equal amounts of both DAI and ETH. Chris who is to be the liquidity provider owns 2 ETH, so he must convert 1 ETH into 500 DAI. The total amount dollar amount his is depositing is $1,000 of which half is ETH and half is DAI. In this pool, we will say that once Chris supplies his crypto to the liquidity pool, he is providing half of the entire liquidity.

Sometime later, Chris withdraws his liquidity (cryptocurrencies) from the liquidity pool and has received half of all the transaction fees from the trades facilitated by the ETH/DAI pool. What Chris has done is called, “liquidity mining“, and his assets helped to facilitate trade through use of the liquidity pool.

Staking is another facet of decentralized finance (DeFi). In a previous lesson, we covered “What is Proof-of-Stake” (found under “Cryptocurrency Basics”), but staking is the act of taking cryptocurrencies that can be staked and delegating them to a pool in order to receive more of that cryptocurrency.

An example of a cryptocurrency with staking functionality is Cardano. With Cardano, an individual that owns Cardano (ADA) could delegate or stake their ADA with a pool, in this case LOOPS pool, in order to receive a portion of the block reward when that pool develops a block.

To receive step-by-step instructions on how to delegate Cardano (ADA) to Crypto Loops’s Pool. Either follow this link and go to the FAQ, or scroll down to “Cardano (ADA) Basics” then click “How to Stake Cardano?”

Flash loans are another tool or function of decentralized finance (DeFi). Flash loans are quite similar to other loans, but flash loans have the following unique characteristics:

• Requires No Collateral – Flash loans require no collateral to take out. This means that an individual can take out a loan for millions of dollars worth of cryptocurrency without any capital. This is possible because the loan has a 0% chance of defaulting or the borrower not paying the loan back, and this is due to the two following characteristics.
• Use Smart Contracts – Flash loans run on smart contracts (See Ethereum Basics: What are Smart Contracts). These smart contracts do not require collateral due to the contract not being executed until specific conditions or inputs are met. In the case of flash loans, the input or condition that must be met is instant repayment of the loan which brings us to the last characteristic.
• Instantaneous (Flash) – Flash loans must be borrowed and repaid within the same blockchain transaction. This means that the input of the smart contract, as previously stated, is the repayment, and the output is the loan. This leads to loans that are acquired and repaid instantly with no risk of default.

Common use cases for flash loans include arbitrage, swapping collateral, self-liquidation, and lower transaction fees.

Currently, Bitcoin is the the largest cryptocurrency by market capitalization. Bitcoin was developed in January 2009 (post-2008 housing market crisis) by an individual or group under the pseudonymous name Satoshi Nakamoto. Nakamoto developed the whitepaper that explains and outlines Bitcoin and posted it on bitcoin.org on October 31, 2008.

Bitcoin functions through a proof-of-work (PoW) consensus where “miners” use computational power or pooled computational power to try and “mine” bitcoin (see 1.2). Bitcoin is a deflationary cryptocurrency. This means that, there are only ever going to be 21 million Bitcoins in existence. This is done by decreasing the reward from mining by half (the halving) every 210,000 blocks.

One Bitcoin is divisible down to eight decimal places (0.00000001 or 100 millionths). This unit is called a Satoshi, named after Bitcoin’s creator. This ultimately means that 1 Bitcoin = 100,000,000 Satoshi(s). Satoshi(s) are often referred to as Sats (ie: Stacking sats or I have 1 million sats).

The term “mining Bitcoin” is a reference to Bitcoin’s proof-of-work (PoW) consensus model for logging transactions on the blockchain (see Cryptocurrency Basics 1.2).

Bitcoin uses a specific PoW model called SHA-256 (See Bitcoin Advanced). New Bitcoins are mined (a block is produced) approximately every 10 minutes, and as we discussed in section 2.0, the rewards are halved every 210,000 blocks. Originally, in 2009, the block reward was 50 Bitcoin. Then on November 28, 2012, the block reward was decreased to 25 Bitcoin. The next two halvings would occur on July 9, 2016 and May 11, 2020 with block rewards decreasing to 12.5 and 6.25 Bitcoin respectively.

Once all 21 million Bitcoin are mined, the system will be maintained by mining rewards being paid through the transaction fees of the system.

As more miners join the ecosystem, it becomes more difficult to mine a block. This is due to the system adjusting the difficulty to make sure that new blocks are developed at a steady rate. This increase in difficulty also helps to increase the network’s security.

Bitcoin has had several hard forks (or hard fork events throughout it’s history. Hard forks typically develop when members of Bitcoin or its developers cannot come to a consensus or become dissatisfied with the current blockchain. This can lead to changes in the blockchain protocol that diverges or branches off the main chain to create a side chain that runs parallel to the main chain. Thusly, hard forks can be seen as a fork in the road for the blockchain.

The best way to understand this is to use the visualization, down below. One of the most popular hard forks of Bitcoin is Bitcoin Cash (BCH). Bitcoin Cash was developed when some Bitcoin miners and developers grew concerned about Bitcoin’s lack of scalability (ability to handle growing numbers of transactions, users, and the speed of processing transactions). Due to the disagreement of how to solve this problem, Bitcoin Cash was created from the hard fork

There have been many hard forks with Bitcoin. Just to name a few, there are Bitcoin Gold (BTG), Bitcoin Diamond (BCD), and Bitcoin Cash (BCH).

The lightning network is a second layer technology built on bitcoin to help overcome many of the downsides to the bitcoin network.

Downsides of the bitcoin network that the lightning network fixes:

• Slow Transaction Speed: Bitcoin’s transaction are aggregated into blocks, so this can lead to payment speeds of almost 1 hour. The lightning network provides almost instant payments due to it functioning on a different layer than bitcoin’s blockchain.
• Micropayments: Bitcoin payments have a minimum balance you can send and a transaction fee that depends on the network conditions, but the lightning network can send as little as 0.00000001 bitcoin or 1 satoshi.
• Scalability: Due to a block on the bitcoin blockchain containing a max of 1 MB, there is a limited number of transactions that can fit within a block. This can lead to increased congestion on the blockchain, but the lightning network is able to avoid these limits due to it using a separate layer.

Ethereum is currently the second-largest cryptocurrency by market capitalization, as well as the most actively used blockchain. Ether (ETH) is the native cryptocurrency of the platform. Ethereum is both a platform and a programming language (Turing complete) that runs on a decentralized, open-source blockchain with smart contract functionality.

This means that developers can build decentralized applications (dApps) on the Ethereum platform. These decentralized finance (DeFi) applications aim at offering financial services without a financial middleman such as brokers, exchanges, or banks, and, in turn, allow cryptocurrency users to borrow against their holdings or lend them out to earn interest.

Moreover, Ethereum allows for the creation and trading of non-fungible tokens (NFTs). Sold as non-interchangeable, unique digital property, NFTs are connected to digital artworks or other real-world items. In addition, many other cryptocurrencies operate as ERC-20 tokens on top of the Ethereum blockchain and/or have used the Ethereum platform for their initial coin offerings.

Lastly, Ethereum is working on a transition from proof-of-work (PoW) to proof-of-stake (PoS) through a series of upgrades to Ethereum 2.0. Ethereum 2.0 is meant to amplify the transaction throughput or scalability through sharding.

A smart contract, as its name suggests, is a contract that is automated by smart functionalities. Based on the terms of a contract or an agreement, a computerized transaction protocol is able to automatically execute, control, as well as document legally relevant events and actions. Smart contracts aim to reduce the need for trusted intermediators, arbitrations, and enforcement costs. Furthermore, this lowers the risks of malicious and accidental exceptions as well as fraud losses.

As an analogy, a vending machine can be viewed as a rudimentary piece of smart contract technology. In Ethereum’s 2014 white paper, the Bitcoin protocol is described as a weak version of the smart contract concept outlined by computer scientist, lawyer, and cryptographer Nick Szabo. Since then, more cryptocurrencies, besides Ethereum, have emerged with advanced smart contract support between untrusted parties.

Ethereum supports many types of tokens, which are digital assets built on top of its blockchain. These tokens can range from a digital representations of a physical object like Gold to a native currency like Golem, which is used to pay transaction fees. They may also be used to represent financial instruments such as bonds and stocks later on. Developers need not create an entirely new blockchain from scratch, as they can leverage the existing Ethereum infrastructure. In this process, the increasing demand for Ether to power the smart contracts would fuel the expansion of the Ethereum ecosystem.

ERC-20

In November 2015, Fabian Vogelsteller proposed the Ethereum Request for Comments 20 (ERC-20) Token Standard. Through this standard, an API for tokens within smart contracts can provide functions including the transfer of tokens from one account to another, getting the current token balance of an account and getting the total supply of the token available on the network.

Smart contracts that correctly implement ERC-20 processes are called ERC-20 Token Contracts, and help keep track of the created tokens on Ethereum. Numerous cryptocurrencies have launched as ERC-20 tokens and have been distributed through initial coin offerings. Fees to send ERC-20 tokens must be paid with Ether.

ERC-223

Despite being well-implemented and well-documented, the ERC-20 Token Standard has a logical bug that has led to permanent losses of tokens worth millions of dollars. ERC-20 assumes two ways of performing a token transaction. First of all, the “transfer” function lets you send tokens to someone’s address, or an externally owned account (EOAs). If you want to deposit tokens to a smart contract instead, you should use the combination “approve + transferFrom”, authorizing this contract to withdraw your tokens via the “approve” function, and then call the “transferFrom” function to handle your deposit and withdraw your tokens.

If the user tries to send tokens to a smart contract by directly calling the “transfer” function, they will see a successful transaction, but the contract will never receive the tokens!

As a solution to this costly bug, the ERC-223 Token Standard was developed by Reddit user u/Dexaran. His solution is to modify the “transfer” method to check whether the receiving address is a contract (i.e. contains data) or not. If it is a contract, then it assumes that there is a “tokenFallback” function to call it back. However, the main weakness is that if the “tokenFallback” does not exist, then the receiving contract’s fallback function will be called and the sent tokens may still be lost.

How to stake Cardano (ADA) on Yoroi?

If you are using Yoroi wallet and wish to stake (or delegate) your ADA with LOOPS pool, then you can follow the video listed below or read the instructions below it!

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This guide will use images from the Yoroi mobile app, but is quite similar and should be followable if you use the Yoroi browser extension. First, you will want to make sure that you have a minimum of 10 ADA in your wallet to delegate. Once you have that, open up the Yoroi mobile app or browser extension. You will have to input your pin code. Once you’ve competed that, you will need to select the wallet you want to delegate.

Once you have selected your wallet, you should be able to see your available funds at the top, and at the bottom, you should see five options: transactions (the one you will be on by default), send, receive, dashboard, and delegate. Select “Delegate.”

Here you will see a search bar where you can search for a pool directly, pick one of the pools that shows up, or sort the pools. We will be picking LOOPS pool as we would recommend you do as well. Though if you want to delegate with other pools, you can get more information on pools here. In the search bar, type LOOPS and click the magnifying glass icon. “[LOOPS] Crypto Loops” should show and click “delegate.”

You will be taken to the last step which is to confirm the delegation. Here you can see the name of the pool you are going to be delegating your stake to “Crypto Loops” and amount of Cardano (ADA) that will be staked. Also you will see the fee of approximately 2.17 ADA. This is comprised of a refundable 2 ADA fee and the ~0.17 ADA transaction fee. Also under the spending password you will be able to see the approximate amount of ADA you will receive each epoch (5 days). To confirm the delegation, you will need to type in your spending password and click “delegate.”

Congratulations! You have successfully delegated your ADA with LOOPS pool. At the bottom, there is the dashboard. Click “dashboard” and you will be able to view how far into the current epoch we are, the summary of your wallet, and what pool you are delegating to. Within “your summary”, you can keep track of your rewards/passive income you have received.

The Cardano road map is the summary of the developmental plan for Cardano. The road map can be broken down into 5 different eras that are centered around a specific functionality or goal.

Byron Era – Foundation

The Byron Era saw the development of many baseline needs for Cardano such as:

• Delivery of the Daedalus Wallet (Cardano desktop wallet)
• Delivery of Yoroi Wallet (A light wallet for browser and smartphones)
• Increasing accessibility to Cardano via 30+ exchange listings
• builing a community around Cardano

Shelly Era – Decentralization

The Shelly Era saw the development and implementation of its proof-of-stake (PoS) protocol Ouroboros. It was during this period that the decentralization of the PoS system in the form of stake pools (like our LOOPS Stake Pool).

Goguen Era – Smart Contracts

We are currently in the Goguen Era. The Goguen era is where smart contract integration and capabilities on the Cardano network begin, and where developers will be able to develop decentralized applications (dApps) of all sorts including applications supporting decentralized finance (DeFi). Some important developments within this era are:

• Development of Plutus, a purpose-built smart contract development language and execution platform using the functional programming language Haskell.
• Development of Marlowe Playground, a useful tool for those without technical knowledge or programming knowledge to be able to build smart contracts or other financial contracts.
• Development of Marlowe Run, a prototype app that, similar to Marlowe Playground, provided the ability to financial services to leverage blockchain-based financial services or smart contracts without prior knowledge of programming or the blockchain. One of the key products of Marlowe Run is the off-the-shelf smart contracts that will be available. All one will need to do is pick a basic financial contract (ex: loan, bond, etc.) and fill in the blanks.

In short, Goguen will bring smart contracts, token creation, NFTs, and many other functions to the Cardano blockchain.

Basho Era – Scaling

The Basho Era era will be optimizing and focusing on two problem areas of most cryptocurrency networks: scalability and interoperability.

The scalability focus is to improve the performance of the Cardano network and to support further growth and adoption of the blockchain for applications and higher transaction volumes.

The interoperability focus is to increase functionality with other cryptocurrency blockchains, and to allow functionality between Cardano’s main blockchain and future sidechains. These sidechains could be used to off-load work/decrease congestion on the main chain (Cardano’s blockchain).

Voltaire Era – Governance

The Voltaire Era is the last era in the Cardano road map and is the most ambitious. Voltaire will aim to create have a governance system that is used to govern developments and the direction that the community wishes to take Cardano.

Currently, we can already see parts of this era such as:

• Project Catalyst- a system by which problems or needed developments within the Cardano ecosystem or community are put forward. The community then provides solutions and proposals to meet these needs.
• Cardano Treasury- a system that is used to fund the solutions put forward in Project Catalyst, and is funded by taking a portion of all transaction fees on the Cardano network.
• Voting- anyone who owns Cardano (ADA) can vote for which proposals should receive funding from the treasury, and by voting, community members are rewarded with ADA.

For more in-depth information check out: https://roadmap.cardano.org/en/

WIP

Ergo (ERG) is the native token of the Ergo Platform, and is used to pay all transaction fees for transfers and smart contract executions. Ergo uses a proof-of-work (PoW) to develop the blockchain.

The team behind Ergo understands that networks should be able to change and adapt with the ever moving environment without the need of a centralized, trusted party. To this end, Ergo has an on-chain miner voting. What this means is that those who are helping to develop Ergo’s blockchain, through mining, can help gradually change different aspects or values of the blockchain itself.

An interesting quality that is similar to Cardano is that custom tokens that are on the Ergo Platform are treated as “first-class citizens.” This means that, unlike Ethereum, movement of custom tokens on Ergo’s blockchain are equal in priority to Ergo’s native token ERG.

Ergo is designed and implemented by a team of experienced developers and researchers, who hold publications and PhDs in cryptography, compiler theory, and blockchain technology. One such developer is Alexander Chepurnoy, who was a core developer at NXT, co-founder of smartcontract.com (now known as Chainlink), and an employee at Input Output HK (IOHK), where he was a research fellow and Team Scorex Manager.

Many, if not most, cryptocurrencies have a limited supply. Bitcoin will only ever have 21 million Bitcoin, Cardano will only ever have 45 billion ADA, and Ergo will only ever have 97,739,924 ERG.

Along these lines, one may have heard about story of a man in San Francisco losing the password to unlock his Bitcoin wallet with $220 million worth of Bitcoin. These lost Bitcoins are lost forever unless the owner is able to remember the password, but what if this were to occur with one’s Ergo wallet?

With Ergo, they have remedied this problem by slowly recycling lost coins with a feature termed “storage rent.”

Storage rent is a process that slowly deducts fees from UTXOs that have not been moved for 4 years or more, and it provides multiple upsides for Ergo and its ecosystem. The first use is that the block reward, after 8 years, will be zero. This means that there will be no incentive to mine ERG and develop Ergo’s blockchain. Along with transaction fees, miners will be paid with the storage rent fees.

The second use is that lost ERG is recirculated back into the Ergo ecosystem. The original wallet holder would still lose their ERG, but the ERG is not also lost to the entire system.

To avoid storage rent, if you were to be a long term holder of ERG, all the holder would have to do is move their balance to another wallet every 4 years. This is a relatively low requirement.

Down below is a step-by-step guide of how to make an Ergo (ERG) wallet on Yoroi.

If you are wanting to make an Ergo wallet using Yoroi, you will first need to go to Yoroi and select the device or service you are wanting to use, and install it.

You will then need to open up Yoroi and select your language.

You will then need to read and acknowledge the terms of use by clicking the box next to “I agree with the terms of use” and selecting continue.

Next, you will be presented with two options on the level of complexity of the wallet interface. For this tutorial, we will be choosing simple.

Now you will have three options: “Connect to hardware wallet”, “Create wallet”, and “Restore wallet.” Select “Create wallet.”

On the next screen, you will need to select Ergo for the cryptocurrency or platform you are wanting to store/use.

Then select “Create wallet” once again.

Next you will need to name your wallet and create a spending password. Your wallet name does not function like a username, so you can use any name for your wallet. This is only used to differentiate wallets if you decide to make more than one wallet.

The spending password will be needed anytime you are moving ERG out of the wallet.

Once you have entered the required information, click “CREATE PERSONAL WALLET.”

Next you will be informed about the recovery phrase you will be getting on the following screen. Read through the entire pop-up before checking the box off and selecting continue.

You will now see your recovery phrase. Make sure to write it down and keep it safe and secure as this is the only way to restore your wallet. The order does matter, so make sure you start with the top row from left to right.

I will be revealing my recovery phrase as I will be deleting this wallet afterwards. Do not try to recover my wallet as it will be compromised.

Once you have written it down, click “YES, I’VE WRITTEN IT DOWN.”

Now you will be required to input your recovery phrase in the correct order. This is to verify that you know your recovery phrase and/or have written it down correctly.

Once you have input your recovery phrase, you will see a new screen that you will need to read before checking off both boxes and selecting “CONFIRM.”

Congratulations! You now have an Ergo wallet!

XRP is the ticker symbol of Ripple’s crypto token. Ripple itself is both a cryptocurrency and a digital payment network for transactions. Ripple was first released in 2021, co-founded by Chris Larsen and Jed McCaleb. As of June 2021, Ripple ranks among the top five most valuable blockchain-based tokens by market capitalization. Ripple transactions use less energy than Bitcoin, are confirmed in seconds, and cost relatively little.

As a payment system, Ripple functions via payment settlement asset exchange and remittance. This can be compared to the SWIFT system that banks or financial middlemen use to transfer money and security internationally, often across different currencies.

As a premined currency token, XRP serves as an intermediate mechanism for the exchange of two currencies or networks. It acts as a temporary settlement layer denomination, without the parties involved in the exchange process having to possess specific coins or tokens before the transaction. That is, if party B is requiring payments to be made in Bitcoin, party A does not have to own Bitcoin; simply, party A can pay in US Dollars to the medium platform XRP utilizes, and party B will be able to withdraw their desired currency, Bitcoin, in equivalent value.

Ripple is a global payments network that operates on an open-source and peer-to-peer decentralized platforms. Ripple’s clientele includes many major banks and financial services, as it allows for smooth transfer of money in fiat currencies like US Dollars, Yen, or digital currencies like Bitcoin or Litecoin (LTC). It facilitates quick and easy conversion between different currencies, bridging the different financial networks through the Gateway medium. Gateway acts as a credit middleman that receives the sender’s currency, and then sends a different currency of equivalent value to the receiver’s public addresses, and this process can “ripple” through multiple exchanges and/or recipients, so on and so forth. Anyone or any business can register to open a gateway, which authorizes them to exchange currencies through the Ripple network while maintaining liquidity.

In effect, Ripple functions as a digital hawala service. That is, Ripple can function as an informal method of transferring money, usually across borders, without any physical money actually moving.

A simplified working example:

1. Lawrence needs to send $100 to David, who lives in a different city.
2. Lawrence gives the funds to his local agent, Kate, to be sent to David. He also provides a secret password that David is required to answer correctly to receive the funds.
3. Kate then contacts David’s agent, Rose, of the transaction details, including recipient, funds to be reimbursed, and the password.
4. If David gives Rose the correct password, Rose gives him $100.
5. However, since the $100 comes from Rose’s account, that means Kate owes Rose $100 – this will be settled at a later date.
6. To keep track, Rose can either record a journal of all Kate’s debt, which Kate would pay on an agreed day, or make counter transactions that would balance the debt.
7. For example, if Rose was also Martin’s agent and Martin needed to transfer $100 to Caroline whose agent is Kate, this would balance out the $100 owed to Rose, since Caroline will be paid from Kate’s account.

From the example above, one can see that a chain of rippling trust is required to initiate a transaction – trust between Lawrence and Kate, Kate and Rose, and David and Rose (and Martin and Caroline, as well as all other members of the network connected through Ripple).

The digital currency, XRP, acts as a bridge currency to other currencies. Its advantage is that it does not discriminate between any fiat/cryptocurrency. Each currency on the ecosystem has its own gateway e.g. CADBluzelle, BTCbitstamp, and USDsnapswap.

Rather than use blockchain mining, Ripple uses a consensus mechanism, via a group of bank-owned servers, to confirm transactions. The Ripple network does not run with a proof-of-work (PoW) system like Bitcoin or a proof-of-stake (PoS) system like Cardano. Instead, transactions rely on a consensus protocol in order to validate account balances and transactions on the system. The consensus works to improve the integrity of the system by preventing double-spending.

A Ripple user can initiate a transaction with multiple gateways to send the same $100, but only the first transaction will be kept. Individual distributed nodes decide by consensus which transaction was made first, and this process takes about five seconds. Since there’s no central authority that decides who can set up a node and confirm transactions, the Ripple platform is described as decentralized.

As described in the working example in the previous section, Ripple keeps track of all transactions in a given currency for all users and gateways. IOU credits and money flows between Ripple wallets are public records on the Ripple consensus ledger. However, the data is not linked to the ID or account of any individual or business, allowing for a certain level of anonymity.