Grayscale Building Blocks | November 2019

An Introduction
to XRP

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November 2019

An Introduction
to XRP
02 | 15

XRP is the native digital currency supported by RippleNet, the underlying

peer-to-peer (P2P) payment network that allows for near instantaneous
transactions across the world. Together, XRP and RippleNet were designed
to address liquidity challenges faced by financial institutions using traditional
payment channels (i.e., SWIFT, ACH, FedWire system). By providing the means
for fast, secure, and low-cost conversions between varying units of value (e.g.,
commodities, fiat currencies, and other digital assets), the network has the
potential to capture significant value from a global payments market worth an
estimated $2 trillion USD.1 It was first conceptualized in 2004 by Ryan Fugger,
and after several iterations, the Ripple network was formally launched in
August 2013, led by the founders2 of the eponymous, private company known
today as Ripple.

By design, XRP is unlike many of its digital currency counterparts. Instead of a

supporting blockchain protocol, it uses the XRP Ledger to validate transactions
by requiring network participants to reach consensus. In addition, the
development and maintenance of the technology is overseen by Ripple, which
is funded through their own reserves of XRP and by private investments from
influential investors, including Andressen Horowitz, Google Ventures, Digital
Currency Group and Pantera Capital.3 Ripple technology is also integrated
with a unique subset of products (e.g., xCurrent, xRapid, xVia, xPring) targeted
©2019 Grayscale Investments, LLC

specifically for financial institutions. These factors have propelled XRP’s

increasing adoption as a global payment rail and helped to establish XRP as
the third largest digital asset in the ecosystem by market cap.4

1. Kate Rooney. “Ripple wants a piece of the global payment system while it fights a cryptocurrency ‘holy war.’” CNBC. January 8,
2019. https://www.cnbc.com/2019/01/07/ripple-wants-a-piece-of-the-global-payment-system.html.
2. The Ripple co-founders are Jed McCaleb, Chris Larsen, David Schwartz, and Arthur Britto.
3. Digital Currency Group, Inc., the sole member and parent company of Grayscale Investments, LLC, owns a minority interest in
Ripple, which retains a central role in stewarding the development of the XRP Ledger.
4. As of October 31, 2019.

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FIGURE 1: XRP SUMMARY STATISTICS5

As of October 31, 2019

Asset6 XRP

Network RippleNet

Protocol XRP Ledger

03 | 15
Inception of Network August 2013

Price (USD) $0.30

Market Cap (USD) $12.82 billion

Circulating Supply (XRP / % of Max Supply) 43.25 billion / 43.25%

Max Supply (XRP) 100 billion

Average Transaction Time 5 seconds

Sector Global Payments

A Brief History of XRP

The Ripple Project emerged in 2004 in the form of RipplePay, a decentralized

P2P payments platform intended to replace financial intermediaries. It was
created by Ryan Fugger, who hypothesized that Ripple, the digital currency
native to the platform that has since been renamed to XRP, would be
preferred to regular money for its ease of use and cost efficiency.7 Early on, it
failed to gain mainstream acceptance and growth was stagnant for years after
its formation.
©2019 Grayscale Investments, LLC

In 2011, Jed McCaleb began to devise a similar payments system and over the
following year, was joined by David Schwartz, Arthur Britto, and Chris Larsen.
In 2012, they approached Fugger and took over the Ripple Project with the

5. Coin Metrics, CoinMarketCap.com, Messari / OnChainFX. As of October 31, 2019.

6. Frequently used terms: XRP is the digital currency and asset native to Ripple technology. RippleNet is the P2P network
comprised of financial institutions that serve as transaction validators. The XRP Ledger is the open-source protocol powered by
RippleNet where users can send or receive payments in XRP.
7. “Why Ripple?” A Ripple Communications Company. https://classic.ripplepay.com/essay/.

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intent of addressing fundamental issues with incumbent financial institutions

and other digital assets at the time. Inspired by earlier works on distributed
consensus networks, the team invented the original Ripple protocol (RTXP)
and with the help of Noah Youngs, the Ripple Protocol Consensus Algorithm
(RPCA),8 to create a system that would process transactions more quickly and
securely.

In September 2012, the team went on to found a privately-owned organization

called OpenCoin. Prior to this, a fixed amount of 100 billion XRP was created
and allocated amongst the founders in an unknown distribution. The founders
04 | 15 agreed that no more XRP would be produced and recognized that the
technology would need capital to accelerate development, and consequently,
granted 80 billion XRP to the organization in a collective effort, while also
using seed funding raised from initial investors.

Today, the company overseeing the development of RippleNet is known as

Ripple. It is headquartered in San Francisco and was named one of Fortune’s
2019 best places to work in Silicon Valley.9 Ripple raised $55 million USD in
its Series B funding round in September 2016.10 RippleNet is now comprised
of over 200 financial institutions (e.g., banks, payment providers, brokers,
unions) that serve as independent users and transaction validators.11 Led by
Brad Garlinghouse, the current Ripple CEO, the company is equipped with an
experienced team of developers and the financial resources to expand the
capabilities of XRP and its accompanying Ripple technology.

Defining Characteristics of XRP

The developers of XRP and the Ripple network designed a protocol to

challenge existing financial systems and alternative digital currencies. XRP
sought to eliminate high transaction fees and long processing times driven
by institutions, and like most digital assets, addresses the double-spending
problem, which is when third parties are needed to monitor counterfeited
money or forged transactions.12 Developers integrated features including a
consensus algorithm and escrow schedule in lieu of a blockchain protocol
and mining rewards, as well as incorporated a suite of commercial financial
products. In doing so, XRP has gained momentum amongst both financial
institutions and individual users.
©2019 Grayscale Investments, LLC

8. David Schwartz, Noah Youngs, and Arthur Britto. The Ripple Protocol Consensus Algorithm. https://ripple.com/files/ripple_con-
sensus_whitepaper.pdf.
9. “Best Workplaces in the Bay Area™ 2019.” Great Place to Work. https://www.greatplacetowork.com/best-workplaces/
bay-area/2019?category=small-and-medium-companies.
10. “Ripple - Investors.” Crunchbase. https://www.crunchbase.com/organization/ripple-labs/investors/investors_list#section-investors.
11. https://www.ripple.com/ripplenet/. October 31, 2019.
12. David Schwartz. “Ripple and XRP - Part 7: Consensus vs. Proof-of-Work (2018).” YouTube. March 9, 2018. https://www.youtube.
com/watch?v=RZqsUaDBgTY.

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XRP Ledger

The XRP Ledger, short for XRP Ledger Consensus Protocol, is an open-source,
distributed ledger that uses cryptography to hold, transfer, and trade assets.13
A distributed ledger uses a decentralized network, RippleNet in this context,
to validate transactions in a process called consensus. The network nodes
independently update their version of the ledger and come together to vote
on the correct order of transactions. Once a majority of the nodes agree, a
new ledger is created and adopted as the correct version.14

This consensus algorithm differs from the proof-of-work (PoW) or proof-

05 | 15
of-stake (PoS) blockchain protocols used in most other digital currency
networks.15 A PoW or PoS network is built so that participants are competing
over rewards for uploading a transaction on to the blockchain. Conversely, in
a consensus network, competition amongst participants does not exist, as the
primary incentive for honest transaction validation is based on trust and the
vested interests of participants in the network.

Absence of Mining Rewards

At inception, 100 billion XRP was created by the founders of Ripple and fixed
to be the maximum supply cap, 80 billion of which was allocated in the form of
a grant to create what is known today as Ripple. The intuition behind this was
to prevent arbitrary creations of money, potentially leading to hyperinflation
or manipulation. Instead of mining rewards, the company utilizes an escrow
mechanism to control the distribution of XRP supply. According to Ripple, 50
billion XRP is currently being held in escrow.16

In escrow means that XRP is held in reserve until a contractual or time

obligation is completed. According to the company, a maximum of 1 billion
XRP will be unlocked on a monthly basis by selling to institutional investors
or on exchanges.17 The remainder from the 1 billion limit that is not sold is
added to the end of the queue and the estimated time to release all XRP from
escrow increases.18

It is important to note that several reports from independent data providers

have surfaced that discuss some discrepancies with how XRP supply is
disseminated. For more, please refer to this May 2019 report by CoinMetrics.
©2019 Grayscale Investments, LLC

13. Brad Chase and Ethan MacBrough. Analysis of the XRP Ledger Consensus Protocol. Ripple Research. February 21, 2018.
https://arxiv.org/pdf/1802.07242.pdf.
14. Shaan Ray. “The Difference Between Blockchains & Distributed Ledger Technology.” Medium: Towards Data Science.
February 19, 2018. https://towardsdatascience.com/the-difference-between-blockchains-distributed-ledger-technology-42715a0fa92.
15. Proof-of-work (PoW) is a blockchain protocol in which miners compete to upload blocks on to the blockchain and receive mining
rewards for their efforts. Proof-of-stake (PoS) is a blockchain protocol in which validators approve of transactions and receive a
transaction fee for their efforts. Source: Ameer Rosic. “Proof of Work vs Proof of Stake: Basic Mining Guide.” Blockgeeks. 2017.
https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/.
16. Ripple. https://data.ripple.com/v2/network/xrp_distribution?descending=true&limit=3. October 31, 2019.
17. Ari Levy. “Ripple is sitting on close to $80 billion and could cash out hundreds of millions per month - but it isn’t.” CNBC. January
16, 2018. https://www.cnbc.com/2018/01/16/why-ripple-is-not-cashing-out-its-xrp-holdings.html.
18. Brad Garlinghouse. “Ripple to Place 55 Billion XRP in Escrow to Ensure Certainty of Total XRP Supply.” Ripple. May 16, 2017.
https://www.ripple.com/insights/ripple-to-place-55-billion-xrp-in-escrow-to-ensure-certainty-into-total-xrp-supply/.

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Commercial Product Suite

There are four financial products geared towards Ripple’s target customer
base -- institutions:

1. xCurrent is an enterprise software designed to integrate with existing

banking infrastructure to allow for fast, global payments. It is backed by
the Interledger Protocol (ILP), which enables payments to be sent and
received across different digital currency networks, rather than the XRP
Ledger, which only enables XRP transactions.
06 | 15
2. xRapid facilitates the trading of XRP on xCurrent. This allows for near
instantaneous liquidity at minimal costs, as long as XRP is amply
available on exchanges. It is intended for emerging markets where fiat
currency liquidity may be inaccessible and transaction costs are often
high.

3. xVia is a payment interface combining the xCurrent and xRapid

services and is used with an API. It allows for payments to be sent,
but not received, with the option to attach important transaction
information, like messages or invoices.

4. xPring is the initiative to invest in and potentially acquire projects

started by entrepreneurs that utilize XRP and Ripple technology.
Its objective is to increase XRP usage, broaden the infrastructure
supporting the XRP ecosystem, and raise awareness on the different
use cases of Ripple technology.

For more information, please refer to the product pages for xCurrent, xRapid,
xVia, and xPring.

In addition, XRP and RippleNet possess the following qualities that make it a
unique digital asset network:

• Level of Decentralization: The degree of decentralization for a

given network is determined relative to the entire digital currency
ecosystem. XRP and RippleNet are relatively less decentralized
because of (i) Ripple’s involvement as one of the driving forces of
adoption, (ii) the amount of XRP supply in possession of the founders
©2019 Grayscale Investments, LLC

and the company, and (iii) the high concentration of XRP in the top 100
wallets.19

• Semi-permissioned: Ripple decides which financial institutions

become a part of RippleNet through its authorship of the RippleNet
Rulebook, the legal framework delineating every transaction
conducted using XRP and / or Ripple technology.

19. “XRP Stats by @WietseWind.” https://ledger.exposed/rich-stats. As of October 31, 2019.

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The network also maintains a Unique Node List (UNL) to verify

validating servers that comply with the RippleNet Rulebook.20 This
differs from most networks using a blockchain protocol, where any
entity with the financial and computational resources can become a
node.

• Secure: RippleNet consists of users and validators in a system

where each validator determines which other validators to trust for
an accurate version of the latest XRP Ledger. Since validators are
identified and selected by other validators based on trust, it is more
07 | 15 difficult for new, unknown validators to carry out a malicious attack on
the network. In more than six years, the XRP Ledger has never been
successfully attacked to reverse or alter its transaction history.21

• Open-source: The source code for the XRP Ledger is available on

the Internet, free for anyone to access, contribute to, or fork. The XRP
Ledger will continue to exist independent of Ripple, the organization.
This is an important characteristic for building trust and accumulating
users.

In contrast, the technology backing Ripple’s commercial products are

proprietary and not necessarily available to the public.

• Transparent: All transactions are recorded and publicly viewable on

the XRP Ledger from anywhere in the world.

• Pseudo-anonymous: Public wallet addresses are not directly linked

to any identifying personal information. However, in the current state,
complete anonymity is difficult to achieve. This is because addresses
involved in any XRP transaction are permanently and publicly
viewable on the XRP Ledger.22

• Finite supply: At inception, 100 billion XRP was created for the Ripple
network. As mentioned, there are no mining rewards and instead, XRP
held in the company’s account is released from escrow on a monthly
basis. An established and transparent monetary supply and issuance
schedule is critical for evaluating a digital currency’s investability.

• Deflationary supply: For every transaction, a minimum commission fee

©2019 Grayscale Investments, LLC

of 10 drops (.00001 XRP) is destroyed.23 Transaction costs are clearly

outlined by the XRP Ledger Project. This fee deters malicious entities
from overloading the network by making it costly to spam the network
and carry out an attack. Moreover, a minimum balance of 20 XRP is
required to be held in each wallet address from the time of creation.

20. “Validators and Unique Node Lists.” XRP Ledger. https://xrpl.org/technical-faq.html.

21. David Schwartz. “The XRP Ledger: Fostering Industry Performance and Innovation.” Ripple. September 24, 2019.
https://www.ripple.com/insights/the-xrp-ledger-fostering-industry-performance-and-innovation/.
22. Aaron Van Wirdum. “Is Bitcoin Anonymous? A Complete Beginner’s Guide.” Bitcoin Magazine. November 18, 2015.
https://bitcoinmagazine.com/articles/is-bitcoin-anonymous-a-complete-beginner-s-guide-1447875283.
23. “Transaction Costs.” XRP Ledger. https://xrpl.org/transaction-cost.html.

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Potential Advantages of XRP

The design of XRP and the Ripple protocol leads to four potential
advantages when compared to traditional financial institutions, payment
channels, and other digital asset networks:

1. Fast transaction speeds: XRP transactions are completed at an

average rate of 5 seconds. It is among the quickest settlement rails
relative to the top ten digital assets by market cap, along with Stellar
Lumens (XLM) and Eos (EOS).24 It is much faster than the time it takes
08 | 15 to process international or domestic transactions sent via traditional
payment channels, which is often several days.

2. Low transaction fees: The average XRP transaction cost is $0.0002. It

is the among the lowest relative to the top ten digital assets by market
cap, along with Stellar Lumens (XLM) and Eos (EOS).25 It is far cheaper
than the international or domestic wire transfer fees charged for each
transaction by banks.

3. Institutional payment network: RippleNet is made up of over 200

major financial companies, including American Express, Santander,
and MoneyGram, and continues to add new customers every week.
This trend reflects that established firms perceive value in a fast,
scalable, low-cost payment system. The Ripple-backed network
provides an extra layer of accountability and reassurance for large-
scale institutional clients.

4. On-demand liquidity: xRapid provides the means for fast liquidity

between financial institutions using XRP. For example, for an illiquid
currency pair with little-to-no trading volume, like the Venezuelan
bolívar and the Indian rupee, XRP can act as an intermediary
currency pair so that the value of the transaction can be received
in the local currency on either side of the transaction. This is also
applicable to other digital currencies, in combination with fiat
currencies.

As a result of these advantages, XRP and the Ripple protocol may be better
suited for financial institutions than existing payment channels that take
days to process, have limited transfer windows and have high international
©2019 Grayscale Investments, LLC

fees. Additionally, it has characteristics unique to its protocol that

differentiate it from other major players in the digital currency landscape.
Given the network’s ability to process transactions faster, cheaper, and in a
more liquid fashion than many of the previously mentioned alternatives, it
may be a better fit for financial institutions and other business enterprises
looking to incorporate this technology into their services.

24. CoinMetrics. As of October 31, 2019.

25. See previous footnote.

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Potential Disadvantages of XRP

Level of Decentralization

XRP appears to be relatively less decentralized when compared to other

digital assets. Determinants of decentralization include, but are not limited
to, (i) the presence of a central authority and its role in the network, (ii)
susceptibility to market manipulation, and (iii) concentration of the digital
asset in a small number of wallets.

09 | 15 (i) Development of the technology is overseen by a

Ripple, a company that is privately owned and operated. It
holds approximately 56.7 billion XRP, including 6.7 billion
for investment and strategic purposes and 50 billion in
escrow.26 It is also important to note that approximately
21% of the validator nodes in the network are controlled by
Ripple.27

(ii) Ripple has rules outlining the organization and founders’

ability to sell their XRP supply, as a safeguard against supply
shocks.

(iii) The concentration of XRP in the top 100 wallets is higher

relative to other top digital assets, corresponding to 75% of
non-escrowed XRP and 37.5% of all existing XRP.28

Potential for Supply Shocks

The majority of XRP supply is still held by the Ripple protocol founders and
the company. Though there are selling restrictions placed on both, there
is a risk that large and/or sustained periodic sales could place pressure on
the price of XRP.

Regulatory Uncertainty

The SEC has stated that certain digital assets may be considered
“securities” under the federal securities laws. To date, the SEC has only
©2019 Grayscale Investments, LLC

identified two digital assets, Bitcoin and Ethereum, for which it does not
intend to take the position that they are securities. As a result, any other
digital asset, including XRP, is at risk of being deemed a security, which
may have material adverse consequences for such digital asset.

26. See footnote 16.

27. “Mini Validator List | XRP Ledger Validating Nodes.” https://minivalist.cinn.app/. As of October 31, 2019.
28. “XRP Stats by @WietseWind.” https://ledger.exposed/rich-stats. As of October 31, 2019.

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Summary

XRP and the underlying Ripple technology stack serve as a fast, inexpensive,
and secure way to make payments across the world. Equipped with a suite of
financial products that support its utility, XRP also has the potential to provide
fast liquidity solutions for institutions. It has several advantages compared to
other digital assets for specific use cases due to key differences in the design,
development, and maintenance of its protocol. For the foreseeable future,
Ripple, the company, has the capital and resources needed to oversee the
continued development of the XRP ecosystem. As it continues to add clients
10 | 15 to RippleNet and fund university research initiatives related to blockchains
and payment technology29, it will be important to understand how their efforts
translate into network growth and new investment required to support XRP’s
viability as a sustainable investment opportunity.

To learn more about other digital assets underpinning the Grayscale family of
products, please visit the Building Blocks section of Grayscale Insights.
©2019 Grayscale Investments, LLC

29. https://www.coindesk.com/ripple-teams-with-10-new-universities-for-blockchain-research-initiative

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About Grayscale Investments, LLC

Grayscale Investments is the world’s largest digital currency asset

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11 | 15 Now, forward-thinking investors can embrace a digital future with an
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13 | 15
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• TAX TREATMENT OF VIRTUAL CURRENCY

For U.S. federal income tax purposes, Digital Large Cap Fund will be a passive foreign
investment company (a “PFIC”) and, in certain circumstances, may be a controlled
foreign corporation (a “CFC”). Digital Large Cap Fund will make available a PFIC Annual
Information Statement that will include information required to permit each eligible
shareholder to make a “qualified electing fund” election (a “QEF Election”) with respect to
Digital Large Cap Fund. Each of the other Products intends to take the position that it is
a grantor trust for U.S. federal income tax purposes. Assuming that a Product is properly
treated as a grantor trust, Shareholders of that Product generally will be treated as if
they directly owned their respective pro rata shares of the underlying assets held in the
Product, directly received their respective pro rata shares of the Product’s income and
directly incurred their respective pro rata shares of the Product ’s expenses. Most state
©2019 Grayscale Investments, LLC

and local tax authorities follow U.S. income tax rules in this regard. Prospective investors
should discuss the tax consequences of an investment in a Product with their tax advisors.

• NO SHAREHOLDER CONTROL
Grayscale, as sponsor of each Trust and the manager of the Fund, has total authority over
the Trusts and the Fund and shareholders’ rights are extremely limited.

• LACK OF LIQUIDITY AND TRANSFER RESTRICTIONS

An investment in a Product will be illiquid and there will be significant restrictions on
transferring interests in such Product. The Products are not registered with the SEC, any
state securities laws, or the U.S. Investment Company Act of 1940, as amended, and the
Shares of each Product are being offered in a private placement pursuant to Rule 506(c)

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More Grayscale research
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under Regulation D of the Securities Act of 1933, as amended (the “Securities Act”). As
a result, the Shares of each Product are restricted Shares and are subject to a one-year
holding period in accordance with Rule 144 under the Securities Act. In addition, none of
the Products currently operates a redemption program. Because of the one-year holding
period and the lack of an ongoing redemption program, Shares should not be purchased
by any investor who is not willing and able to bear the risk of investment and lack of
liquidity for at least one year. No assurances are given that after the one year holding
period, there will be any market for the resale of Shares of any Product, or, if there is such
a market, as to the price at such Shares may be sold into such a market.

• POTENTIAL RELIANCE ON THIRD-PARTY MANAGEMENT; CONFLICTS OF INTEREST

The Products and their sponsors or managers and advisors may rely on the trading
expertise and experience of third-party sponsors, managers or advisors, the identity
of which may not be fully disclosed to investors. The Products and their sponsors or
14 | 15 managers and advisors and agents may be subject to various conflicts of interest.

• FEES AND EXPENSES

Each Product’s fees and expenses (which may be substantial regardless of any returns on
investment) will offset each Product’s trading profits.

Additional General Disclosures

Investors must have the financial ability, sophistication/experience and willingness to bear the
risks of an investment. This document is intended for those with an in-depth understanding of the
high risk nature of investments in digital assets and these investments may not be suitable for
you. This document may not be distributed in either excerpts or in its entirety beyond its intended
audience and the Products and Grayscale will not be held responsible if this document is used or
is distributed beyond its initial recipient or if it is used for any unintended purpose.

The Products and Grayscale do not: make recommendations to purchase or sell specific
securities; provide investment advisory services; or conduct a general retail business. None of
the Products or Grayscale, its affiliates, nor any of its directors, officers, employees or agents shall
have any liability, howsoever arising, for any error or incompleteness of fact or opinion in it or lack
of care in its preparation or publication, provided that this shall not exclude liability to the extent
that this is impermissible under applicable securities laws.

The logos, graphics, icons, trademarks, service marks and headers for each Product and
Grayscale appearing herein are service marks, trademarks (whether registered or not) and/or
trade dress of Grayscale Investments, LLC. (the “Marks”). All other trademarks, company names,
logos, service marks and/or trade dress mentioned, displayed, cited or otherwise indicated herein
(“Third Party Marks”) are the sole property of their respective owners. The Marks or the Third
Party Marks may not be copied, downloaded, displayed, used as metatags, misused, or otherwise
exploited in any manner without the prior express written permission of the relevant Product and
Grayscale or the owner of such Third Party Mark.

The above summary is not a complete list of the risks and other important disclosures involved
in investing in any Product or digital assets and is subject to the more complete disclosures
contained in each Product’s Offering Documents, which must be reviewed carefully.
©2019 Grayscale Investments, LLC

PLEASE REVIEW IMPORTANT DISCLOSURES & OTHER INFORMATION AT THE END OF THIS PAPER.
General Inquiries:

info@grayscale.co
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Phone: (212) 668-1427
@GrayscaleInvest