Ethereum vs Ripple: which one should be in your portfolio in 2020?
By A.G.
12:37, 28 July 2020
A brief summary of Ripple and Ethereum
Despite all the turmoil and uncertainty in the global financial markets, cryptocurrencies are currently experiencing somewhat of a bull run. While new projects attract most of the attention, Ethereum, Ripple and Bitcoin continue to dominate the market cap rankings.
In this Ripple vs Ethereum guide, we compare two of the most significant crypto projects and check out whether they belong in your investment portfolio. However, before we dive in, here's a quick summary of the projects.
Ripple is an open-source protocol that supports real-time cross-border transactions. It was created by Ripple Labs in 2012 and aims to modernise the world of payments, exchange rates and replace the SWIFT network. XRP is the native token of the platform and acts as a medium of exchange, representing the transfer of value on the network.
Ethereum is best known for its smart contracts functionality. In brief, it's a distributed computer that allows developers to build applications on top of the Ethereum blockchain. Ether or ETH is the native token used to pay for transactions and other interactions with the protocol.
What is your sentiment on XRP/USD?
Ethereum vs Ripple: critical differences between the two
When looking at Ripple vs Ethereum, investors should remember that they are entirely different projects, designed to address different markets and solve different problems. Same applies to ETH vs XRP tokens.
Technology and utility aside, there are apparent ideological differences behind the two projects. Ripple Labs is a for-profit technology company that invented and continues to develop the Ripple protocol. It owns a majority of the XRP tokens and has commercial interests, including a potential IPO. Ethereum, on the other hand, is a decentralised network supported by the Ethereum Foundation, a Swiss non-profit organisation.
So, is Ethereum better than Ripple? Let’s look at the main differences to find out.
Consensus mechanism
Ethereum blockchain currently uses Proof of Work (PoW) consensus mechanism to validate transactions. In PoW consensus, miners compete with each other to solve complex mathematical puzzles and are rewarded with ETH. Anyone can mine ETH, which contributes to the decentralisation of the Ethereum blockchain.
Ripple network uses a unique distributed consensus mechanism. A network of trusted "transaction validators", mostly banks that use Ripple technology, decide which transactions are valid and authentic. Network participants can select which nodes they trust. However, they are encouraged to adopt Unique Node Lists (UNLs) maintained by Ripple Labs. Because of this, the Ripple network is often viewed as centralised in the crypto community.
Supply economics
There's currently almost 12m ETH and new coins are created as a reward for miners who maintain the network. There's no hard cap on the total amount of ETH that can be issued. The system is decentralised and no central authority controls the issuance of ETH.
XRP, on the other hand, is pre-mined with a total supply of 100bn tokens. However, only 45bn are currently in circulation. The rest are held in escrow and released to Ripple Labs at a rate of 1bn per month. The company can choose if they want to put XRP back into escrow, sell it on the market or sell directly to financial institutions that use Ripple technology. For Ripple Labs, selling XRP is part of the business model and a way to maintain profitability ahead of the potential IPO.
Network performance
At the moment, the Ethereum network can, at its best, process roughly 15 transactions per second. The transaction fees on the network have been climbing recently due to the emergence of stable coins and decentralised finance (DeFi) projects. The average transaction fee on Ethereum is currently around $1.50, up from $0.10 in April 2020.
Ripple network can process a transaction in four seconds and can handle 1,500 transactions per second, according to the company. The standard transaction fee on the Ripple network is 0.00001 XRP per transaction, which gets burned, creating a deflationary mechanism.
Historical performance and the latest news
Truth be told, early investors in both cryptocurrencies have done exceptionally well. ETH went from trading below $10 at the beginning of 2017 to an all-time high of above $1,400 in January 2018. Similarly, XRP was trading below $0.01 in March 2017 and after going on an impressive run, reached $3.40 in January 2018.
Since January 2018, however, ETH is down over 75 per cent while XRP is down more than 90 per cent. Regardless, it is worth noting that more recently, since the March 2020 lows, ETH rallied over 200 per cent going from $100 to just over $300. XRP lagged during the same period, only appreciating by about 35 per cent.
In the latest news, the Ethereum community continues to focus on scalability solutions and the transition to Proof of Stake (PoS) consensus. The initial phase, or Phase 0, has been delayed multiple times but is still expected in 2020. The team will release the last testnet on August 4, at the earliest, with the mainnet launch expected to follow later in the year. It's near impossible to discuss Ethereum without mentioning the impressive growth in DeFi. There's currently more than 4m ETH locked in various DeFi platforms, contributing to the demand for ETH.
Ripple is well known for its extensive list of partnerships with financial institutions around the world. From that perspective, it is set to benefit from the recent decision by the Office of the Comptroller of the Currency (OCC) to allow banks that are licensed in the US to offer crypto custody services. In other news, Santander, one of the large retail banks working with Ripple, has recently expanded available regions for its international payments app. The app is a borderless blockchain payment tool, built alongside Ripple, that aims to make transactions cheaper, faster and more transparent.
On a less positive note, Ripple continues to battle a string of class-action lawsuits claiming it violated securities laws in the US. The lawsuits allege that XRP is a security and was not registered with relevant authorities when it was marketed and sold in the US.
Ethereum vs Ripple: investment thoughts
So now that we know what both projects are about and the main differences between them, which one is a better investment in 2020, ETH or XRP?
The usual disclaimer here, no one knows which token will perform better in the future, so it is always crucial to do your own research. What we can do, however, is consider whether the Ethereum or Ripple network has better prospects.
On that front, Ethereum has a brighter future. Most decentralised applications are currently built on the Ethereum blockchain. DeFi projects are an easy example of Ethereum's utility. Over the long-term, there are many other areas, like energy, where Ethereum's smart contract functionality could make a big difference. And while the future is bright, Ethereum does need to execute on its PoS roadmap as well as other scaling solutions.
For XRP, the source of fundamental demand for the token is unclear. Many retail investors abandoned XRP after the 2017 bull run. Institutional investors are also not too keen. The Grayscale XRP trust, for instance, had $6.6m in AUM in June 2018, compared to just $2.7m at the end of June 2020. An additional supply of 1bn new XRP every month is likely to limit any sustained price upside. The pending lawsuits also present a substantial risk. If the SEC designates XRP as a security, its utility as a medium of exchange will disappear.