San Francisco-based Ripple has had meteoric success, many would argue off the back of the crypto hype but few can deny the possibilities of what the company was bringing to market: Remittance and international settlement in seconds - not hours or days.
It has the correspondent banking world looking on in interest. Directors and treasurers from large financial institutions are observing them keenly, raising experienced industry eyes over the use case and white papers, pulling it apart for any cracks or discrepancies.
Still in its pilot phase, Ripple has taken full advantage of the collaboration trend seen in the financial industry since 2015 while the incumbent versus challenger debate raged hotly.
Ripple now has a network of 100 or so banks and has inevitably been drawn against SWIFT. But how will the firm sustain its rise beyond pilot?
To answer this trillion-dollar question, bobsguide spoke to David Schwartz, second employee at Ripple and current chief cryptographer at Money2020 in Amsterdam. Schwartz discussed how the Ripple vision has changed since its inception and how the same vision will keep it from the pitfalls other digital giants have succumbed to.
How does one come to be the chief cryptographer at one of the most exciting blockchain start-ups?
I was working as a software developer focused on cryptography for a company in Silicon Valley, but they ran into some interesting financial problems due to the real estate collapse.
In 2011 I discovered bitcoin just by luck and started examining it and taking it apart and it resonated with my slightly libertarian side - not so much anti-disestablishment - but the idea of giving people control over their money was appealing to me as a principle.
That comes from my politics, and I’d love to see the US adopt instant run-off voting or fusion voting - allowing people to express second and third preferences; if there’s one thing the Republicans and Democrats agree on, it’s that the two-party system is great. Anyone who is in power is predisposed to like the mechanism that put them there.
Having found bitcoin, I started looking at how money moves, and realised quite how archaic the system is. It’s not something you’d design on a clean sheet of paper and, even the innovation we’ve seen, has all been at the top while the base has stayed the same for decades.
At the time, we thought – naively - that bitcoin could be the world’s ledger and mining would distribute throughout the world fairly. I got in just about the time it was starting to fail, when the cracks were starting to show, and that it wasn’t turning out to be the solution to everything. This was an area that’s ripe for innovation and development, I thought.
Along with Jed McCaleb, we started to explore better ways to progress in ledger technology without a central authority and, already the cracks and proof of works were being to show.
One of the big cracks in the bitcoin ecosystem is that miners are sending millions of dollars to electric companies every day, where’s that money coming from? The miners aren’t creating that value, but from the users and traders who are trying to make it work, they’re producing the value that the miners are sucking out of the system; that’s not a sustainable model.
That was the first crack.
We had the idea to make use of this distributed agreement protocol. That was informed by the bitcoin protocol. It was almost like we’d stumbled across an alien artefact that did something amazing, and we’d study it to work out what the magic secret sauce is.
At the time, most people thought proof of work was the secret sauce because that was the last piece to be developed. I think they’re wrong and it’s an accident of chronology.
The actual secret sauce is the fact that all the data is public, every participant verifies each transaction, and nobody has any legal authority to control. Proof of work was just the implementation they chose on top of that and it’s also expensive and forces stagnation.
That led to the creation of the XRP ledger which is a system built to solve the double spend problem with a decentralised exchange built into it. Our original business model was to forget bitcoin and put the entire world on our ledger. It’s faster and cheaper so everybody should do everything on our ledger. That still isn’t quite right but now we’re much more focused on specific use cases and interoperability.
This brought us to Ripple’s specific use case which is settling international payments which is a bit of mess today. The vision is to have regional liquidity hubs settled by XRP instead of a correspondent banking system.
What aspects of cryptography do you and Ripple deal in?
I deal with two basic technologies, digital signatures and Secure Hash Algorithms (SHA). A digital signature is an identity which is reflected cryptographically and means that we don’t know your name, address, social security number et cetera on the ledger.
But, on a decentralised system you need something anyone can verify, and that’s essentially a key. When you want to transfer XRP, you prove that you initiated it by demonstrating you possess the matching key.
We also use secure hash algorithms (SHA) to internally secure the integrity of the data we’re manipulating, which allows big pieces of data to reference other pieces of data in such a way that we know we’re referencing the right data. This means it’s possible to describe the entire state of the XRP ledger with a single number, and prove it is the correct number with the correct data.
These two technologies are what lends the system it’s efficiency.
Is the comparison to SWIFT fair?
SWIFT is a system that evolved out of batch processing and people handling wheels of tape.
It’s amusing, we didn’t want to be a payment company, we wanted to settle international payments with a digital asset.
The problem is that the existing payment infrastructure was so old with very specific problems. For example, it inherited unidirectional messaging from its batch processing. We were forced to build what some call a SWIFT 2.0, not because we wanted to take business away from SWIFT but we wanted to settle on the digital asset.
That led to partnerships, traction and visibility into the movement of money. The strategy for Ripple is to see where the money is flowing in the network and then consider the corridors we can settle with XRP.
We’ve built this payment network of 100+ banks only because we’ve needed to. It’s funny, because we’ve almost involuntarily become this company partnering with banks to complete payments.
Was this always the plan for Ripple?
I was the first person Jed [McCaleb] brought on and we didn’t have any of the current strategy. This current strategy is about three years old. Our first strategy was to wait and see if a distributed agreement protocol would work and figure out for what later.
We finished proof of work in 2012, and discovered it was good for asset exchange. With proof of work, someone mines every block and that person gets to decide which transactions goes on that block.
If the transactions are very simple, it doesn’t matter who decides where they go, but if you have a cross-asset exchange, having someone who decides which transactions goes where is a real problem. If I offered to exchange dollars for euros, and the exchange rate moves against me, the person who fills the block can put his/her transaction first or control if I cancel my own offer.
We realised immediately that we had a system that solved certain use cases that bitcoin couldn’t tackle.
That was when we hit on the idea of an asset exchange with XRP at its centre. If we had 100 assets instead of 2000 pairs, we would make an asset liquid to XRP and then liquid to all other assets. But again, our vision was still ‘everything on our ledger’.
In 2015, we started hearing from banks that they were averse to digital currencies but that they were also concerned about making their transactions public or being forced to choose a digital asset.
A company can’t stay in business if it doesn’t listen to its customers, so we adjusted the business plan to a strategy where we could improve banks’ payments system and then providing a payment service that settled.
Ripple has been busy forming partnerships. How is your partnership strategy changing in line with Ripple’s growth?
Now that we’re going to our 101st bank, our sales pitch has stopped being ‘let’s make your payments cheaper and faster’ and more like ‘we have these corridors that are useful for you and will allow you to retain customers and, if you have other valuable partners, we can market to them too’. We used to jokingly call it tinder for banks.
When you have no banks you just want a bank, and when you have one bank, you just want a second, but when you have 100 you want volume and depth and something to get the next person on board, you have to think more strategically.
Our sales are built around ‘top line customer retention’ rather than penny saving, the big advantage of that being, besides building a network of volume, a partner who has an incentive to see through any problems. If they’re concerned about the penny saving, they might not think that a $2m integration is worth the cool tech, but if they take the position that it sets them up to almost be a mini correspondent in a new world, that gets your level executives motivated to see through execution.
We have a joint venture in Japan, so we have a lot of Japanese banks, currently Mitsubishi as well as Resona, SBI Sumishin Net Bank and Suruga, as well as Standard Chartered, SEB, processing over a billion dollars.
What are your thoughts on the volume and legality of ICOs? A harm to the market?
It’s paradoxical. XRP is very volatile but the company has taken off. It seems the crypto market doesn’t value individual projects based on their merit or doesn’t seem to follow that pattern.
That’s one of the reasons that we’ve been working on Xpring which is an incubator/venture arm to get them building on the XRP ledger, figuring out what they need in terms of technical or investment support to realise their project.
The idea is to level the playing field. If someone has a great idea and decides to go down the ICO route, they’d basically only get one round - they’ll never get a second round - so how much money should they raise? If they raise $3m and build a product, then what? If they raise $50m in a few weeks and the idea doesn’t stack up, then what?
We’re trying to level the playing field by offering support to someone with a good idea and a credible plan but needs that patience absent from Venture Capitalists.
I joke that having an incubator is like hosting the Olympics. You know it’s not going to fund itself, but do you really want to be the country that hasn’t hosted it?
How do you sustain the meteoric rise Ripple has seen?
Sustaining the Ripple culture despite huge growth is exactly what I worry about. I worry about whether we’ll get too comfortable, put our projects on cruise control and lose focus. I think being consciously aware of those worries helps maintain culture.
As a company that can retain top talent, we have gifted people who focus on asking these sort of questions: what did we lose in terms of culture when we got big? Do we have enough team lunches with all the developers?
The volatile nature of the cryptocurrency market and the meteoric rise of XRP can be massive distractions. I was worried that a lot of our employees would quit during the rise because they owned XRP and they’d call in rich, as we jokingly say. Or vice versa, being distracted during the crash (‘oh, I just lost a million dollars today’).
But they weren’t distracted, because they share the vision. I think there’s a focus on executing the vision, and that vision is about delivering products for customers and solving real problems and not about the price of XRP being up but driving it through until the end to deliver.
There are many recent examples of digital companies that have flown dangerously close to the sun and expanded at rapid unsustainable rates for their corporate culture. Uber for one, is being kicked out of cities.
That’s what I worry about. Uber is a great example, everyone assumed the world was its oyster and the company ran into all sorts of problems and that’s down to company culture.
Culture is especially critical in this [financial services] space because everyone has money. If you have a group of people who aren’t dedicated to what they do or don’t care about their co-workers, someone will offer them more money.
What I’ve discovered is that a lot of people are not motivated by money as much as you might think. If they’re early on in their career they want to have something on their resume at a place that succeeded. If they’re later on in their career they want to change the world.
Keeping employees motivated in that respect is the key. Brad Garlinghouse (CEO) has been a fantastic leader and keeps a conscious focus on culture.
What is the Ripple culture?
There are a couple of big ones. Every employee, whether you’re technical, legal or the guy who stocks the fridge with soda, you need to understand what we do and why we do it.
Brad [Garlinghouse] makes a point of meeting with every single employee in the company to discuss where the company’s going or, if something bad happens like a crash or lawsuit or partnership loss, we talk about it! We think about how we can do it better.
We have a philosophy called one Ripple.
Everything is your responsibility. That can become an absorptive takeover of your life, but we match that with tremendous respect for each other’s personal lives; we don’t want to burn people out. For instance, we have an open time-off policy, yet people take very little time-off and even feel guilty when they do and I say, ‘no man, go to your daughter’s wedding and enjoy it!’
For the Ripple end vision to take off when will institutional investment overtake speculative?
For our use case what we need is liquidity.
We currently do remittance from dollar to peso because that requires very little liquidity because each transaction is very small, typically $100. There’s enough liquidity now to make $100 payments all day long. But if you want to do $1m payments, you’ll move the nodule.
Institutional adoption adding to liquidity would be helpful for us because that’s what we need for payments. We’re not pushing use cases that rely on appreciation of XRP or telling companies to hold a whole pile of XRP and use it to make their payments, we can’t do that because the price is too volatile.
We’re focusing on use cases that match the liquidity and volatility of the market. If you imagine more liquidity and a stable market, you can also imagine a use case where we are telling a company to hold XRP and make payments that way; obviously benefits us and use XRP as a settlement asset.
Speculators are making the market volatile by buying when it’s up and selling when it levels off and bringing in more speculators could make volatility worse. Ultimately, the use case will moderate the volatility; if someone needs to make a remittance payment to Mexico, they don’t care if XRP is going up and down.
We’re not averse to regulation either, particularly consumer protection which has been underserved in this field.
We engage with regulators and we’d like to see thoughtful regulation that doesn’t stifle innovation. I agree with you, 70% of ICOs are probably scams. I think everybody here [at Money2020] pitching ICOs would agree that 70% are scams and they’ll tell you that they’re part of the 30%, which is mathematically impossible at a certain point.
We’re not anti-regulation or anti-establishment, we’re top down. We’d go to a company like Western Union and ask them do their business exactly the same but convert currencies differently. We’re not asking them to build a whole new world based on a digital asset. We’d like to see that happen, but we need to take a step at a time, where each step makes independent sense.