The Ripple Business Model – How Does Ripple Make Money?

Executive Summary:

Ripple is a developer of software for settling payments online as well as the creator of the cryptocurrency XRP.

Ripple makes money by selling XRP, payment fees, profits from investments, as well as interest fees on loans.

Ripple, founded in 2012, has risen to become one of the most prominent blockchain and cryptocurrency projects. The company has raised over $293 million in venture funding.

How Ripple Works

Ripple is a currency exchange as well as a system for settling payments that can facilitate financial transactions across the globe.

Dubbed RippleNet, the network allows any sort of institution to run its own node. More specifically, Ripple works together with financial institutions (such as banks) to operate these nodes. Partners include Union Credit, Santander, or Axis Bank.

Furthermore, Ripple has developed its very own cryptocurrency called XRP. The currency can be used to transfer funds within Ripple’s payment network.

RippleNet as well as XRP do not rely on blockchain technology unlike other crypto tokens like Bitcoin (which is based on Blockchain technology). As such, XRP tokens are not mined and there is no proof of work or stake protocol powering it.

Instead, Ripple has created its very own patented technology named Ripple Protocol Consensus Algorithm (RPCA). In order to verify transactions, all nodes within the network need to unanimously agree on the validity of said transaction.

In fact, all the XRP tokens in circulation have already been pre-mined. Furthermore, since the RippleNet is not based on validation through mining, its transaction speed is much faster (as well as environmentally friendlier).

There is a total of 100 billion available XRP coins that have been pre-mined. Around 45 billion of those are currently in circulation (i.e. can be used to transact on the RippleNet).

Ripple Company History

Ripple, headquartered in San Francisco, California, was founded in 2012 by Chris Larsen, Jed McCaleb, David Schwartz, and Arthur Britto.

While Britto has always remained in the background (folks in the industry even have speculated whether he actually exists), both Larsen and McCaleb have always been at the forefront of cutting-edge businesses.

Chris Larsen had two major entrepreneurial achievements before joining the Ripple project. He launched E-LOAN, one of the first-ever online mortgage lenders, in 1997. The company went public two years later. In August 2005, Puerto Rico-based commercial bank, Banco Popular, acquired E-Loan for $300 million.

After his first successful exit, Larsen went right back into the world of entrepreneurship. That same year, he co-founded Prosper Marketplace, one of the first peer-to-peer lending marketplaces. Prosper has raised hundreds of millions in funding while currently employing close to 500 people.

McCaleb, on the other hand, leaned more towards the chaotic side of things with his business endeavors. In 2001, he co-founded eDonkey2000, a Napster-like file-sharing program. By 2004, eDonkey, running up to 200 servers at a time, managed to become the Internet’s most popular file-sharing network, handling an average of nearly 2 billion files shared by over 3 million users.

But just like its famous counterpart, eDonkey2000 soon got into legal troubles. In 2006, the RIAA filed a $30 million copyright infringement lawsuit, which forced McCaleb and his co-founder Sam Yagan (who went on to start OkCupid) to fold the business.

After eDonkey went bust, he launched the so-called Code Collective, which was responsible for the development of The Far Wilds, a turn-based strategy game. His big revelation came two years later, though.

In 2009, Satoshi Nakamoto created Bitcoin. Jed, realizing the potential of the blockchain and cryptocurrencies as a whole, immediately handed over the game development to a group of fans and began working on a crypto project.

That project would later turn into Mt.Gox, one of the world’s first Bitcoin exchanges based in Tokyo, Japan. Within months after the launch (July 2010), Mt.Gox became the largest crypto exchange worldwide, handling 70 percent of all Bitcoin transactions.   

A year later, McCaleb sold the business to Mark Karpelès for an undisclosed sum while keeping a minority stake in the company. Years later, in 2014, Mt.Gox was hacked, leading to the theft of 850,000 bitcoins as well as the subsequent bankruptcy of the company.  

Luckily for McCaleb, he was already working on bigger and better things. As the story goes, he quickly realized that Bitcoin’s underlying technology, the Blockchain, would have some severe technological limitations (such as high energy consumption).

To create a better currency, McCaleb sought out some of the smartest people in tech. David Schwartz, a software engineer, and manager with decades of experience in tech, became his first co-founder (and the firm’s Chief Cryptography Officer).

Later on, legendary futurist Arthur Britto joined as chief strategist. Jesse Powell, founder of the Kraken Exchange, invested $100,000 to give the team a head start. Despite the fact that all three founders are considered to be geniuses, none of them had the skills to effectively lead a large-scale organization.

Larsen, having led companies in the FinTech space to successful IPOs and exits, eventually became the public face of the newly founded company. Initially, the company was launched as OpenCoin Inc. but was later renamed into Ripple Labs.

The first two years of operation were spent on developing the technology as well as raising outside funding. In 2013, Ripple Labs picked up $1.4 million and $3.5 million in May and November, respectively.

Nevertheless, cracks in the founding team’s relationship soon started emerging. It all began with a change in McCaleb’s private life. Somewhere along the way, he ended up meeting a woman named Joyce Kim who herself was considered to be quite smart and graduated from Harvard, Cornell, and Columbia Law.

The two were actually introduced by Jesse Powell, Ripple’s first investor because Kim was seeking funding for her very own startup. Eventually, her pitch for McCaleb’s money ended up in an affair – and the subsequent separation between McCaleb and his family of three.

Next, McCaleb convinced his founding partners to acquire Kim’s company, a wish list-based iPhone app named SimpleHoney, in April 2013. Kim joined Ripple Labs as its Chief Engagement Officer, a title she held all but a few weeks.

But that was only the public tip of the iceberg. Behind the scenes, Kim was pushing all kinds of agendas within Ripple. For once, she was apparently creating rumors that Jed was Satoshi Nakamoto, the founder of Bitcoin. Her thinking was that it would help Ripple to go viral and gain the necessary credibility.

By summer 2013, both Kim and McCaleb essentially departed from the company – but not without a few more acts of retaliation. Soon after their departure, McCaleb met with Patrick Collison, the founder of Stripe, one of the world’s highest-valued FinTech companies.

The two discussed a sale of Ripple Labs to Stripe, with the latter even making a formal offer. But since neither of the other co-founders was partaking in these discussions, the deal ultimately fell through.

Then, after months of tensions between the two parties, McCaleb wrote the following on Ripple Lab’s messaging board:

“I plan to start selling all of my remaining XRP beginning in two weeks.  …. So just fyi…. xrp sales incoming.”

The problem? Both McCaleb and Larsen were rewarded 9 billion XRP each, equalling 18 percent of the total XRP in circulation (100 billion). A sale of such magnitude would shatter the currency’s value due to a surplus of supply as well as the signaling (i.e. lack of founder conviction) it entailed.

Luckily, Larsen and the rest of Ripple’s board were able to convince McCaleb to not follow through with the sale. Instead, they agreed on a scheme that limited his sales to $10,000 worth of XRP per week during the first year (and higher thresholds in the years to come).

A month after his infamous post, in June 2014, McCaleb announced that he launched a new project called Stellar. As many news outlets reported at the time, Stellar’s codebase, as well as its targeted user base, was strikingly similar to Ripple’s, leaving the two projects to be fierce competitors over the years to come.

With McCaleb out, it was time to get back to serious business. That same month McCaleb made the forum post, German bank Fidor Bank announced that it would test Ripple’s platform for foreign deposits and transfers. A few months later, in September, two U.S. banks CBS Bank and Cross River Bank) followed suit.

Unfortunately for Ripple, 2015 began just as turbulent as the previous year. In May, the United States Department of Treasury imposed a $700,000 fine on Ripple for violating regulations under the Bank Secrecy Act and failing to register with FinCEN.

Luckily, that was offset by a $28 million Series A funding round the company raised that same month. The additional cash was primarily used to expand into new regions, primarily targeting Asia and Europe. 

With a newly opened office in London in March 2016, European banks CBC, UBS, Santander, and four other banks signed up to use the payment network. Santander, in particular, actually adopted the technology within its One Pay FX product.

A $55 million Series B round in September further amplified the firm’s trajectory while adding Standard Chartered Plc, Bank of Montreal, and Mizuho Financial Group Inc. to its network of banks.

That same month, it launched the Global Payments Steering Group in cooperation with various major banks, such as Bank of America Merill Lynch and Royal Bank of Canada, to establish a “rules-based blockchain payments network”, a globally accepted standard for monetary transactions.

Unfortunately, on November 1st, 2016, CEO Larsen decided to step down as the firm’s CEO and move to a board role. His replacement became Brad Garlinghouse, who joined the company a year prior as COO and previously held senior roles at companies like AOL and Yahoo.

On the backbone of the 2017 crypto craze, Ripple’s underlying currency became the third-largest coin by market capitalization, only trailing Bitcoin and Ethereum.

In March 2018, it followed on the path of many of its competitors, such as Binance, and began to invest in other projects. Its focus was put towards startups that planned to use XRP, which in turn expanded its adoption. Most prominently, Ripple invested $265 million worth of XRP into Coil, a content creation platform led by its former CTO Stefan Thomas.

By January 2019, Ripple crossed the inaugural 200 partner mark of banks and other payment services that were adopting (but mostly testing) its technology for various use cases. Unfortunately, a lot of these partnerships raised some serious doubts.

First, skeptics speculated that these partners weren’t seriously using Ripple’s technology and, at best, testing it out to appear more innovative to outsiders. Second, since Ripple controls about 55 percent of the total XRP supply, it was using the currency to entice partners to adopt its service or list XRP on their exchange.

In March 2019, rumors emerged that the company bribed America’s biggest crypto exchange Coinbase to list XRP. Similarly, it paid MoneyGram upwards of $50 million (in XRP) to adopt the RippleNet technology.

In December 2019, Ripple raised its largest funding round to this date, netting them another $200 million while valuing the company at $10 billion.

Despite the humongous funding round and continuous addition of new partners, Ripple’s focus eventually began to shift towards software as opposed to only being a payment network. As such, Ripple began introducing new software offerings such as the XRP Ledger (XRPL).

It also has dabbled in other finance verticals. In August 2020, for instance, Ripple launched a lending product, allowing customers to take out XRP-based loans.

Then, in December 2020, a bombshell dropped. The Securities and Exchange Commission sued Ripple Laps, alleging that the company sold unregistered securities when it handed its investors XRP’s as compensation.

Quickly after, Coinbase removed XRP from its exchange while MoneyGram suspended its partnership with Ripple Labs. The case is still ongoing. Ripple CEO Garlinghouse announced in May 2021 that he intends to take Ripple public once the case is settled.

Today, Ripple has close to 400 customers using its payment network. Furthermore, over 500 people work for the company in offices across the globe.

How Does Ripple Make Money?

Ripple makes money by selling XRP, payment fees, profits from investments, as well as interest fees on loans.

Let’s take a closer look at each of these in the section below.

XRP Sales

When the XRP currency was created in 2013, 100 billion coins were used as supply. Co-founders Larsen and McCaleb held 20 billion while the rest was assigned to the other co-founders as well as Ripple Labs.

With that much control over the supply, critics soon began to emerge, sending the coin’s value plummeting. After all, cryptocurrencies are built on the belief in decentralization. If one entity effectively controls the majority of supply, it isn’t much different than a central bank.

As a result, in May 2017, Ripple announced that it would put 55 billion XRP in escrow, unleashing up to (!) 1 billion into the market every month.

As such, Ripple generates money whenever XRP is dumped into the market. According to CoinMarketCap, one XRP is currently valued at around $0.97, so Ripple could generate up to $1 billion of income in XRP every month.

Ripple, furthermore, promised to not flood the market with XRP to avoid devaluing the currency (more supply = lower price). It, therefore, committed to selling only a small portion to exchanges like Binance. Instead, it focuses on institutional investors for incentivizing the XRP ecosystem.

The company even releases a quarterly report about how many XRP it has sold and what value it held.  

Payment Fees

Moving money from A to B on the RippleNet incurs a small transaction fee. Network participants pay about 0.00001 XRP for every transaction. With a value of $0.97, this would mean one transaction would roughly cost $0.00097.

Ripple’s bet is to compete on price and make money on the ability to process much more transactions. Ripple can process up to 50,000 transactions per second (TPS) compared to 1,500 TPS Visa has recorded.

RippleNet is particularly cheap when trying to send money abroad and in a different currency. Foreign transfers can cost as much as 10 percent of the sum that is being sent.

That’s because smaller banks often don’t hold foreign reserves and therefore rely on deposits at local and bigger banks. These depositors are then charging the bank a fee on the money held.

Furthermore, the more transactions it processes (i.e. the more important it becomes to businesses), the higher the valuation of XRP (remember that Ripple still owns around 55 percent of all XRP).

Interest Fees

As previously stated, Ripple launched a loan product back in August 2020. Dubbed Line of Credit, the service enables customers to access On-Demand Liquidity (ODL) to effectively get a loan.

The loan would be issued in XRP. The existing XRP that a borrower holds can be used as collateral. Given that the loans will likely be issued to institutions, the risk should be negligible.

Ripple makes money on the interest fees that customers pay to access these loans. The company does not publicize its interest rates. Competing services include Aave, BlockFi, or TrueFi.

Investments

Ripple has made more than 15 investments over the course of its lifetime in companies such as Coil, Keyless, or Tranglo.

Most of these investments have the intention to widen the adoption and usage of its XRP currency. The more it is used, the higher its value (and price).

Ripple makes these investments in XRP, which the companies they put money into can then use to convert either into other cryptos or cash out in any fiat currency.

Ripple can make money from these investments by selling the shares it buys in a deal at a higher price point later on. These sales could occur if those companies go public, get acquired, or during a secondary sale.

Second, although highly unlikely since many of the companies it invests in still running at a significant loss, Ripple could generate income through dividend payments.

It has to be noted that the investments are made via a separate entity called Ripple X (formerly Xpring).

Ripple Funding, Revenue & Valuation

According to Crunchbase, Ripple has raised a total of $293.8 million across 13 rounds of venture capital funding.

Notable investors include Core Innovation Capital, SBI Investment, Mouro Capital, Tetragon Financial Group, Route 66 Ventures, and many more.

Ripple’s valuation is currently equal to $10 billion, which it received when the company raised its Series C round back in December 2019.

As a privately held company, Ripple is not obligated to disclose revenue figures to the public.

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..