Max Maher points to how Ripple Net uses two currencies. IOUs and XRP. The IOU basically is a debt certificate, which you issue to someone when you owe them. The creditor will hold the IOU certificate and say “X” is going to pay “whatever the value the IOU is for.”
The IOU certificates can be traded, but they are not interchangeable. To understand, learners can think of it as a personal check. With the IOU certificate, you trust that the person who has given you the certificate is going to pay you back. However, the IOU written by two different people does not have the same creditworthiness, because one entity has much better odds of paying a debt than the other.
Further on this, it can be used to transact any asset (USD, Gold, BTC, or Chuck-e-Cheese tokens and it is all again through the honor system. This is kind of like a personal check. This is an option because of XRP’s volatility. The banks have some risks in transacting in XRP, where it stands because they don’t want the final value to be far off than what the value is that they are trying to transact.
It is very much understandable. Let us assume someone should be paid $100. However, you wanted to make sure that it is actually $100 a week from now. Are you going to hold it in XRP? Probably not, because that price could go up either up by a dramatic amount or down by a dramatic amount in one week’s time. And, that is exactly how banks are thinking about this.
So, the less volatile that XRP gets over time, the more likely banks will use these more and more for these transfers. Now, banks can use XRPs for the transfers. And, some do on this occasion. It is what the system is built for, but they can use either of those IOUs or the XRP.
In this case, XRP is used as a link between different currencies or different banks, or different types of assets. It is the linkage between. So, instead of having to transfer USD to Euros back to USD or something like that, a bank could just transfer to XRP, then transfer that XRP to another bank. And, the XRP will be transferred to whatever denomination the end goal is here.
With XRP, they are transacting the actual asset, because XRP is actually worth something. And, IOU is just a debt certificate not actually worth anything. It is just basically a piece of paper. There is no counter party risk; there is no trust needed. Again, actually, because this is an actual asset that you are giving to someone like you are giving somebody a nugget of gold or something like that. You can think of this more like a cashier’s check. The IOU is a personal check. A cashier’s check you have to pay upfront for a certificate that says, it is worth X amount of dollars, and that it is as good as gold as well. And, that is what XRP transaction is like. And, the more XRP is used, the more it will be worth, because of supply and demand.
And, XRP cannot be mined because of the consensus mechanism that XRP uses.
Get the latest Crypto & Blockchain News in your inbox.