Blockchain-based cross-border payments – the Ripple effect

Digital ledgers have the potential to accelerate payment rails, and fintech firms are working hard to evolve blockchain-based solutions.
24 July 2023

David Schwartz, CTO at Ripple, believes in the power of blockchain solutions and digital ledgers to improve financial services. Image credit: Ripple.

Getting your Trinity Audio player ready...

Companies researching the best way to receive international payments in 2023 soon discover that they have no shortage of options for accepting foreign currency from customers overseas. And that includes blockchain-based cross-border payment solutions such as Ripple. The US tech firm has long been on a mission to ‘build breakthrough crypto solutions for a world without economic borders’ – but how do blockchain-based cross-border payments work and should your organization use them?

Making overseas payments using traditional banking systems means lining up multiple intermediaries between the payer and the beneficiary. And with each link in the chain taking a fee for enabling the transaction, the cost of international payments adds up. Plus, those transfers can be delayed if cross-border payment requests happen to coincide with a weekend or bank holiday. Also, the pre-funding of overseas accounts locks up working capital.

Ripple’s blockchain-based cross-border payments, on the other hand, promise settlement in seconds, not days. And transaction fees are kept low by removing no-longer-needed intermediaries from the equation to give customers competitive last-mile payment rates.

How does Ripple work?

Ripple’s solutions are built using the XRP Ledger, which is a blockchain for IOUs and enables transactions between different payment types. The digital ledger has a number of features that make it attractive to fintech providers looking to modernize financial services, including on-chain escrow that can gate XRP and release it once payment settlement conditions have been met.

Using XRP as a digital intermediatory, Ripple cross-border payment settlement is active in more than 50 countries, allowing users to send a variety of currencies using the blockchain-enabled system. Senders receive a fiat-to-fiat quote on pricing and FX, and beneficiaries can be paid out immediately in the chosen currency.

Ripple is an interesting case study on how fintech providers are using blockchain to modernize the provision of financial services. Rather than compete against traditional banks, Ripple is reaching out to them – offering its digital currency payment rails as a high-speed, more efficient alternative to legacy systems such as SWIFT.

Ripple vs SWIFT

SWIFT, a global member-owned cooperative that specializes in secure financial messaging services, connects more than 11,000 banking and securities organizations. And the Belgium-headquartered organization has customers in more than 200 countries, putting it ahead of Ripple.

But announcements by SWIFT, such as a successful experiment to move tokenized assets using its infrastructure, show that even dominant players are having to adapt to a financial future that could be increasingly blockchain-based.

A common criticism of cryptocurrencies has been their energy demands, with Bitcoin miners propping up the profits of energy companies and chip makers. A switch from proof-of-work to proof-of-stake shrinks this carbon footprint by reducing the computing demands of running a digital ledger. Rather than mining for cryptocurrency, users can earn rewards by staking their cryptocurrency to participate in the consensus mechanism of the blockchain.

The safety net comes from the idea that stakeholders won’t want to jeopardize their locked-up cryptocurrency by attempting to add invalid blocks to the chain. But there are fears that proof-of-stake networks could become centralized if a large amount of cryptocurrency is controlled by just a few actors.

The XRP ledger, which underpins Ripple, gets around this by adopting a different method of coming to consensus on adding blockchain entries. XRP makes use of a so-called federated byzantine agreement, which relies on validators overlapping in their endorsement of yet-to-be-added transactions. For example, if 80% of validators agree on adding a block to the chain then those details are assumed to be trusted.

And nodes carry their own unique node lists (UNLs) of validators, which they believe provide reliable information – removing them if they keep failing to reach consensus. Overlap between UNLs provides continuity across the community, with the XRP Ledger gravitating towards proven validators and shying away from untrusted nodes. But there could be a catch.

A study by researchers at KAIST in South Korea on Stellar – a cryptocurrency that also operates using the federated byzantine agreement method of reaching consensus – showed that, rather than encouraging decentralization, the approach can bake in dependences on certain key nodes.

“We show that all of the nodes in Stellar cannot run SCP [Stellar Consensus Protocol] if only two nodes fail,” writes the KAIST team in its paper. “To make matters worse, these two nodes are run and controlled by a single organization, the Stellar Foundation.”

And like Stellar, Ripple operates its own validators, which could be problematic if those nodes form the dominant link between the various UNLs. Also, blockchains aren’t bulletproof and exhibit residual failure modes – something that David Schwartz, Chief Technical Officer at Ripple, admits.

“It’s important that we continue to innovate to reduce the odds of them happening and reduce their severity even if it is a bit embarrassing for the industry to point the finger at these failure modes,” he commented at Apex – the XRPL developer summit, in a talk on the continuous evolution of the XRP Ledger.

In Ripple’s case, the ledger could halt its forward progress if too many validators fail before humans can respond to the issue. And, as Schwartz points out, the goal is to have ledgers that offer maximum reliability. Hence, it’s why developers are working on solutions such as Negative UNL – a feature of the XRP Ledger consensus protocol designed to improve ‘liveness’.

“Using the Negative UNL, servers adjust their effective UNLs based on which validators are currently online and operational, so that a new ledger version can be declared validated even if several trusted validators are offline,” explains the latest XRP Ledger documentation.

Given the rollercoaster ride that cryptocurrencies have been on lately, it’s promising to see fintech firms being transparent about potential weaknesses. And if these are signs of blockchain developers building firm and well-tested foundations, digital ledger projects may live up to the hype after all.