If you’re just starting off on your crypto journey, you may have heard of the term “mining” being thrown around a lot. Mining in the crypto world doesn’t refer to hard-hatted laborers with coal smeared faces. Instead, it refers to people who provide some sort of proof that they can be trusted to add new transactions on the blockchain ledger. As a reward, they receive newly “mined” coins, which then enter circulation.
However, it’s important to note that not all coins behave this way AND not all coins are mineable…
Which brings us to the Ripple Network. One of the most criticized aspects of Ripple’s currency XRP is that it’s not mineable.
Why Can’t XRP Be Mined?
Before delving into why XRP can’t be mined, let’s explore how Bitcoin mining works. Essentially, a “miner” solves a bunch of complicated math problems to prove that they are trustworthy enough to generate new blocks on the blockchain. The important part is the spending of computer resources as proof of work, which allows the rest of the network to trust that particular user. This responsibility allows the miner to earn some coins in exchange. These are coins that are newly introduced into circulation. Therefore, new Bitcoins are released into circulation when the entire network reaches a consensus to reward a particular miner.
On the other hand, the release of new XRP into circulation is not dependent on the network but is entirely controlled by its creators, the US-based company Ripple Labs. Ripple claims to have 100 billion XRP available for use, but only 39.8 billion are currently in circulation. New XRP entering circulation is entirely dependant on Ripple Labs releasing funds into the market. This gives them significant control over its market price.
It’s important to recognize that XRP is still traded over a blockchain network. This means that it has the characteristics of other blockchain based currencies, including a network robust against hacking and easily searchable transaction information allowing for transparency. The only difference between this “unmineable” network and traditional blockchain currencies is that this network is actually hierarchical with Ripple Labs running much of the show.
Arguably, the most revolutionary feature of cryptocurrency is that it is exchanged on a peer-to-peer network. This means that there are no central authorities who establish rules which everyone must follow to be allowed to use the network. This is called decentralization. To drive the point across, think of cash or fiat as a centralized network. The government establishes the rules around the exchange of this fiat currency. It determines who can print more money, which bills are official and which ones are not, and it can also track the exchange of these funds for tax purposes.
On a peer-to-peer network, two parties can deal directly with each other, no third party needs to be involved. Your information stays private and the actual exchange is executed over a blockchain network, so all the nodes must agree on the validity of this transaction, making it extremely secure.
In this context, XRP’s lack of mining really starts to become controversial. For many crypto enthusiasts, a cryptocurrency that is controlled by a centralized authority is an abuse of blockchain technology. The whole point of blockchain is to allow a democratic consensus to be established, allowing the network to function without the need of a middleman. Which is why, in the eyes of many, Ripple Labs is not fully breaking away from a traditional banking framework as warranted by the advent cryptocurrency.
The Counter Argument
In the heat of a debate like this, it’s important to consider the opposite viewpoint. There’s no doubt that Ripple has traded off the decentralized nature of its XRP network for the sake of faster transaction speeds, lower fees, and more authorized control. However, let’s consider what the principle of “decentralization” actually entails. Is there really no hierarchy on the Bitcoin network?
Decentralization, meaning the lack of central authorities, is not entirely achievable. Sure with blockchain networks like Bitcoin, the proof of work can be provided by anyone on the network, meaning anyone can earn the mining reward. This makes it decentralized since no hierarchy exists amongst the nodes. However, as Bitcoin prices continue to rise, the mining reward does as well. This means that there is far more competition to try and earn the trust of the network.
Usually, when the competition between miners rises, the ones that come out on top are those with better computational resources, like more storage space and better processors. Now it’s important to ask yourself, is that truly decentralized? It seems as though the miners with access to the most computer resources tend to be the ones who introduce new coins to circulation. In other words, this network is also hierarchical.
- No cryptocurrency is perfect. There will always be tradeoffs between three major characteristics of any crypto asset, which are: decentralization, faster transactions, and scalability
- Ripple is a company that develops products for banks. The centralized nature of this network starts to make sense when you consider that banks are more likely to trust products controlled by a noteworthy company. There is less risk involved.
- You can still earn new XRP by mining. Just mine another cryptocurrency and exchange it for XRP, that’s the only way to earn XRP coins.
Source: GetSmart Hub: Ripple Mining: An Urban Legend
Disclaimer: CryptoCanucks.com is not intended to provide tax, legal or investment advice, and nothing on CryptoCanucks.com should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any asset by CryptoCanucks.com or any third party. You alone are solely responsible for determining whether any investment, asset or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation.