Commentary,  Ethereum,  XRP

XRP and ETH fight for second place a preview for bigger battle

Bear market battle between XRP and ETH exposes strengths and vulnerabilities of each token

Unfolding in the markets right now is a battle that has taken place several times over the past year: who will be listed at No. 2 in total market capitalization on the digital asset listing websites?

Throughout most of 2018, the digital asset markets have been in a bear market tailspin. After hitting an all-time high of $1,538.13 for Ethereum’s ether and $3.92 for Ripple’s XRP (as reported by Live Coin Watch), the markets began falling just as fast as they went up.

Looking back at the end of 2017 and the beginning of 2018, it is easy to see where investors were acting out of “fear of missing out” or FOMO rather than any objective fundamental analysis. Honestly, when soaring prices of digital “kittens” are the high point of a network’s fundamentals, something is definitely wrong.

Other than CryptoKitties, Ethereum’s price climbed due to speculation that initial coin offerings would thrive on the network, requiring ETH as the “gas” to mine transactions and the possibility of smart contracts being used on the network. The popularity of CryptoKitties caused the Ethereum network to become congested, which in turn caused the network to require more “gas” (ETH) fees, which made mining on the network that much more profitable. Add in the potential value of the network being used for what seemed at the time an endless stream of potential ICOs and the coming advent of smart contracts and the value of ETH began rising to unsustainable levels.

This phenomenon was not limited ETH. The price of XRP rose due to FOMO of its own.

It was well known in 2017 that Ripple was using its corporate power to solve a global problem: move value across borders with little friction and an even smaller cost using the digital asset XRP. The markets, however, were concerned with the amount of XRP that Ripple had at its disposal: over 55 billion. Market prices seemed to be kept artificially low because of fears that Ripple could “dump” its XRP onto an exchange, causing the supply to increase to a point where demand would not be able to keep pace.

To assuage the markets, Ripple announced that it would execute a series of escrow transactions, effectively locking up the vast majority of XRP Ripple owns for a period of no less than 55 months. Every month, 1 billion XRP would be released from escrow for Ripple to sell or use as necessary. At the end of the month, any XRP remaining would be placed back into a cryptographic escrow for 55 months. The escrow officially happened on December 7, 2017.

In the escrow announcement Ripple stated that the escrow underscores

“Ripple’s commitment to building XRP liquidity and a healthy and trusted market. Long term, the value of digital assets will be determined by their utility. XRP has emerged as the only digital asset with a clear institutional use case designed to solve a multi-trillion dollar problem – the global payment and liquidity challenges that banks, payment providers and corporates face.

“Unlike other digital assets purely driven by unexplained speculation, real institutional customers are already using and finding value in XRP, and governments, regulators and central banks are increasingly recognizing the role it could play in the global system.”

The escrow lock-up combined with a defined real-world use case—and a list of Ripple customers who, it appeared, were ready to use XRP now that the markets would be “healthy and trusted”—propelled the price of XRP from around mid-20 cents to its all-time high. Speculation ran rampant about which companies were using XRP and which companies were preparing for announcements. The feverish pitch of speculation was so loud that the markets forgot one key piece of information: xRapid, Ripple’s software that would allow their “real institutional customers” to use XRP in a real way had yet to be come out of beta testing.

When the markets finally figured this out, the damage had been done and the price of XRP began its multi-month descent. During this time XRP solidified its place as No. 3 on the market ranking reports displacing Bitcoin Cash, a fork of the Bitcoin network, from the coveted top-3 spot.

As 2018 progressed, there were times when XRP would see short price runs and it would get close or briefly overtake ETH in the No. 2 spot. Some in the XRP Community call this the “flippening”: that moment when XRP “flips” ETH for second place. However, the “flippening” has only lasted for a short period of time and ETH has risen again to reclaim its No. 2 spot.

The markets began to drop precipitously on November 14, 2018. After a strong run, Bitcoin Cash began to fall as it neared its own fork on November 15. Having been dubbed a “stable coin” due to its relatively stable price around $6,500, Bitcoin suddenly dropped below $6,000 per coin and kept falling. As the price of Bitcoin fell, the uncertainty in the markets dragged the prices of other coins down, putting the market in a tailspin. However, not all digital assets fell at the same rate. As ETH and XRP began to fall, ETH fell faster, allowing the gap in market cap to close. A couple of times XRP passed ETH to reclaim the spot it had only briefly held before, then ETH would rally and retake its position.

As it stands right now on November 16, XRP has taken and held on to the #2 spot for two days. The difference between the market cap of No. 2 XRP and No. 3 ETH has been as wide as a few hundred million dollars. The question is, will it last?

While those in the XRP Community would rather see XRP overtake ETH in a bull market, this bear market could be the impetus for the “flippening,” allowing XRP to stay in the #2 place. Why? Fundamentals.

This year has been defined by announcement after announcement for Ripple and the software products they are offering to institutions, payment providers, governments, and corporates. The announcement the markets were waiting for finally came at the SWELL Conference Ripple hosted in October: xRapid is now live and ready for enterprise use with features such as multi-hop built in that allow xRapid to converge with Ripple’s other software products, xVia and xCurrent.

Additionally, others have been building use cases for XRP such as Omni, Coil, and a team of developers led by XRP Community member Wietse Wind who are opening the envelope of what can be accomplished using XRP. More exchanges offer XRP/fiat pairs or use XRP as their base trading asset against other digital assets than ever before. Codius, the tool used to write and execute smart contracts on the XRP Ledger (XRPL), has been placed into use with Codius hosts popping up around the globe. Ripple has decreased its influence over the recommended Unique Node List (UNL) to well below 50 percent, proving the XRPL is more decentralized than either of the BTC or ETH networks. Finally, Cobalt, a much anticipated update to the stability and reliability of the XRPL is on the horizon, potentially allowing transactions to settle on the XRPL in about one second versus the current three seconds.

What about ETH?

CryptoKitties has been spun off into its own company and a couple anticipated upgrades/hard forks called Casper and Constantinople have not been implemented due to various troubles. The smart contracts that can run on the Ethereum network can also run on XRPL through Codius without the network congestion or higher fees. ICOs, once seen as a coup d’état for the Ethereum network against other networks, have essentially been placed on hold as the market cooled and governments decide whether ICOs represent sales of a security and must be registered as such.

Why has ETH still been ahead of XRP based on market cap most of this year? It appears the markets are getting ready to answer this question.

The real battle for the No. 2 spot is not between ETH and XRP. The real battle is actually the realization that real-use, utility, and strong fundamentals are what is necessary to bring validity to digital assets. Once the markets realize that fundamentals matter more than speculation, the real battle will be for No. 1.

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Orlando Buck is a supporter of filterofhope.org and a blockchain enthusiast.