ripple – payment protocol

RIPPLE – PAYMENT PROTOCOL

NIKHIL BHIDE

INTRODUCTION

• Ripple is an Internet Protocol (IP)-based technology for banks to clear and settle transactions in real-time via a distributed network• Ripple is a internet protocol which works on the consensus• Consensus process enables payment exchanges and remittance without

need of centralized clearing house• Ripple’s distributed financial technology allows banks to directly transact

with other banks to settle transactions in real time• Ripple provides an alternative to today’s global payment infrastructure

WHAT IS RIPPLE?

• A Basic infrastructure for payment systems – Ripple itself is not a payment system

• A Ledgering and funds-exchange technology for clearing and settlement

• A Neutral transaction protocol for global connectivity

source : https://ripple.com/files/ripple_solutions_guide.pdf

WHO CAN USE RIPPLE?

Directly by interbank payment network members, operators and liquidity providers• Network members such as banks, financial service businesses• Network operators such as payment networks, clearinghouses• Liquidity providers like central banks, banks and non-bank market

makers

CROSS BORDER PAYMENTS - TODAY

• Involves delays; generally takes around 2-4 days• Counterparty risks• Involves costs and fees; settlement costs are high• lengthy settlement times, and a poor customer experience• Less transparent

CROSS BORDER PAYMENTS FLOW - TODAY• Most banks relay transactions through a network of correspondents • More Cost• Cross-border payments have to be routed through a series of counterparties

Sender Bank

Central Counterpa

rty

Sending Correspond

ent

Central Counterpa

rty

ReceivingCorrespond

entReceiver Bank

Australian Debtor

FrenchDebtor

SEPA

CROSS BORDER PAYMENTS FLOW – TODAY (USING SWIFT)

• Country - Receiver

Messaging Infrastructure

Debtor

Sender Bank Paymen

t System

Correspondent – Sender

Correspondent Banking Fee

Payment

System

Correspondent – Receiver

Correspondent Banking Fee

Creditor

Receiver Bank

• Correspondent BankingCountry - Sender

CROSS BORDER PAYMENTS FLOW – RIPPLE

Sender Bank

Liquidity Provider -1 USD to EUR

Cost of FX – X USD

Liquidity Provider - 2USD to EUR

Cost of FX – 2X USD

Receiving Bank

source : https://ripple.com/solutions/executive-summary-for-financial-institutions/

RIPPLE – KEY COMPONENTS

Key components of Ripple

source : https://ripple.com/solutions/executive-summary-for-financial-institutions/

RIPPLE NETWORK

• A distributed system which does not require central operator• The Ripple network contains the Ripple Consensus Ledger (RCL)• RCL is a secure distributed ledger which uses Consensus process to

settle transactions• RCL holds the order book with bid/ask offers from payment initiators and

liquidity providers• Ripple Connect connects to the Ripple Consensus Ledger over WSS to

settle payments in near real-time on the RCL

RIPPLE STREAM

• An order book management system• Enables FX trading desks to facilitate FX markets on the RCL• RCL holds the order book with bid/ask offers from payment

initiators and liquidity providers• Enables cross currency payments using foreign exchange

RIPPLE CONNECT

• Component that processes international payments for banks• Communicates with the Ripple network to get the lowest currency

quotes• Provides secured Rest apis for communication• Connects to the receiving bank’s Ripple Connect to exchange KYC and

risk information, fees, payment details and expected time of funds delivery• Provides information about total costs of the transaction to sending bank

RIPPLE CONNECT INTEGRATION

• Payment processing involves 6 workflows• Rest Connect has exposed Restful services• The services are secure, reliable and highly available• Integration involves work flow development; all workflows are

serially executed• Except first two work flow are workflows are based on event pull

model

RIPPLE CONNECT INTEGRATION

• GetQuote Initial sender requests for a quote from sending institution Sender provides sender details, final receiver details, amount and currency to be received Ripple connect instance at sending institution provides sender FX rate for the payment; response also includes fees

o It involves communication with Ripple connect at receiving end o Querying Ripple networko Path finding algorithm

Payment object is in “quoted” state

• AcceptQuote Initial Sender gets the quote (previous step) Reviews quote and approves/rejects the quote Payment object is in “accepted” state

RIPPLE CONNECT INTEGRATION

• LockQuote (Receiver) Receiving institution polls its Ripple Connect instance for payments in an "accepted" state Receiving institute retrieves any additional information (such as PII) requested by the sending

institution Submits Lock Request Payment status is “locked”

• Submit Payment (Sender) Sender polls for payments which are in “locked” status Sender performs essential activities such as posting, compliance Sender executes submit payment request Payment status is in “In_Progress”

RIPPLE CONNECT INTEGRATION

• Submit Payment (Receiver) Receiver polls for payments which are in “In_Progress” status Receiver performs essential activities such as posting Sender executes submit payment request Payment status is in “Succeeded” Payment is complete from receiver side Payment is complete on ripple network

• Complete Payment (Sender) Sender polls for payments which are in “Succeeded” status Sender marks payment as complete End to end payment is complete

COMPLIANCE

The regulatory treatment of Ripple is dependent on several factors, such as: • The type client being serviced• Country and geographic region of operations • Volume and scope of activity• Other factors determined by financial institution or regulator

• Ripple has engaged with central banks and regulators globally to educate them on distributed networks• Ripple works with each financial institution to identify and meet all relevant regulatory requirements

ahead of integration

source : https://ripple.com/solutions/executive-summary-for-financial-institutions/

SECURITY

In financial world, especially in payment security is at most important

Ripple provides highest level of security to ensure that payments data is secured in every manner

Ripple employs different methodologies at different levels to ensure highest level of security

SECURITY

• Cryptographic Security Financial transactions on Ripple are signed using industry-standard

cryptographic algorithms ECDSA and ED25519 Ripple servers use public/private key cryptography to validate

transactions Each submitted transaction is signed with a unique digital signature Ripple apis are accessed using secured access token based

mechanism

source : https://ripple.com/files/ripple_solutions_guide.pdf

SECURITY

• Payment Data Separation Ripple provides a layer of separation and security between payment data and settlement Actual payment data is encrypted and shared only between the two institutions making

payments to each other

• Payment Data Separation Communication is over secure HTTPS using OAuth 2.0 Ripple Connect connects to the Ripple Consensus Ledger over WSS (Secure websockets) Ripple network leverages TLS to ensure communication is secure between all the nodes

on the network

https://ripple.com/files/ripple_solutions_guide.pdf

BANKS ARE ADOPTING RIPPLE

• 10 of the top 50 banks work with Ripple• 25 active integrations including integration with DH’s

payment hub• 60+ countries accessible though Ripple network• 116M exchanges processed on the Ripple network

RIPPLE BENEFITS

• Enables banks to settle cross border payments in real time• Lower operational costs and settlement risk• Complete transparency• No need of intermediaries, correspondent banking

relationships

RIPPLE USE CASE

Direct bank-to-bank settlement International Transaction Banking Service

• Banks can provide settlement service to other regional banks International Corporate Payments

• Banks can offer real-time, on-demand international payment services for their corporate customers Cross-Border Intra-Bank Currency Transfers

• Banks with branches in different countries can use Ripple to transfer funds between their entities in different countries at a fraction of time and cost

• Enables bank’s treasury to allocate capital more efficiently across international operations Remittance Service for Retail Customers

• Ripple’s real-time settlement and complete transaction traceability lowers the total cost of settlement• Ripple enables banks to offer low-value international payments to their retail customers

SUMMARY

• With Ripple, It takes 3-6 seconds for cross border payments compared to 2-4 days• Ripple reduces settlement risks• Ripple eliminates intermediaries, midpoint failure, delays, lifting fees• Ripple minimizes exchange spreads, credit risk, collateral costs• Ripple connect provides instant, bilateral and straight through processing• Ripple has cryptographically secured end-to-end payment flow with

transaction immutability and information redundancy