The founders of Ripple have provided its old and new investors with a detailed blog post regarding its liquidity solution through xRapid.
The Financial Times defines liquidity within a transaction as how easy it is to perform an exchange in a particular security or instrument, or the ease of converting an instrument into cash for withdrawal. This takes into account the stability and price of each instrument over the course of a transaction.
For domestic transactions, liquidity is typically high as financial exchanges execute the transactions in one single currency. They are also generally approved against account balances held by each person.
Due to this, exchanging one currency for another brings about a price and time difference that can impact the pricing on either side of the exchange. This, in turn, reduces the performance of the transaction and the liquidity while increasing the cost and risk involved.
In order to lessen these risks to a certain degree, financial establishments are required to pre-fund nostro accounts on either side of a transaction in that country’s currency. Ripple states that through this method, liquidity is improved as it lowers the risk for the parties involved in the transaction.
In the blog, Ripple states: Ripple’s xRapid solution uniquely uses XRP to offer on-demand liquidity. By facilitating real-time, lower cost transactions across currencies, xRapid reduces the risk and unlocks the full potential of cross-border payments for enterprise clients. Ripple wrote that there are greater challenges in the case of international and cross-border transactions.
Not only that, but unlike bitcoin, which can take over an hour to fully settle a transaction with a limited capacity of 16 transactions per second (TPS), Ripple is far quicker. XRP settles its transactions in seconds and can manage 1,500 TPS, the equivalent to major card networks such as Visa.