Why XRP Ledger Is the Game-Changer in Blockchain Technology

Both Bitcoin and Ethereum are known for their consensus algorithms - that is the way network participants agree on which transactions are valid. Inspired by their approach, the majority of smaller blockchains adopted a variation of the Proof-of-Stake consensus. This resulted in a large number of networks facing similar problems - congestion, centralization, or security breaches.

XRP Ledger, the decentralized network developed by Ripple Labs chose a very different strategy. Let's have a look at how XRP Ledger tackles the Blockchain Trilemma and how it compares to PoS and PoW networks.

Quick Recap on the XRP Ledger Network

The XRP Ledger Network, or XRPL, is an open-source, decentralized network developed by Ripple Labs. It enables users to execute transactions, exchange value, tokenize assets, and develop advanced applications with a high degree of security and immutability. The backbone of this network is the XRPL consensus algorithm, which plays a crucial role in updating the ledger's shared state and ensuring its security and decentralization.

Is XRP Ledger Proof-of-Stake?

No, XRP Ledger does not use Proof-of-Stake. The main difference between XRPL and the Ethereum consensus algorithm is that PoS uses monetary incentivization.

In short, PoS systems also contain validators, but their authority and power depend on how much of the native asset they are willing to risk (stake). In exchange for staking and validating, the system rewards stakers with a certain yield on their assets.

The incentivization is beneficial, because it motivates users to set up their own validators, thus increasing decentralization. But on the other hand, it concentrates power amongst the wealthier validators.

XRP Ledger does not have this staking incentive and instead focuses on promoting validators based on their reputation and past performance.

XRP Ledger Consensus vs. Proof-of-Work

The Proof-of-Work algorithm used by Bitcoin is the original consensus mechanism designed for blockchain networks. However, when compared to newer algorithms, such as the XRPL Consensus Protocol, it has a few shortcomings.

What is Consensus Algorithm and why is it important?

A consensus algorithm is a fundamental component of any distributed ledger, like a blockchain. Its primary role is to ensure that all nodes in the network (or at least the majority) reach a consensus on the next shared state of the ledger.

This is crucial because, at any given time, the distributed ledger can only exist in a single state, which needs to be agreed upon by the majority of nodes in the network. The consensus algorithm decides which transactions are legitimate, validates them, updates the ledger's state, and ensures that other nodes have the same results.

How does XRP Ledger Reach Consensus?

The XRP Ledger, like the majority of other blockchains, is comprised of a network of interconnected servers, which are often called nodes. These nodes accept transactions from users and their task is to agree with other nodes on which transactions are legitimate and should be included in the next ledger state.

Related: XRP Ledger Consensus Mechanism Explained in Simple Terms

Nodes and Validators

Nodes, which directly cooperate to reach a consensus are called validators. You can imagine a validator node as a server with some software running on it 24/7. Each validator has a list of other, highly trusted validators, called the Unique Node List (UNL).

When transactions start to come, validators compare and exchange information primarily with their trusted peers aka. their Unique Node List. By doing this, the consensus process gravitates toward highly trusted validators - those with a high success rate.

What Happens with Transactions?

Transactions are essentially proposals to change the state of the ledger, such as transferring funds from one wallet to another, minting new tokens, or exchanging them.

Validator servers receive transactions and exchange them with their UNL. They repeat this process until more than 80% of validators agree on the proposed transactions. Some transactions are discarded, while others are added.

Each validator then separately computes the change to the ledger state. Again, validators share the proposed changes with their UNL in a cryptographically secure form. If more than 80% of validators agree on the proposed changes to the ledger, transactions are validated and the ledger state is updated.

From that point on, the ledger state cannot be changed in retrospect and will now serve as a starting point for new incoming transactions.

Making it all Secure and Decentralized

One of the main features of the XRPL Consensus Protocol is the Unique Node List (UNL). Let's say a validator is misbehaving and consistently returns incorrect results - what other validators will do is they remove the misbehaving validator from their UNL. This way there is a higher chance of reaching a consensus.

It also works the other way around. If a validator is consistent and fast, other validators will want to include them in their UNL, thus raising their own success rate.

By requiring the supermajority (80%) of participants in order to reach a consensus, the XRP Ledger is more resilient against 51% attacks.

The Bottom Line

The XRPL consensus algorithm is quite unique in the blockchain world. It works like no other, while still ensuring security, decentralization, and speed of the XRP Ledger network. Its design relies on using validators with their lists of trusted servers to ensure that no single entity gains control over the network.

Understanding how blockchains work is crucial for choosing the best one for your endeavors. In general, it is not necessary to have a deep technical knowledge of every project, but at least a basic overview can save you a lot of trouble in the future.