On February 6th, 2018, the BitMEX research team released a piece titled “The Ripple story” in which they systematically dismantle Ripple’s key value propositions, ultimately concluding that XRP does not “appear to share any interesting characteristics with crypto tokens like Bitcoin or Ethereum, at least from a technical perspective.” A major factor in the evaluation was the reveal of their “distributed” consensus mechanism to be an “unnecessary and essentially pointless” show of smoke and mirrors, with full control ultimately in the hands of Ripple.com.

Update Feb 7th, 2018, 1 PM UTC: The source material referenced above from BitMEX has been removed/is not displaying correctly. We are investigating and will update. 

Update Feb 7, 2018, 2 PM UTC: The link has been replaced and is now functioning correctly

The overall critique on Ripple by the BitMEX Research team is three-pronged:

Shady origins & disputes

Some background is provided on Ripple’s various pivots before eventually launching the XRP token in 2013. The main point highlighted was Jed McCaleb taking the lead on Ripple in 2011, after offloading the now-known-to-have-been insolvent (to a figure of 80,000 BTC and $50,000) MtGox to Mark Karpeles. While not a red flag in itself, it certainly makes you wonder the ripple effect of the corporation’s businesses practices as a result of the foundation set by McCaleb. On this note, it was under McCaleb’s direction that Chris Larsen came on board with the project, who remains an executive chairman to this day.

Under Larsen’s guidance, Ripple launched an initial seed round for the XRP token in October 2012. This direction can be seen as an attempt to follow in Bitcoin’s footsteps and capitalize on the market demand for a decentralized payment network with no counterparty risk. However, built upon what was essentially a central platform, this is arguably like trying to fit a square peg into a round hole – or from a more skeptical perspective, a cash grab following market sentiment.

The first glaring red flag regarding centralization fears was the introduction of the “balance freeze” feature in February 2014. As the name indicates, this “allowed Ripple gateways to freeze or even confiscate coins from any user of its gateway, even without a valid signature for the transaction”. Following a large $700,000 fine for violating the Bank Secrecy Act, the Ripple corporation effectively fell in bed with FinCEN, requiring a complete submission of authority, main terms summarized below by the BitMEX Research team:

  • Ripple Labs must register with FinCEN.
  • If Ripple gives away any more XRP, those recipients must register their account information and provide identification details to Ripple.
  • Ripple must comply with AML regulations and appoint a compliance officer.
  • Ripple must be subject to an external audit.
  • Ripple must provide data or tools to the regulators that allows them to analyse Ripple transactions and the flow of funds.

Considering the gravity of compliance required and other red flags to date, it’s amazing that Ripple have managed to define their token as a cryptocurrency for so long, even touting similar value propositions to that of Bitcoin.

Ripple supply

In summary, the entirety of Ripple’s 100 billion supply was pre-mined and allocated to the corporation or founders. All the coins are effectively subject to trust-based lock up agreements. The trust-based nature of the arrangement despite “legal” backing is evidenced when it was revealed McCaleb broke terms of his lock up agreement following an exit from the corporation in 2015.

What can be concluded is that Ripple’s circulating supply is subject to be massively inflated at any given time. Hence, outside of XRP’s position as a centralized “cryptocurrency”, the nature of the investment hinges entirely on the Ripple platform and its token-holding custodians in the form of founding members. In other words, the financial viability of the investment itself is highly questionable, and entirely dependent on the transparency and level of disclosure provided by Ripple themselves. On this point, it is best summarized in BitMEX Research’s own words “the disclosure related to this matter [of XRP’s circulating supply] is weak,” stated after a thorough examination shared on their piece.

Ripple “consensus” system

The most egregious misconception pushed by Ripple’s marketing team is its purportedly “decentralized” consensus mechanism, as detailed below:

Source; Ripple Wiki

The image above can be summarized as overtly confusing, revealing little of how the actual gears of Ripple’s alleged decentralized consensus mechanism works. After downloading the reference software, the BitMEX Research team concluded that five public keys assigned to Ripple.com dictate the ledger records and its movements, rendering the system effectively centralized – and the above graph meaningless (if not misleading).

It appears that the entire consensus mechanism is superfluous, designed to obfuscate XRP’s true backing design as a centralized platform. This is a major hit to its marketing campaign which has been leaning heavily on the “distributed ledger” and blockchain value proposition – and will likely attempt to continue to do so through further misdirection.


The BitMEX Research team concludes their analysis with a direct quote of Ripple leading proponent David Schwartz, which can be interpreted as a tongue-in-cheek reference to the XRP case itself:

Many scams will make some people some money some of the time. Many pyramid schemes actually turn a significant profit for their early adopters. Just remember, the amount of money that comes out is always going to be less than the amount that goes in, because the owners are taking a cut. For every dollar some lucky guy makes, some unlucky guy loses more. It can’t pay out if nobody pays in.

Update Feb 7, 2018, 2 PM UTC: The above quote has been removed from the now-edited version of the BitMEX reference article for reasons unknown. It will remain unchanged here.

For investors who bought XRP at its peak past $3 in early January, this is another nail in its coffin with a price of $0.6 (-82%) at press time.

Featured image from Shutterstock


Disclaimer: The views expressed here are those of the author and do not necessarily represent Crypto Insider.