TLDR;
This video challenges the common understanding of XRP payments and their impact on XRP's price. It explores three different payment models, revealing that only one of them, pre-positioned XRP, actually takes XRP out of circulation and potentially increases its price. The other two models, on-demand liquidity and liquidity hub, simply recycle XRP, having no significant impact on its price. Despite this, the video argues that XRP remains a valuable asset due to its role as a hub in the new financial system and the strong community belief in its potential, which can drive speculative investment and price appreciation.
- Only one XRP payment model increases the price.
- Exchanges and liquidity providers hold the XRP.
- Community belief can drive speculative investment and price appreciation.
Introduction [0:00]
The author admits to a past misunderstanding of XRP payments and introduces a detailed explanation of how they function, emphasizing the potential implications for XRP's value. He highlights the importance of basing investment decisions on thorough research and documentation rather than speculation. The author expresses confidence in the information presented, which is derived from actual documents and research, contrasting it with unsubstantiated theories prevalent in the crypto space.
Global Financial Payment System [3:21]
The global financial payment system operates through three venues: central bank venues for CBDC conversions, private ledgers for large institutional payments, and public markets. XRP is primarily used in the "seams" or gaps between these venues, where different governance systems need to interact. The key question is what these payments look like and whether XRP usage translates to price appreciation. Understanding the flow of money between these venues is crucial to determining how much XRP is needed and whether it is taken out of circulation.
Liquidity and Scarcity [6:55]
The amount of money flowing between venues doesn't directly correlate to the amount of XRP required. The Jackson liquidity framework was created to determine the necessary liquidity in these seams, considering factors like XRP reuse. Utility doesn't necessarily equal scarcity; the architecture of the payment system determines whether XRP is taken out of circulation.
Three Ways to Make an XRP Payment [8:42]
There are three distinct models for making XRP payments, each with different implications for liquidity and XRP's price. The first model is on-demand liquidity (ODL), where XRP is used as a transient bridge between fiat currencies. The institution doesn't hold XRP; instead, the liquidity is sourced from exchanges and liquidity providers.
On-Demand Liquidity (ODL) [9:21]
In the ODL model, an institution converts fiat currency into XRP, which is then immediately sold for the destination currency. The XRP is sourced from exchanges and liquidity providers like Caleb and Brown, Uphold, Binance, and Kraken. These entities already hold large amounts of XRP, which are recycled for these transactions. ODL is a service that uses APIs to connect institutions with liquidity providers, facilitating smooth transactions. This model doesn't take XRP out of circulation, so it doesn't impact XRP's price.
Liquidity Hub [15:48]
The second model is Ripple's Liquidity Hub, where institutions connect to Ripple's hub, which then finds the best source of liquidity. The Liquidity Hub acts as an intermediary, suggesting the best place to source liquidity, but the XRP itself is still held by exchanges and liquidity providers. This model, like ODL, doesn't create scarcity or increase the price of XRP.
Prepositioned XRP [18:30]
The third model involves institutions buying and holding XRP as liquidity for their transactions. In this case, XRP is taken out of circulation. The Jackson liquidity framework helps institutions determine how much liquidity they need based on transaction volume, accounting for peaks and troughs in payment activity. However, not all institutions will pre-fund XRP accounts, as they can use ODL, Liquidity Hub, or AMMs.
Money Flow and XRP Price [20:19]
The potential for XRP to be a reserve currency is reconsidered, with the understanding that different venues exist (central bank, private, public), and XRP is primarily used in the seams between them. The type of payment dictates the price impact, narrowing down the scenarios where XRP usage leads to price appreciation. Ripple's creation of ODL and Liquidity Hub indicates that these are the most functional ways to facilitate payments, while pre-funding is likely an outlier.
Global Money Flows [22:55]
Cross-border payments represent a significant seam, with trillions of dollars in annual flows. The FX seam sees trillions of dollars daily, and the capital seam involves trillions in US treasuries. However, only a percentage of these flows go through seams, and even fewer require XRP. The prevalence of ODL and Liquidity Hub means that much of this activity doesn't impact XRP's price.
Why Invest in XRP? [25:57]
Despite the limited direct impact of utility on price, XRP remains a worthwhile investment due to community belief and network effects. The belief that XRP will reach high prices due to its utility drives speculation and holding behavior, which can increase its price. XRP is likely to move with the market but outperform it due to this bullish sentiment. Ripple and XRP are hubs in the new financial system, making them likely to integrate with new projects and experience consistent growth.
