How does Ripple work?
As with several cryptocurrencies, Ripple uses a medium known as Gateway. A Gateway acts as an intermediary receiving and sending currencies to public addresses all over the digital currency's network.
A person or a business can register and open a gateway which authorizes them to act as a middleman transfering coins within the network. Multiple gateways can be used in order for a transaction to be completed.
Here is a simple example on how Ripple works:
Let’s say Tom wants to send 100$ to his friend Matt. Tom goes to his local agent and gives him the money along with a password that Matt needs to know in order to get the money.
Tom’s agent calls Matt’s agent and informs him that if Matt knows the password then he, Matt’s agent, can give Matt the 100$. Which Matt does.
Note that the money has been transmitted from Matt's agent to Matt but not between the two agents. The debt created can be either settled later or in case of a reverse transaction.
This is where trust comes in.
Ripple's network does not run on a proof-of-work system like Bitcoin. Instead, transactions are based on a consensus protocol, which prevents double spending. Double spending occurs when a user is trying to outsmart the system by sending the same amount of money to several gates. In this case all transactions within the network, apart from the first one, are canceled.
The first transaction is defined by a poll taken within seconds.
In addition, every transaction-flow taking place between wallets is available on the Blockchain. The data though, is not referred to any account or ID of an individual.
XRP coins are not mined, the Ripple company decides the quantity of coins circulating the market as it holds the currency reserves.
Lastly, each time a transaction is completed a small amount of XRP is destroyed. This is to protect the XRP Ledger from spam or denial of service attacks. A denial-of-service is any type of attack where the attackers (hackers) attempt to prevent legitimate users from accessing the service.
The transaction cost is designed to increase in parallel with the load on the network, making it very expensive to deliberately or accidentally overload the network.