Ripple's founders have been promoting On-Demand Liquidity (ODL) as a game-changer for banks and payment operators for over a year. They claim that this innovation will revolutionize the field of international transactions.
We break down its workings in layman's terms and ponder the potential hurdles the project could encounter.
What is ODL?
ODL is a fresh offering from Ripple Labs that carries high expectations from the company's leadership. It's projected that ODL will provide financial firms the ability to expedite cross-border payments by utilizing the token.
ODL stands for On-Demand Liquidity. This application has already been introduced on the RippleNet network, a platform that amalgamates the largest global banks with fintech firms and payment services.
RippleNet already hosts several products:
- xVia, which acts as a standard interface across various networks.
- xCurrent, an application designed for processing payments in real-time using APIs.
- XRP Ledger, a distributed payment registry for a peer-to-peer network of servers.
- The Interledger Protocol (ILP), a packet router ensuring interoperability between different blockchains.
Simply put, RippleNet provides a standardized infrastructure for the global interaction of financial institutions. It's like a universal layer that ensures compatibility across different systems.
As the ODL project reaches full capacity, it's anticipated to facilitate immediate money transfers worldwide within this system. Importantly, XRP will be used as the single currency for intermediary conversions.
How does ODL operate?
Here's the step-by-step process:
- A bank or payment service initiates a transaction by submitting a directive through the RippleNet Application Programming Interface (API).
- The originator's currency is converted into XRP via liquidity pools that Ripple Labs can access. The developers claim that this swap occurs almost instantly via the XRP Ledger blockchain.
- The XRP acquired through the exchange is then routed to a cryptocurrency exchange that operates within the recipient's legal jurisdiction.
- On this particular exchange, the XRP is converted into the recipient's local currency.
- The sum dispatched from the exchange is subsequently transferred to the recipient's bank.
- The bank then credits the money into the payment recipient's account.
The team at Ripple Labs assures their potential customers that such a cross-border transaction would take no more than 2-3 minutes. The only possible holdup might occur at the recipient's bank side: operations can sometimes slow down the process when it comes to depositing funds into the final account.
It raises the question: why is the correspondent selected to be the bank's account rather than the final recipient's? It seems that certain intricacies within this algorithm pertain to Anti-Money Laundering (AML) requirements, which are managed by the banks.
It's worth recalling that the conventional SWIFT transfer process spans several days, with the majority of time consumed by currency conversion via correspondent banks, a process often performed manually.
Why It's Not as Straightforward as It Appears
Ripple Labs believes that, following the judicial ruling that XRP is not a security, the process of incorporating banks into RippleNet and the adoption of the ODL solution will dramatically speed up. However, remember that this ruling only applies to individual traders, not banks. Decisions regarding institutional investors haven't been made and it's unclear when they will be.
Would financial institutions be willing to take on the risk of irking regulators for the sake of faster payment processing? Especially considering Ripple's claim that using ODL drastically reduces transaction costs. The question remains: how would this impact the revenue of the banks? An answer to this is still pending.
Furthermore, companies that are in discussions with Ripple about joining the system have expressed worries about the token's volatility. Lately, XRP has been showing significant daily price swings (up to 2%), which is unacceptable for large payments.
Under these circumstances, payment operators and banks might find an equivalent algorithm, but using stablecoins, a safer choice.
As long as the XRP token operates as a typical speculative asset, its application as a stable currency for intermediary conversions brings additional risks.
