Editor’s Note: This analysis is brought to you by Alternative Wealth Daily advisory board member Helena Margarido. Helena is a former lawyer who got hooked on crypto in 2012 after a client suggested she look into Bitcoin (BTC). In the years following, she turned her new crypto “hobby” into a career never looked back. Today, she is a full-time crypto researcher and partner at financial research company Monett in São Paolo, Brazil. You can check out this interview to learn more about Helena’s background and investing philosophy.
Analyzing an opportunity in cryptocurrency – or any other market, for that matter – comes down to answering questions until we have enough information to reach a decision. It’s like peeling an onion, layer by layer.
With cryptocurrencies, we look at the fundamentals: what current problem can the technology behind a certain crypto asset solve more efficiently than the preexisting methods? How is that crypto asset set up (“tokenomics”)? Who are the developers behind the asset, and what does it stand for? Is there a community? What is the development roadmap, and what has been achieved so far?
Then, we look at the macroeconomic narrative to understand if adopting the technology is currently in discussion, if there is a demand for such technology, and what might trigger the crypto’s price increase. We not only look at the price movements but also on-chain activity, total value locked (TVL), the protocol differentials, and other metrics.
Finally, we look for the challenges that the project may face, as well as its competitors, and if there is a hierarchy in the segment they compete in.
When we sum all those factors, we’re able to come to a decision on any given cryptocurrency in the vast ocean of more than 18,000 coins.
Chief Crypto Strategist Nick Black uses his own proprietary framework, the “Five Ts” of crypto investing, to evaluate a new investment.
The framework that I use every day to identify good crypto investments is a “crypto fundamentalist” analysis – which is a little different but still has a lot of similarities to Nick’s Five Ts.
And today, I’ll be using it to evaluate two cryptos, Chainlink (LINK) and XRP (XRP), to show you which is a “buy” – and which is not.
Find out which of these cryptos passes the test…
Quick Facts about XRP (XRP)
- Market Cap: $34,022,530,408
- Total Supply: 99,989,739,391
- Circulating Supply: 47.95B
- Rank: #6 on CoinMarketCap.com
What Is Ripple /XRP
Ripple is a private company that developed an exchange and payments network based on a distributed ledger database. The main goal is to connect banks, payment providers, and digital asset exchanges to enable faster and more cost-effective global payments.
Conceived in 2004 by Ryan Fugger, who developed the first prototype as a decentralized digital currency system, the system was launched in 2005 and aimed to provide secure payment solutions within a global network.
In 2012, Fugger handed the project to Jed McCaleb and Chris Larsen, who together founded the United States-based technology company Opencoin. From there, Ripple was built as a protocol focused on payment solutions for banks and other financial institutions. In 2013, Opencoin was renamed to Ripple Labs, which was then renamed to Ripple in 2015.
It’s Not Blockchain
Ripple implemented the Ripple Consensus Ledger in 2012 (currently, it’s called XRP Ledger (XRPL)), along with its standard cryptocurrency, XRP.
XRPL works as a distributed economic system that stores all the accounting information of network participants and provides exchange services on various currency pairs. Ripple introduced XRPL as an open-source, distributed ledger that enables real-time financial transactions. These transactions are guaranteed and verified by the network participants through a consensus mechanism.
However, the way one reaches consensus in XRPL is different than what happens in Bitcoin: XRP Ledger is not based on a proof-of-work (PoW) consensus algorithm and does not rely on a mining process to verify transactions. Instead, the network achieves consensus using its own custom consensus algorithm.
Ripple does not use blockchain – it uses a distributed consensus ledger.
Crypto has a language all its own. Access our Complete Crypto Investor’s Glossary of Terms from A to Z to learn about nodes, blockchain, DeFi, and more.
XRPL is managed by a network of independent validation nodes that constantly compare their transaction records. In theory, anyone can configure and run a Ripple node, as well as choose which other nodes will be part of their communication network. Nonetheless, Ripple recommends that its customers use a list of trusted and identified participants to validate their transactions, which greatly compromises its decentralization. This list is known as the UNL (Unique Node List).
In practical terms, what happens is that UNL members exchange transaction data with each other until everyone agrees on the current state of the ledger. Transactions that are agreed upon by an absolute majority of UNL nodes are considered valid, and consensus is reached when all these nodes apply the same set of transactions on the ledger.
According to Ripple’s official website, it is a private company that sponsored the development of XRPL as an open-source distributed ledger. This means that anyone can contribute the code and that XRPL can continue even if the company ceases to exist.
Advantages and Disadvantages of Ripple
Besides allowing integration with traditional financial systems, the system created by Ripple offers security and transactions in seconds, in addition to being open source. This allows simple connection to payment networks.
Also, for those who express concern about the future of cryptocurrencies due to attempts at regulation, Ripple has the advantage. It’s had BitLicense since 2016, authorized by the New York State Financial Department.
On the other hand, there are disadvantages. As Ripple does not require mining, the incentives for this transaction validation work are lower, depending on the performance of a smaller group of nodes with such powers. It is extremely centralized.
While having a supporting company behind it helps advance its integration with the traditional financial system, it also has a centralizing bias.
Over time, some co-founders ended up leaving the company, including Jed McCaleb, who created a competing crypto asset, Stellar (XLM). This generates additional selling pressure as Jed has many XRP tokens, which are released monthly.
As long as Ripple Labs controls the list of preferred nodes for the formation of consensus that validates transactions, the criticism of network centralization must go on.
Another problem that arises is the lawsuits from investors who felt harmed after the ICO (initial coin offering) made by Ripple Labs.
In December 2020, the Securities and Exchange Commission (SEC) accused Ripple and its top executives of violating securities laws in selling XRP tokens since 2013.
In summary, the entire Ripple ecosystem presents a very cloudy future that is full of uncertainties, despite being the sixth place in the CoinMarketCap.com ranking.
For these reasons, XRP is a crypto asset that I would recommend steering clear of.
Final Analysis: XRP Is NOT a “Buy”
Quick Facts about Chainlink (LINK)
- Market Cap: $6,431,557,289
- Total Supply: 1,000,000,000
- Circulating Supply: 467,009,549.52
- Rank: #22 on CoinMarketCap.com
Blockchain technologies, in spite of providing great security and reliability through a pre-programmed structure (code and cryptography), also have their limitations. It is hard for them to communicate to other systems and real-world information, which have different formats and sources, in order to execute smart contracts.
What Chainlink (LINK) does is work on a basic structural demand of the blockchain ecosystem to insert off-chain data into blockchains in a decentralized and reputed way.
The main role of Chainlink, as an oracle network, is to serve as the communication channel between external sources, creating a proof-of-event (proof that something has happened) through its nodes network and sending this proof to the blockchain, which in turn executes the smart contract as programmed.
What Is Chainlink
Chainlink has a fundamental role in the DeFi infrastructure, connecting multiple off-chain data to the ecosystem of multiple blockchains, which allows some business models like lending and synthetic tokens to exist.
Its protocol aims to be a bridge between external and blockchain data, allowing the development of numerous smart-contract-based business models.
The technology has a fundamental role in increasing the utility of blockchain applications, as 80% of all smart contracts currently need data that are not on blockchains. The Chainlink protocol is composed of groups of nodes that provide a database about specific topics.
The token LINK is not a governance token, as the protocol allows each group of nodes to determine their own governance structure. In that sense, LINK serves as the basis for the reward mechanism that compensates the groups of nodes for aggregating real world databases and releasing them in a format that is readable for a specific blockchain.
Additionally, the token LINK can be used for staking, which looks to guarantee the node’s honesty when providing information, introducing a penalty through token burns when a malicious behavior is met. This functionality has its release projected for 2022 and is named “Super Linear Staking.”
Despite a good proportion of the token LINK being held by its developers’ team and to the incentive fund to the group of nodes (or “decentralized oracle networks” – DONs), the protocol does not suffer with centralization or great price actions caused by whales (big investors), as the funds are held by the team looking for the ecosystem development and growth.
Through its service structure, not only of data provision, but also of certification of randomness and sequencing of transactions, the protocol manages to generate sustainable and growing revenue. That growth is fueled by its high volume of partnerships and protocols that contract services paying with LINK, leaving Chainlink on a different level than its competitors.
The most significant trigger for Chainlink is based on the larger adoption of smart contracts. This structural bias lends itself to a great capacity for valorization and is justified by the fact that the project has become essential and the preference of countless other protocols.
Chainlink technology, through an oracle ranking model, selects and transmits the best data to any smart contract application that needs its resources.
From a practical point of view, the network provides several services for the purpose of using off-chain data, such as price feeds, which transmit the values of asset pairs in real time, and as proof-of-reserve models, which allow the backing of stable assets (like stablecoins) to be verified.
This unique format of the Chainlink network has attracted many users, especially large private companies such as BitGo (the main custodian of the cryptocurrency market), Google, and Paxos, as well as protocols from the NFTs (non-fungible tokens) and DeFi markets.
The protocol has more than 45 thousand smart contracts using its services, with an ecosystem with almost 500 companies and applications, including more than 200 DeFi algorithms that total more than $15 billion in total value locked.
All this perceived value has made LINK one of the largest cryptocurrencies today, presenting an exponential growth of its ecosystem since the launch of its network in 2019, which occurred two years after its ICO (Initial Token Offering), in September 2017.
However, given the importance of Chainlink as infrastructure for blockchain applications, it is to be expected that in the near future, LINK will appreciate – not only due to the expansion of the crypto-assets market, but also because, in my opinion, its share of the crypto market should be bigger.
Exactly for these reasons, I believe that LINK has incredible long-term potential for price appreciation.
Final Analysis: LINK Is a “Buy”
At the end of the day, whether or not you invest in a cryptocurrency is a highly personal decision that only YOU can make. That’s why our team of experts is here to equip you with the knowledge you need to be successful with a variety of different approaches for evaluating a new crypto investment.
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All the best,
Advisory Board Member, Alternative Wealth Daily