From messari by Red Sheehan

Key Insights

Primer

XRP Ledger (XRP) has been running for over a decade, offering cross-currency and cross-border payments, and tokenization, among other features. Core value propositions of the XRP Ledger (XRPL) include fast and cheap transactions (relative to other currency-focused networks) and native functionalities — such as tokens, NFTs, a decentralized exchange (DEX), escrow functionality, embedded compliance, and token management.

With these capabilities, the XRPL can execute many of the same functions as other networks. NFTs, stablecoins, synthetic assets, and other markets found on programmable settlement layers are available on the XRPL as native functionality with composability through enshrined mechanisms such as a CLOB and AMM. The XRPL base layer doesn't currently support arbitrary smart contracts, which was a deliberate design choice to prioritize security and stability through simplicity. However, the community is actively exploring ways to introduce advanced scripting functionality, such as through solutions like Hooks. Additionally, alternative execution environments, via sidechains, add additional functionality and use cases to the overall ecosystem.

The XRPL is supported by various development groups and individuals, including Ripple, XRPL Foundation, XRPL Labs (and Xumm), and XRPL Commons. It provides a digital payment infrastructure not just for individuals but also for existing financial entities, such as commercial banks and fintechs, with the community's deep interest in B2B and B2C solutions for finance. For a full primer on XRP Ledger, refer to our Initiation of Coverage report.

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Key Metrics

Financial Analysis

As of Q1’24, the XRPL’s native token, XRP, was the sixth largest cryptocurrency by market capitalization at $34.1 billion. Its circulating market cap increased 1.3% QoQ. XRP’s price decreased 0.1% QoQ, with the discrepancy between market cap and price being due to a 1.4% increase in circulating supply.

On XRPL, transaction fees are systematically burned, applying deflationary pressure to the total supply of 100 billion XRP. Since the XRP Ledger’s inception, around 12 million XRP has been burned. This low burn rate is due to the relatively low transaction fees (<$0.002 per transaction) on the network. Counteracting the burn rate, there is 1 billion XRP that releases from escrow to Ripple per month. Any XRP not spent or distributed by Ripple in that month is put into new escrow contracts. This system will continue until the remaining ~45 billion XRP becomes liquid. After all escrowed tokens become liquid, the deflationary pressure from burned fees will be the only variable related to supply.

Unlike many other cryptocurrency networks, the XRPL does not distribute rewards or transaction fees to its validators. In Proof-of-Association (PoA), rather than receiving rewards, validators are mainly incentivized by supporting the decentralization of the network, similar to a full node for Ethereum/Bitcoin rather than a validator/miner. The PoA consensus algorithm relies on trust between nodes, organized through unique node lists (UNLs).

XRP’s QoQ price decrease of 0.1% lagged behind the overall crypto market’s increase of 63.0%. On an annual scale, XRP’s price has increased 14.8% YoY. Revenue is measured as total fees collected by the network. In the case of XRPL, these fees are burnt and not distributed to stakers like on many other networks. The burning of those fees still decreases the overall supply, adding value to the remaining XRP. In this way, revenue still represents a redistribution of wealth from transaction fee spenders to XRP holders.

Network Analysis

Network activity increased by nearly all measurements in Q1. Overall, active addresses and transactions increased 37% and 113% QoQ, respectively.

Much of the transaction activity actually came from a relatively small group of accounts sending transactions to one single account. Over 30 million transactions were sent to a single account by a group of ~45,000 accounts, for inscription-related activity. Inscriptions are a transaction type popularized on Bitcoin in early 2023 which have popped up on almost every other large network since, even causing outages from the high activity volumes. XRPL peaked at over 80 transactions per second (TPS) for an entire day (6.9 million total transactions on December 31, 2023) but did not experience networking issues. XRP Script is responsible for much of the inscription activity.

The net number of accounts increased by 150,000, driving total accounts up 3.1% to 5.15 million in Q1. New addresses over the quarter decreased 12.4% QoQ to 183,000. This QoQ decrease is because of the unusually high amount of addresses created in Q4 when the inscription activity began. On an annual scale, quarterly new addresses increased 29.8% from Q1 2023 to Q1 2024. Deleted addresses increased by 55.9% QoQ to 33,000. The deletions came as inscription activity died down. Account creations and deletions are meaningful on the XRPL (unlike on most networks) as accounts require a deposit to be created, which can be reclaimed after deleting the account. As such, the XRPL’s account metrics are more reliable than other networks where account creations can easily be spammed/Sybiled at zero cost.

Addresses on the XRPL can contain destination tags, which enable a single address to receive and track XRP deposits for an arbitrary number of users. As a result, the number of daily active addresses is skewed downward, given that one account (e.g., a centralized exchange) could be responsible for a large number of users. It should be noted that a unique address is required for receiving tokens on most other networks, like ETH on Ethereum or BTC on Bitcoin.

The active recipient metric is determined by the number of addresses that receive a transfer or other transaction, which had been the primary factor behind major activity spikes in 2023. The 2023 metric spikes came from accounts that were recipients, not senders. This indicates that the network's activity surges were generally caused by senders distributing tokens to large groups of previously inactive recipients. Many of the senders were wallets distributing airdrops, such as XRPDrops. Airdrops are a token distribution strategy to reward and engage community members, which is more practical on networks with low transaction fees, such as the XRPL, or networks that enable batch transactions. From July 30 to August 13, the XRPL averaged 122,000 daily active addresses (received), which was 3.3x the daily average in Q3. However, this was not the case in Q1 2023.

Overall active addresses increased 37% QoQ, primarily driven by active addresses sent (i.e., unique senders) which increased 92% QoQ. Unique senders exceeded unique receivers for the first time since Q1 2022. This dynamic occurred because inscription activity was the driver of the overall activity, and the users creating and distributing inscriptions used new accounts for each.

Starting at the end of Q4 2023 and leading into Q1 2024, there was a spike in Payment transaction activity that was not accompanied by a spike in active addresses. This began with over 22 million Payments executed over the span of one week. Inscriptions were the cause of this activity, resulting in over 2 million daily average Payment transactions during Q1.

Historically, for the smaller activity spikes in 2023, the inequality between the active recipient and sender addresses had been largely due to centralized exchanges and custodians using destination tags and sending Payment transactions. Centralized exchanges and custodians mostly use the Payment transaction type for deposits and withdrawals. As such, the Payment transaction type has consistently had more receiving addresses than sending addresses. In addition, users typically prefer creating wallets on centralized solutions for easy access to the initial XRP required to create a self-custody wallet. After acquiring their initial XRP, many users withdraw to their self-custody wallets, resulting in fewer active senders and many active receivers.

The total daily transactions metric includes 35 different transaction types, such as payments, escrow creations, NFT burns, and account deletions. Average total daily transactions increased 113% QoQ from 1.30 million per day to 2.77 million per day.

OfferCreate, a transaction type that submits an order to exchange cryptoassets, has consistently represented the bulk of transactions. This transaction type only creates an “Order” on the order book and does not necessarily facilitate an exchange unless it completes an existing open Order. OfferCreate initiates a DEX limit order, and Offer objects represent bids/asks on the order book. Offers are consumed to process transactions such as Payments and OfferCancels (triggered manually or by expirations). If an Offer is only partially consumed by a transaction, new Offers are created with the remainder of the original, similar to a UTXO. Offers can be canceled by the OfferCancel transaction. Trust Lines are structures for holding tokens that protect accounts from being sent unwanted tokens, and the TrustSet transaction is used to open or close those Trust Lines.

The increase in Payment transactions had the largest impact on shifting overall transaction dominance. Average daily Payments increased 350% QoQ to 2.0 million. This increase was caused by inscriptions that began in December. Due to those inscriptions, Payments were the most common transaction type over the quarter, historically belonging to OfferCreates.

Overall, total transactions increased 113% QoQ to 2.8 million per day. The “Other” category of transactions includes functionalities for NFTs, escrows, multisigs, setting signer keys, and more. NFT transaction types were standardized and enabled by XLS-20 in October 2022, resulting in a sudden spike in transaction dominance. These transaction types are covered in depth in the Ecosystem Overview section.

Six new transaction types were introduced in Q1 2024:

These transactions did not see much usage in Q1, as they’re almost all related to the automated market maker (AMM), which went live at the end of Q1. The exception was the Clawback transaction, which saw sustained use since launch, likely in part due to ecosystem developers testing integrations with it.

The AMM launched in March, but functional issues were quickly uncovered, and developers advised users to avoid using AMM pools until they were fixed. On March 27, rippled V2.1.1 was released with the fixAMMOverflowOffer amendment, addressing the critical bug related to handling large synthetic AMM offers within the payment engine.

DEX

A built-in central limit order book (CLOB) processes all exchanges on the XRPL for fungible tokens (also called Issued Currencies or simply tokens). This CLOB has been part of the XRPL since inception and comes with the benefit of fewer trust assumptions and consolidated liquidity, rather than the inherent vulnerabilities of smart contracts. The majority of transactions come from the native CLOB. Although there is only one CLOB, there are many marketplaces acting as gateways that facilitate access. Gateways, also known as marketplaces, all share liquidity and provide a viable user interface for the average user.

In addition to the existing CLOB, an automated market maker (AMM) was voted into the protocol in Q1, as detailed by the XLS-30 standard. AMMs function through liquidity pools that algorithmically price assets rather than creating offers of preset specifications. Liquidity pools allow holders to earn a share of trade fees on their tokens by offering them as liquidity.

Servers

Nodes and validators, known as servers, all run the same client software: rippled. Over 90% of nodes upgraded to V2.*.* in Q1. The remaining nodes either have yet to vote or have chosen not to update in order to vote against the implemented amendments. As of the end of Q1, the XRPL is supported by 627 nodes and 124 validators. Nodes increased from 606, and validators decreased from 125 since Q4.

XRPL servers participate in federated consensus as part of the XRPL’s Proof-of-Association (PoA) consensus mechanism. Validators do not stake tokens or receive financial rewards. Instead, the system is based on trust between nodes. Each node sets a list of trusted nodes, known as a unique node list (UNL). The UNLModify transaction, which is used to add/remove nodes from a UNL, was called an average of 3.7 times per day in Q1.

Ecosystem Analysis

Although the XRPL’s ecosystem hosts many of the same features as programmable settlement networks — such as Ethereum, Solana, and Cardano — the XRPL does not natively support smart contracts. Arbitrary smart contracts are not enabled on the base layer as a design choice to ensure maximum security and stability. Instead, ecosystem artifacts – such as a DEX and Issued Currencies – are natively built into the protocol. The XRPL supports multiple assets through tokens (also called Issued Currencies or IOUs). They are onchain representations of arbitrary currencies, commodities, units, etc.

DeFi

The total market cap of fungible tokens, known as Issued Currencies, decreased 16% QoQ to $142 million. There are over 3,300 listed assets on the XRPL, but the top token, SOLO, accounted for 42% of the total market cap. Combined, the top three tokens accounted for 65% of the total market cap.

The top tokens on the XRPL by market cap were as follows:

Trust Lines make metrics around token behavior on the XRPL more reliable. The XRPL requires a lockup of 2 XRP for an account to hold an Issued Currency and wallet reserves, which require a lockup of 10 XRP to create a wallet. These requirements make it expensive to enact a Sybil attack on XRPL metrics, such as the number of holders. For this reason, the number of holders is a reliable metric of a token’s adoption on the XRPL. The metric is especially relevant for fungible tokens, which have much higher supplies than NFTs.

The average daily DEX volume of fungible Issued Currencies decreased 41% QoQ to $789,000. This metric is almost entirely comprised of CLOB activity, as the AMM only launched at the end of Q1. This volume increase was driven by 57% and 23% increases in unique DEX traders and overall DEX trades, respectively. Sologenic is the leading DEX (i.e., the leading gateway to the native DEX) on the XRPL by volume of Issued Currencies exchanged. Other prominent DEXs (gateways) include XPMarket and xrp.cafe.

With the launch of the AMM, both incumbents, such as Sologenic and xrp.cafe, as well as new platforms, such as Orchestra Finance, are integrating with the functionality right away. Orchestra Finance aims to offer users an improved UX, and additional services, such as hedging against price fluctuations and speculation on asset prices. Liquidity on the AMM is shared across all DEXs (gateways), just like with the CLOB.

Stablecoins and wrapped tokens are popular on XRPL ranked by number of holders, relative to other tokens. Gatehub and Xumm have worked together to offer a total of 14 digital assets on XRPL. The top stablecoins and wrapped tokens (also known as IOUs) on the XRPL are as follows:

Ripple recently announced plans to launch a USD-pegged stablecoin on both the XRPL and on Ethereum, using XRPL native functionality and ERC-20 token standards, respectively. The stablecoin will be backed entirely by U.S. dollar deposits, short-term U.S. treasuries, "and other cash equivalents," with monthly third-party attestations. The introduction of a trusted stablecoin in a novel execution environment has proven to be a massive liquidity event in many cases (e.g., Cardano’s iUSD in 2023), particularly as a desired pairing asset for AMMs. Currently, stablecoins on XRPL have not seen the adoption of major stablecoins on other networks, such as USDT ($110 billion market cap) or USDC ($34 billion market cap).

Band Protocol, an oracle service, will soon integrate with the XRPL and its EVM sidechain. This will offer greater data availability for pricing wrapped/bridged assets. Integration on XRPL Mainnet will require a PriceOracle object (XLS-47d) which is currently in development. XLS-47d is planned for a mainnet proposal in June 2024.

Proposal XLS-39 introduced a clawback function to help protect token issuers. This amendment, enabled in Q1 2024, enables token issuers to reclaim issued assets from holders. It was made with regulation in mind, as it gives issuers more control.

Axelar, a full-stack interoperability protocol (i.e., a crypto overlay network), integrated XRPL in Q1. It connected the XRPL ecosystem to the 60+ networks, including the Ethereum and Cosmos ecosystems. As the AMM grows, as the Axelar connection makes it easier to source liquidity from many of the highest-TVL networks.

RWAs

Real-world assets (RWAs) are being explored on XRPL in several ways. Zoniqx and Ripple are working on bringing Zoniqx’s tokenization services to the XRPL. Features such as clawbacks are particularly useful here to allow asset issuers to experiment with moving RWAs onchain while remaining compliant.

Adjacent to RWAs, the XRPL has also been explored as a tool for other institutional products. Ripple is one of the leading companies developing technologies to leverage the XRPL for institutional and government use cases. The company is focused on utilizing XRP and the XRPL to drive its On-Demand Liquidity service, custody, and tokenization initiatives.

NFTs

On the XRPL, NFTs are built into the core protocol and do not require smart contracts for creation or transfers, like Issued Currencies (also known as native tokens). NFTs were standardized by XLS-20 in October 2022, bringing benefits such as royalties and anti-spam features. These features help users not only avoid unwanted tokens but also help them stay legally compliant by avoiding specific tokens and smart contracts that have been made illegal within specific regions.

NFTokenAcceptOffers and NFTokenBurns were the only NFT transactions that increased in activity in Q1. They increased 29% and 128% QoQ, respectively. Total NFT transactions decreased 65% QoQ, NFTokenMints, which decreased 77% QoQ.

Massive spikes in mint activity drove NFTokenMint to surpass NFTokenCreateOffer as the most common NFT transaction type in Q4 2023. However, NFTokenOfferCreate once again became the dominant transaction type in Q1 2024. This reversal followed the trend set by OfferCreate typically being the most dominant of all transaction types on XRPL. As of the end of Q1, 6.5 million total NFTs have been minted with the XLS-20 standard. Over 3.4 million of those mints came in Q4 2023.

Notable NFT projects on XRPL include:

Sidechains

Multiple sidechains for the XRPL are either in development or were recently launched. The XRPL has stayed true to its vision of minimized L1 complexity, offering increased programmability for both general and specific use cases on sidechains.

Coreum

Coreum (CORE) is an enterprise-grade L1 focused on interoperability and scalability. Coreum runs a WASM VM and is secured by a Bonded Proof-of-Stake (BPoS) consensus mechanism. CORE is used for transaction fees, staking, and validator rewards on Coreum.

Coreum was built by the Sologenic team to service user needs that could not be efficiently managed on the XRPL. The network's initial focus is on providing security tokenization, such as tokenized stocks from the NYSE and synthetic assets. Coreum has completed an IBC integration, granting access to all IBC-connected networks such as Cosmos Hub, Ethereum, and BSC. Users can already transfer between Coreum and the XRPL via the noncustodial Sologenic bridge.

EVM Sidechain

Peersyst’s EVM sidechain proposal offers a proof of concept for bringing smart contracts to the XRPL ecosystem. It aims to grant the XRPL ecosystem access to EVM developers and functionality, with a general-purpose scope. The sidechain is being built on the Cosmos SDK, specifically Ethermint, and connects to the XRPL through the XRPL-EVM bridge. The Devnet is currently live and is creating blocks every ~3.4 seconds using the Comet BFT PoS consensus mechanism, a variant of Tendermint.

The latest version of Peersyst’s EVM sidechain was deployed on Devnet V2 in Q2 2023. Dapps such as identity protocol XRPDomains were deployed on the testnet. Notable additions to the latest version include:

Additionally, this EVM sidechain is connected to the XRPL using the same bridge design proposed in the cross-chain bridges (XLS-38d) specification. XLS-38d was audited by Bishop Fox in Q3 2023. Bishop Fox’s report results were released in Q4 2023, with zero critical or high-severity risks found.

The bridging of XRP, IOUs, and ERC-20s on this sidechain was implemented following the specifications of the XLS-38d bridging standard. XLS-38d was first proposed by Ripple developers in February 2023 for a cross-chain bridge between the XRPL mainnet and any sidechain. Bridges built by this standard will lock tokens on the XRPL to first mint a wrapped version on the sidechain and then later burn the wrapped tokens to unlock the original assets on the XRPL. A new node type called a “witness server'' will communicate between chains. Witness servers together operate the door account connecting the XRPL mainnet.

Root Network

The Root Network sidechain is a blockchain-based NFT system with a focus on UX and metaverse, run by Futureverse. The Root Network is live in alpha, along with its bridge to XRPL and Ethereum. Built from a Substrate fork, the Root Network uses XRP as the default gas token and has EVM support for smart contracts. The Root Network uses a delegated-Proof-of-Stake (dPoS) consensus mechanism (via the ROOT token). The protocol’s roadmap items are aligned with the XRPL, seeking to integrate the XLS-20 NFT standard and source liquidity from the XRPL DEX. Root Network also plans to offer users social recovery, management of assets, increased wallet flexibility, and a familiar Web2 experience through the account abstraction solution FuturePass.

Hooks

Hooks is a feature to include smart contract-like functionality for the XRPL transactions. While Hooks are not Turing complete and do not enable arbitrary logic, they do allow conditions and triggers to be attached to transactions — similar to scripts on UTXO chains like Bitcoin and Cardano (pre-Alonzo). In particular, Hooks enable several programmability features, including the scheduling of payments, distributing a set percentage of funds to a creator for royalties, or imposing limits/restrictions on transactions for both volumes and counterparties.

Hooks went into a public testing and feedback period on XRPL Labs’ public testnet in Q2 2023.

Governance

Several teams support the development of XRPL, including Ripple, XRPL Foundation (XRPLF), Xumm, and more. A community discussion sparked in Q1 around the XRPLF’s role in the ecosystem. This led to a formalized proposal for the XRPLF to be member-governed, which aimed more at driving attention and participation to the discussion rather than implementing any specific new structure. This step towards decentralized governance of a core contributor organization would further decentralize and add transparency to the entire network.

Closing Summary

Average daily transactions increased 113% QoQ from 1.3 million to 2.8 million. The increase was largely driven by inscription activity, but it also came from other ecosystem activities, such as the 23% QoQ increase in DEX trades. DEX trades and volumes may further increase as new infrastructure, namely an AMM, was deployed on mainnet at the end of Q1. Incumbent CLOB gateways, such as Sologenic, and new players, such as Orchestra Finance, integrated the new AMM right away.

New transaction types were introduced in Q1 that enabled the enshrined AMM as well as other functionalities like clawbacks. These new features are laying the foundation for an expressive DeFi environment around RWAs and other tokenized assets. Other new infrastructure like stablecoins and the Axelar bridge are complementary and can particularly help provide new liquidity.