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Before I begin, here's what I'm NOT saying: I'm NOT saying that XRP is not valuable. I'm NOT saying that XRP has no utility. I'm definitely NOT saying that Ripple (the company) has no intention or desire for the price of XRP to rise.

Brad Garlinghouse, in his recent interview with Anthony Pompliano said that “Ripple is to cross border payments as Amazon is to books”. This one phrase prompted me to think and realize that the current projects Ripple is focused on (cross-border payments via On-Demand Liquidity by using XRP) may not be the main reason XRP will increase in value, both now and in the near future.

Hear me out.

Basic Economic Principles

The most fundamental principle of economics is supply and demand. Supply is the amount and availability of a good or service in a market. Demand is the desire for that product or service by the general public. In general, when the demand is greater than the supply, the value of the product or service rises, because people are willing to pay more for a what they want. When supply is greater than demand, its value will most likely decrease.

XRP is forever capped at 100 Billion units. Because every transaction burns a bit of XRP, the number of XRP in existence will always decrease rather than increase. This makes XRP a deflationary asset that has an ever decreasing supply.

But that's not the whole story. The smallest, indivisible unit of XRP is referred to as a “drop”. A drop is 0.000001 of XRP. Or, to put it another way, there is a maximum of 100 Quadrillion drops of XRP that can exist at any time. Because there has already been XRP that has been burned through transactions, there is a bit less than that currently.

This may make it sound like the supply of XRP could never be exhausted. However, that is not really the case. Just as a comparison to internet storage, it is predicted that, by 2025, humanity will have used up at least 175 zettabytes of storage. In other words, after less than three decades of existence, the Internet will have compounded the sum of our data to more than 175 sextillion bytes, which is already more than a thousand times the number of XRP drops that will ever exist. These are incomprehensibly large numbers, but suffice to say, humanity can certainly use or use up the supply of XRP in the near future, if we so desire.

The Problem with Utility

One of the things Brad Garlinghouse also espouses is the idea that, as blockchain and cryptocurrency becomes more mainstream, the value of a crypto coin will be determined by its utility. I completely agree with this statement, but I don't believe it necessarily means that XRP will be valued highly in comparison to other cryptos, even those with lower levels of utility.

XRP is considered by many a currency—a medium we exchange to quantify value for goods or services. So let me use a real-world example to illustrate what I mean.

Let's compare gold and silver. Both these precious metals have, in the past, been used in one form of currency or another. Both metals are currently considered hedges against recessions and global market crashes by economists.

Gold was once considered the standard by which all government fiat was measured. You used to be able to literally turn in your cash for gold. It can never tarnish or rust, thus never losing its beauty or allure. It has many uses, from coinage to jewelry, to dentistry and even space (it's actually used by NASA!). And it is sufficiently rare enough that the demand for it will consistently (over the long term) far outstrip supply.

Silver is quite similar. As long as you do some upkeep on it, its tarnishing effect is often mitigated. It is also rare enough that demand for it often outstrips supply. However, silver's utility far outstrips gold's. Not only is it used for almost everything gold can be used for, but it can also be used to make daily items such as mirrors, photography-related products, medicinal anti-bacterial goods, and even solar panels.

Silver is rare, but not so rare that people would much rather hoard it than make use of it. And that, in addition to silver's more ready availability, is what makes silver worth less than gold. Currently, gold sits a little less than $1500 an ounce. Silver sits at around $18.

Now, I actually believe XRP is more like digital gold than Bitcoin (you can see my thoughts on that here). However, I think the above example can still be an analog for XRP.

While XRP has much more utility and is vastly more scalable than any cryptocurrency out there, this permeability of XRP doesn't necessarily equate to price. And so, while I don't believe that the abundant divisibility of XRP has much to do with its price, I also don't believe that high utility necessitates high value for XRP.

Instead, I think that the basic economic principles will always be in play. Demand for XRP needs to outstrip its availability (i.e. supply) for its price to heavily increase. Or, perhaps to say it another way, a desire to hold XRP rather than sell it needs to pervade so that those who want to use it would be required to pay a higher price for it.

Evaluating ODL

Ripple's ODL technology, previously categorized distinctly as xRapid and xCurrent, is trying to solve the problem of cross border payments by using XRP as a bridge between different currencies. To explain it simply, ODL uses exchanges in various locales or third party liquidity providers to facilitate the transfer of money between financial entities.

Now, since I'm not an employee at Ripple, I don't know the intricacies of how ODL works. But I speculate that it doesn't require that transactions be large in order for it to be a vast improvement over current ways of cross-border money transfer. In other words, if one bank needed to transfer a million dollars, ODL software may not require that one million dollars be transferred all at once. Instead, it's probable that the amount transferred can be divide up into smaller amounts, and transferred through Ripple's networks. This would allow ODL to be efficient, whether or not XRP's price is high or low.

Thus, in this scenario, the price of XRP doesn't actually need to rise to accommodate large transfers. Banks would just need to be slightly more patient, but still be able to get their transfers. And this will still allow ODL to be a far better solution for those institutions than any other system currently.

Critically, banks don't need to hold any XRP for the transactions to function. But if ODL can work as stated above, then no one really needs to hold XRP in reserve for ODL to work either. And since there's no real desire to hold, the demand for XRP in this case does not always outstrip supply.

Now, since the above is speculation, I don't know if any of it is really correct. However, I can't imagine a scenario where Ripple promises major banks and financial institutions a better solution for their problems, but only if XRP rises in price. I'd think that Ripple would rather build a system that works very well regardless of the price of XRP, but would be far more beneficial if the price of XRP were to rise.

An Ecosystem for Hodling

Because banks and financial institutions transfer money in volumes that eclipse all other use-cases, I believe that if a large enough number of them hop onboard, then the volume of XRP being used could sufficiently stabilize the price. But again, as given above, that doesn't necessitate a rise in price.

This is where I believe Garlinghouse's statement comparing Ripple to Amazon is key to understanding Ripple's vision and its view of XRP.

Amazon, by first selling books, was able to get its foot in the door of online shopping. It did it so well that most physical bookstores collapsed, and the current ones are basically fighting to stay alive. However, once it saw that its online bookstore experiment was doing well, it began to reach into other avenues of online shopping, and then online storage, and now in-home services connected to the various Amazon services.

Similarly, I think Ripple views ODL as simply a first step. If its systems using XRP were to topple the current financial world's way of transferring money, then XRP's utility and reputation will be proven. As ODL takes off (and there's a lot of indication that it already is), like Amazon, Ripple will be able to concentrate on other things that will flourish the XRP ecosystem beyond just cross-border payments.

And perhaps other companies will begin to jump onboard, buying up extraordinary volumes of XRP to get their own projects started that will change other systems in other places in society. This would inevitably decrease the available XRP supply, and thus, even if demand stays the same, the ratio between supply and demand would flip.

Thus moon.

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