One of the most interesting features of the XRPL is the ability to send and hold digital assets like Bitcoin and Ethereum in the form of an IOU issued from popular exchanges like Bitstamp and Gatehub. A user isn’t holding actual BTC, ETH, etc., they’re holding a representation of that asset in the form of an IOU from an entity they trust. An IOU isn’t an elegant solution for storing non-native digital assets in the long term given the history the cryptocurrency community has with exchange collapses and thefts. If you’re holding a BTC IOU in your XUMM wallet and an exchange collapses, how do you now collect that BTC from an entity that no longer exists?
Banks have similar issues with currency custody. An individual is trusting a bank that their money will be there when they try to withdraw. Sill, because of incidents like the suspicious collapse of Quadriga, one of the largest exchanges in Canada, I never feel comfortable storing cryptocurrency with an exchange. In contrast, I’m much less apprehensive about keeping my money in a bank. Then again, a large number of cryptocurrency holders don’t seem to have a problem storing their funds in exchanges, so perhaps my concern stems from risk-aversion.
The XUMM application advises users not to deposit large amounts of funds, as XUMM is still in beta. I loaded up enough to money to pay the initial XRP account setup fee for my XUMM wallet, and that left me five dollars to play with. On the Bitstamp exchange, five dollars of BTC is an amount you can neither trade with (the trade limit for Bitstamp is $25), nor withdraw as the withdrawal fee costs more than $5). During times of network congestion, the BTC transaction fees would be cost-prohibitive for sending such a small amount of Bitcoin. Absent the IOU features of the XRPL, that five dollars of Bitcoin would have been trapped on that exchange.
In order to receive the BTC on my XUMM wallet, I first had to establish trust with the exchange and that particular digital asset. It’s easy to do: in the XUMM wallet, you click on the add button next to “other assets” listed near the bottom of the app. Then you click on the exchange you wish to trust and the asset you wish to add, follow the prompts (there’s a small transaction fee of 0.000012 XRP), and you’re good to go.
With the trust line established, I sent the BTC to my XRP address using Bitstamp’s “IOU Ripple Payment menu.”
The BTC IOU was added to my account almost immediately and for a fraction of the cost of a traditional Bitcoin transaction (only 0.02 XRP). From there, I was able to convert the BTC into XRP, bypassing Bitstamp’s $25 trade limit for an exchange rate of 0.000021 XRP/BTC. The transaction cost consumed 0.000012 XRP.
I was able to send a Bitcoin IOU cheaper and faster than a traditional Bitcoin transaction. And I was able to bypass an exchange’s rather stringent trade limitations. XUMM also allows you to hold fiat currencies with trust lines from Bitstamp and Gatehub – Bitstamp supports USD and Gatehub supports Euro and USD. If banks begin to support XUMM and XRPL integration, they would be able to allow clients to transact across a variety of currencies and digital assets using the XRPL.
The XRPL and XUMM solve a serious problem for high transaction cost cryptocurrencies like Bitcoin. The oft mentioned BTC cup of coffee problem: If a BTC user wanted to purchase a cup of coffee using their BTC, the transaction cost of sending the Bitcoin to the merchant would be prohibitive and the amount of time it would take to verify essentially makes BTC a currency you can’t spend in the real-world. Using something like XUMM integrated with an exchange or bank, a customer could easily pay with a BTC IOU issued by a financial institution for a much lower transaction cost. XUMM would make simple transactions cheap and straightforward for users of any digital asset supported by the XRPL and issued by an exchange or bank.
XUMM is a bridge between those distant and hard-to-use features of the XRPL like the decentralized exchange and non-native currency IOUs and average users whose eyes gloss over when you try to explain how some of these features work. If it finds institutional adoption and manages to solve a few minor user-interface issues, it could solve many of the niggling issues that plague digital-asset adoption.