XRP Ledger’s Role in Enhancing Real-World Asset Tokenization

Ripple is vigorously advocating for the XRP Ledger (XRPL) as the premier blockchain for the institutional tokenization of real-world assets (RWA). The company underscores aspects of security, scalability, and interoperability, establishing itself as a reliable platform for decentralized finance (DeFi) and the management of tokenized assets.

In a recent exclusive interview with BeInCrypto, Ross Edwards, Senior Director for Solutions and Delivery at Ripple, shares his thoughts on why the XRPL is perfectly positioned to connect traditional finance with DeFi.

Instant Settlement, Stability, and Reduced Risk: Why XRPL is Ideal for Financial Institutions

When exploring the XRPL’s potential in revolutionizing institutional finance, Ross Edwards clearly articulated its foundational strengths. He mentioned the distinctive advantages that make the blockchain appealing to institutions aiming to tokenize RWAs.

According to Edwards, XRPL’s design is central to its effectiveness. He particularly noted that the XRPL boasts a transaction speed of just 3 to 5 seconds at minimal expense, effectively tackling the high costs and delays that often plague traditional financial systems.

“The XRP Ledger facilitates the immediate settlement of value, coupled with transparency and auditability that can significantly alter the risk profile of transactions,” he explained.

Read more: How Does Real World Asset (RWA) Tokenization Affect Us?

He further detailed that XRPL utilizes a robust governance framework. This allows the community to propose changes that cater to the needs of financial institutions.

Moreover, it negates the requirement for custom coding, deploying, and managing smart contracts along with the necessary audits. These features ultimately mitigate risks, which is vital for financial entities.

“The ledger was designed for creating value and assets on-chain, ensuring their secure storage, trading, and transfer. Thus, it is inherently engineered for this purpose. The XRP Ledger is a tested technology that has been operational for 11 to 12 years and is remarkably stable. […] All you need to do is call the APIs of the XRP Ledger to initiate those use cases,” Edwards argues.

Additionally, the Automated Market Maker (AMM) is one of Ripple’s fundamental innovations within the XRPL. This function, built straight into the protocol, permits institutions to participate in DeFi securely without relying on potentially unreliable third-party smart contracts.

XRPL’s AMM is distinctive in its capability to pool liquidity across the protocol. Ripple’s liquidity strategy is specifically tailored to meet the demands of institutional investors.

By integrating the AMM into the XRPL’s decentralized exchange (DEX), institutions can engage with DeFi more easily. This mechanism guarantees both security and efficiency for extensive operations.

The XRPL’s AMM is also adept at consolidating liquidity from across its framework. This system guarantees that institutions have access to ample liquidity pools, enabling them to execute transactions at the most advantageous rates. Furthermore, it significantly reduces slippage—a critical concern for institutions handling large transactions—and ensures consistent liquidity for trading purposes.

Moreover, the advent of the Multi-Purpose Token (MPT) standard will empower institutions to establish intricate token structures that represent various asset categories. Slated for release in Q3, MPT will offer greater flexibility for organizations looking to tokenize and manage a diverse range of assets on the XRPL.

Ripple is also aiming to broaden the XRPL’s applicability for institutional DeFi with the imminent launch of Ripple USD (RLUSD), a fully-backed stablecoin tethered to the US dollar. Edwards perceives this stablecoin as a pivotal move to enhance liquidity and streamline cross-border transactions for the institutions leveraging the XRPL.

“If you’re operating in the space of real-world asset tokenization, stablecoins are indispensable. Their importance will continue to grow, not only in the crypto arena but also within the broader financial landscape. This is why Ripple sees the issuance of Ripple USD as adding value to the existing stablecoins available. They will cater to specific institutions and uses, effectively propelling the ongoing growth of tokenization,” he said.

Leveraging DIDs and Strategic Alliances for Enhanced Influence in Tokenized Assets

Alongside strong infrastructure and technology, security and compliance are crucially important for institutions, especially regarding tokenized assets. In a previous discussion with BeInCrypto, Ripple’s Markus Infanger, Senior Vice President of RippleX, emphasized how the XRPL utilizes Decentralized Identifiers (DID) to effectively address these issues.

With DIDs integrated, the XRPL allows institutions to manage user identities securely and verifiably, ensuring compliance with Know Your Client (KYC) and Anti-Money Laundering (AML) regulations. This integration curtails the risks associated with fraudulent transactions by optimizing KYC/AML processes, thereby boosting security and regulatory compliance for tokenized asset dealings.

“The interplay of these features, along with additional proposals to facilitate institutional DeFi on the XRPL, such as a native Lending Protocol and Oracles, is simplifying the integration of tokenized real-world assets into the on-chain financial infrastructure. Ultimately, DeFi supports new financial platforms for activities like trading, collateralization, investing, and borrowing. Bringing real-world assets onto-chain and exposing them to these platforms presents new opportunities—this is the true value of tokenizing real-world assets,” Infanger detailed.

The growing adoption of the XRPL in institutional finance is notable through partnerships with significant industry players. For instance, Ripple’s collaboration with OpenEden led to the introduction of tokenized US treasury bills (T-bills) on the XRPL.

Likewise, Ripple has teamed up with Archax, the UK’s inaugural regulated digital asset exchange, broker, and custodian. Archax plans to introduce hundreds of millions of dollars in tokenized RWAs onto the XRPL within the coming year.

Balancing Immediate Returns and Long-Term Development in Tokenization

Despite the solid groundwork laid by the XRP Ledger for institutional adoption, it has encountered some obstacles, particularly regarding on-chain activity. A recent report disclosed that in the second quarter of 2024, the number of transactions on the XRPL plummeted by over 65% compared to the first quarter. This decline also manifested in transaction volumes and overall DEX participation, where trading volume decreased by almost 43%.

The average transaction cost on the XRPL rose sharply as well. In Q2, transaction fees surged by more than double compared to Q1, skyrocketing by 168%, which may have contributed to the drop in activity. Additionally, the creation of new wallets on the network declined, with wallet growth falling by 45.8%.

Additionally, Edwards pointed out that the hurdles of tokenization extend beyond the XRPL itself. He acknowledged that one of the most significant challenges in this process is its inherent long-term nature. He emphasized that this necessitates patience and gradual ecosystem development.

“Tokenization is not an instantaneous process. It’s not contingent on someone’s decision or capability to take an asset, write a code, and store it—whether on a blockchain or otherwise. That aspect is relatively simple. It involves constructing the ecosystem and interconnecting these value streams,” he stated.

Edwards emphasized that financial institutions seek immediate, concrete benefits. This indicates that each phase in the tokenization journey must provide short-term value while laying the groundwork for long-term development.

He also indicated that achieving this equilibrium is a sensitive balancing act that Ripple and the industry at large must carefully navigate. Moreover, Edwards highlighted that financial institutions are crucial to properly achieving this balance, as their involvement is essential for the success of the tokenization ecosystem.

Read more: RWA Tokenization: Examining Security and Trust

However, in the short term, Edwards believes that the rising demand and comprehension of the driving factors behind tokenization will be vital. As the uptake of tokenized assets progresses—extending beyond mere acquisition and retention to more comprehensive use cases—the market will begin to expand rapidly.

“We’ll witness that, once this unlocks and there’s an increase in the utilization of these tokenized assets, rather than just purchase and retention, this area will accelerate significantly. It is set to become critical to the future of the financial ecosystem,” he concluded.