State of XRP Ledger Q2 2023

Key Insights

• XRP’s circulating market cap is up 42.5% YTD, primarily due to Q1’s surge. However, the market cap decreased 10.7% QoQ from $27.8 billion to $24.8 billion in Q2.
• Average daily NFT transactions increased 12.7% QoQ from 13,800 to 15,500. Almost all NFT transaction types increased QoQ, and NFTokenCreateOffer increased its dominance to over 50% of all NFT transactions.
• Average daily transactions and average daily active addresses declined 11.9% and 17.6% QoQ, respectively. Aside from NFT activity, most network activity metrics declined in Q2.
• The XRPL continues to expand in new directions with efforts on sidechains. Coreum and Root Network recently launched, offering XRPL developers more programmability to explore security tokenization and metaverse, respectively.
• The EVM sidechain and XLS-38d bridge both saw another iteration launch in Q2. Developers are now testing transfers between Issued Currencies and ERC-20s, a new consensus mechanism, and more.

Primer on XRP Ledger

The XRP Ledger (XRPL) has been running for over a decade, offering fast, energy-efficient, cross-currency, and cross-border payments, among other features. The XRPL offers native Issued Currencies, a decentralized exchange (DEX), escrow functionality, and token management. With these native capabilities, the XRPL can execute many of the same functions that other networks do, even though it does not support smart contracts. Arbitrary smart contracts are not enabled on the base layer as a design choice to ensure maximum security and stability.

XRP, the native token on the XRPL, is the sixth largest cryptocurrency by market capitalization at $24.8 billion, as of Q2 2023. The XRPL averages ~15 transactions per second, although it could theoretically support up to 1,500. Transactions on the XRPL are deterministic in cost, with most transaction types costing 10 drops. A drop is a millionth of an XRP, worth a fraction of a cent at XRP’s current price of $0.47.

The XRPL – supported by Ripple, XRPL Foundation, XRPL Labs, XRPL Commons, and other developers around the world – aims to go beyond other networks’ narrow focus of peer-to-peer transactions. It provides a digital payment infrastructure not just for individuals but also for existing financial entities such as central banks.

For an in-depth look at the XRPL’s history, technology, tokenomics, and more, see our Initiation of Coverage report.

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Key Metrics

Performance Analysis

Network Overview

Alongside most other large Layer-1 (L1) networks, XRPL’s network activity metrics took a decline across the board in Q2. Average daily transactions declined 11.9% QoQ from 1.32 million to 1.16 million, returning to a level last seen in Q3 2022. Average daily active addresses took a larger decline, down 17.6% QoQ from 66,000 to 54,000. Unlike transactions, Q2 active addresses hit a yearly low.

The net number of accounts increased by ~30,000, driving total accounts up 0.7% to 4.68 million in Q2. New addresses over the quarter were roughly equivalent to Q1, decreasing 1.3% to 138,800. Deleted addresses spiked to their highest level in over a year, jumping 366.9% QoQ from 22,900 to 107,100. Specifically, AccountDelete transactions were at 50x their daily average from June 15-17 due to activity from the Poloniex exchange.

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 (DAA) 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 has been the primary factor behind major activity spikes. In contrast, the number of addresses that sent transactions remained relatively stable during Q2. This indicates that the network's activity surges were generally caused by senders distributing tokens to large groups of previously inactive recipients. The senders were likely exchanges and custody solutions, as they generate many active receiving addresses while only being counted as a single (or few) active sender address.

On May 28, 2023, about 523,000 addresses received a transaction, which was ~11x the daily average in Q2. This was the second-largest address activity day of all time.

The inequality between the active recipient and sender addresses is largely attributed 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, which 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.

Total daily transactions is a metric made up of 29 different transaction types, such as payments, escrow creations, NFT burns, and account deletion.

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.

OfferCancels and TrustSets declined 26.0% and 25.3 QoQ, respectively. OfferCreates only decreased 7.6% QoQ, less than the total transaction decrease of 11.9%. Thus, OfferCreate’s transaction dominance increased from 64% to 68%.

Despite having a few days of heightened activity in late May, Payments had the largest absolute decline of all transaction types and the largest percentage decline of major transaction types, declining 28.4% QoQ from 252,000 to 180,000 per day.

The ‘Other’ category of transactions includes functionalities for NFTs, escrows, multisigs, setting signer keys, and more. This category was the only one to grow in Q2, and NFTs are responsible. 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.

Financial Overview

XRP is the native token on the XRPL and is used for transaction fees, wallet reserves, and other functionalities. XRP’s circulating market cap decreased 10.7% QoQ from $27.8 billion to $24.8 billion, lagging behind the total crypto market cap’s increase of 0.4%. However, XRP’s market cap stayed up 42.5% YTD thanks to the massive Q1 surge. Due to the 1.1% QoQ inflation rate, XRP’s price saw a slightly greater QoQ decrease of 11.7% QoQ from $0.54 to $0.47.

In June, XRP’s price nearly bounced back to its yearly high set in late March after a decline in early May. While correlation does not necessarily equate to causation, some of XRP’s price action in recent months surrounded news from the SEC’s ongoing case with Ripple, which began in 2020. The massive revenue spike in June also occurred near news from the SEC case; revenue was ~20x its daily average for three days. The SEC separately charged both Binance US and Coinbase in early June and, in the process, alleged various cryptoassets to be securities. While XRP was not one of those securities, these cases carry implications for the overall industry.

Transaction fees on the XRPL are burned, applying deflationary pressure to the total supply of 100 billion XRP. Since the XRP Ledger’s inception, only around 10 million XRP have been burned. Counteracting the burn rate, there is 1 billion XRP that vests to Ripple per month. Any XRP not spent or distributed by Ripple in that month is returned to escrow. In Q1 2023, total XRP sales by Ripple, net of purchases, were up 60% from Q4 2022, from $226 million to $361 million. This system will continue until the remaining ~48 billion XRP becomes liquid.

Unlike many other cryptocurrency networks, the XRPL does not distribute rewards or transaction fees to validators. Rather than receiving awards for Proof-of-Association (PoA), 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). The only revenue component comes in the form of burned fees, which combat inflationary pressure and drive value to the XRP token.

Ecosystem Overview

Although the XRPL’s ecosystem hosts many of the same features as programmable settlement networks such as Ethereum, Cardano, and Solana, the XRPL does not yet 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. Issued Currencies, also referred to as IOUs, are how the XRPL supports multiple assets; they are on-chain representations of arbitrary currencies, commodities, units, etc. XRPL Labs is developing plans to support smart contract-like functionality via Hooks, which is explored further in the Qualitative section.

A built-in central limit order book processes all exchanges on the XRPL, for both fungible tokens and NFTs. This decentralized exchange (DEX) comes with the benefit of fewer trust assumptions and consolidated liquidity, rather than the inherent vulnerabilities of smart contracts.

Although there is only one DEX, 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.

Issued Currencies

The average daily DEX volume of fungible Issued Currencies declined 56.5% QoQ, from $1.3 million to $0.5 million. The total market cap of fungible Issued Currencies also declined 20.6% QoQ, from $182.2 million to $144.7 million. 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 onXRP.

It is expensive to enact a Sybil attack on XRPL metrics such as the number of holders. Its security comes from Trust Lines, which require a lockup of 2 XRP to hold an Issued Currency, and wallet reserves, which require a lockup of 10 XRP to create a wallet. 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 top tokens on the XRPL by market cap are as follows:

• Sologenic (SOLO) has $60.5 million in market cap and 235,000 holders. SOLO has utility for the Sologenic gateway.
• Coreum (CORE) has $10.4 million in market cap and 57,000 holders. CORE is the native token of the Coreum sidechain.
• CasinoCoin (CSC) has $8.2 million in market cap and 28,000 holders. CSC has utility on CasinoCoin’s Lobby platform for regulated gaming.

The Sologenic gateway is the service behind the SOLO token. SOLO is primarily used to pay transaction fees on the Sologenic gateway. CORE exists as a token on the XRPL, but it is also the native token of the Coreum sidechain, which was also developed by the Sologenic team. SOLO and CORE were the most popular assets on Sologenic in Q2, with 83,200 trades for $7.5 million in volume and 67,900 trades for $5.5 million in volume, respectively.

The top stablecoins and wrapped tokens (also known as IOUs) on the XRPL are as follows:

• Gatehub ETH: $10.5 million market cap and 25,000 holders
• Bitstamp BTC: $8.0 million market cap and 6,000 holders
• Gatehub USD: $4.2 million market cap and 21,000 holders

The number of Trust Lines open for a given Issued Currency is generally tightly coupled with the number of holders of said token. The average Issued Currencies have around 20-40% more open Trust Lines than holders. Stablecoins and wrapped tokens, on the other hand, typically have 3-10x more Trust Lines than holders. Gatehub’s EUR stablecoin, for example, has the 6th most open Trust Lines, despite only having the 15th largest market cap.

The number of open Trust Lines may be relatively high because users may keep them perpetually open for quick escapes from network-specific volatility. Alternatively, the relatively low number of holders for stablecoins and wrapped tokens could have skewed the percentage differences higher than the absolute values would suggest.

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, which help users not only avoid unwanted tokens but also stay compliant.

Total NFT transactions were one of the few network activity metrics to increase QoQ. Average daily NFT transactions increased 12.7% QoQ from 13,800 to 15,500. The fastest-growing transaction type was NFTokenAcceptOffers, which increased 25.5% QoQ from 3,100 to 3,900. NFTokenCreateOffers grew by the largest absolute terms, increasing by over 1,000 average daily calls in Q2.

NFTokenCreateOffer, which was already the most common NFT transaction as of Q1 2023, increased its dominance of all NFT transactions from 48.3% to 50.4% in Q2. Its increase was in line with its general transaction dominance, as CreateOffer is the most common of all transaction types. By nature of the transaction types, mint and burn transactions (i.e., NFTokenMint and NFTokenBurn) will likely continue to lose dominance to Offer-related transactions (i.e., CreateOffer, AcceptOffer, and CancelOffer). Mint and burn transactions can only be called a maximum of one time per NFT, while Offer-related transactions have no limit.

As of the end of Q2, 1.6 million total NFTs have been minted with the XLS-20 standard. XPUNKS remains the all-time leader in NFT sales volume, with 4.0 million XRP ($1.6 million USD) in sales volume.

Sidechains

Coreum (CORE) is an enterprise-grade L1 focused on interoperability and scalability. CORE’s market cap was down 61% QoQ from $138 million to $54 million; its circulating supply increased 3% from 503 million to 516 million. CORE is used for transaction fees, staking, and validator rewards on Coreum.

The max validator set size increased 25% from 32 to 40, although at the end of Q2, only 37 validator slots were full. Of those 37, it takes the top four validators to control over 33% of the voting power.

Servers

Nodes and validators, known as servers, all run the same client software: rippled. Over 46% of nodes are running the latest version, V1.11.0, which was only released days before the end of the quarter. The others have not yet updated or have chosen not to update in order to vote against the implemented amendments. These nodes are still using V1.10.* or V1.9.*. As of the end of Q2, the XRPL is supported by 701 nodes and 119 validators. Nodes and validators increased from 683 and 117 in Q1, respectively.

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 3.6 times per day in Q2.

Qualitative Analysis

Community

The XRPL is supported by various independent entities. Although these entities are generally aligned, they have their own priorities and goals, resulting in competition and overlap between sidechains, ecosystem tools, and more.

Notable community events in Q2 include:

• XRPL Grants Wave 6 applications were open from April 25 through June 24. Since 2021, the program has allocated over $10 million worth of XRP to over 100 projects. Awardees for Wave 6 will be rewarded in September 2023.
• Cohort 1 of the XRPL Accelerator kicked off on June 12. This 12-week program is partnered with Ripple to support XRPL builders and will run until late August. Cohort 2 will begin in early August and is partnered by Tenity.
• Phase I of the 2023 Ripple CBDC Innovative program kicked off with applications being opened in May. Judges will look to distribute $200,000 in prizes to participants building central bank digital currency (CBDC) based products. This is the program’s second year.
• Applications were opened for the XRPL Campus Ambassador program. This program offers an opportunity for students to involve themselves with education and mentorship related to XRPL technology.
• The XRPL Summer Hackathon is taking place online until July 30, offering prizes and workshops to builders.
• Space Mermaids, a play-to-mint tournament-style NFT game, launched in June. Space Mermaids was a winner from Wave 3 of Ripple’s $250 million Creator Fund to support NFT projects on the XRPL.
• Novatti’s Australian dollar-backed stablecoin (AUDD) went live on the XRP Ledger.
• QuickNode began support for XRPL, offering new infrastructure for developers.

XRPL Development

Notable developments in Q2 include:

• Hooks passed its security audit.
• The Xumm wallet released version 2.5.0, with UX improvements such as NFT action previews and navigation fixes.
• Fractal, a digital identity solution, is working towards bringing KYC/AML compliance to the XRPL.
• XLS-40d was proposed as a standard for XRPL Proof-of-Payment (XPOP), i.e., offline proofs for transactions and their metadata.
• XLS-42d was proposed as a standard for XRPL Plugins to make it easier for developers to modify and build sidechains, without needing to know C++.
• Rippled V1.11.0 was released.

Hooks

Hooks is a system to include smart contract functionality in XRPL transactions and is live on XRPL Labs’ public testnet. Hooks is not Turing complete and will not enable arbitrary logic, but it will allow conditions and triggers to be attached to transactions, similar to how scripts work on UTXO chains like Bitcoin and Cardano (pre-Alonzo).

After its mainnet deployment, Hooks will enable several programmed features. These include scheduled payments, distributing a set percentage of funds to a creator for royalties, or imposing limits/restrictions on transactions for both volumes and counterparties.

AMM

In addition to the existing order book DEX, an automated market maker (AMM) is being built for the XRPL as detailed by the XLS-30d standard. AMMs function through liquidity pools that algorithmically price assets rather than creating offers of preset specifications.

Liquidity pools create an opportunity for holders to earn a share of trade fees on their tokens by offering them as liquidity, but they also introduce risks such as impermanent loss.

Enterprise Solutions

Ripple is one of the companies leading the development of technologies that 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 and CBDC initiatives.

The XRPL continues to be at the forefront of CBDC explorations by various governments. The new Ripple CBDC platform is based on the same blockchain technology used by the XRPL. Ripple is working with more than 20 countries on CBDC plans and hopes to leverage the XRPL to realize those visions. Most recently, the Central Bank of Colombia has begun working with Peersyst and Ripple toward a CBDC.

Multichain Development

Multiple sidechains for the XRPL are either in development or have recently launched. The XRPL is staying true to its vision of minimized L1 complexity, which is why increased programmability for both general and specific use cases is being provided on sidechains.

Coreum

Coreum is an independent L1 network running a WASM VM and secured by a Bonded Proof-of-Stake (BPoS) consensus mechanism. Coreum is focused on interoperability, scalability, and speed. The network was developed by the Sologenic team, and the CORE token has existed on the XRPL as an Issued Currency since Q1 2022.

Coreum was built by the Sologenic team to service user needs that could not be efficiently managed on the XRPL. The initial focus of the network is to provide security tokenization, such as tokenized stocks from the NYSE and synthetic assets.

Development is kicking off on Coreum with over 160 submissions for Wave 2 of the Coreum Grants program. Coreum has had two proposals so far, which both passed. Those proposals increased the length of the voting period to five days and expanded the maximum validator set size to 40, thus furthering the potential decentralization.

Users can now use the noncustodial Sologenic bridge to transfer between Coreum and the XRPL. This alternative bridging option came just in time as the initial bridging solution, Multichain, was exploited and is not recommended for use.

EVM Sidechain

Peersyst’s EVM sidechain proposal offers a proof of concept for bringing smart contracts to the XRPL ecosystem. It will grant the XRPL ecosystem access to EVM developers and functionality, with a general-purpose scope. This EVM sidechain is live on Devnet. 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 Comet BFT PoS consensus mechanism, a variant of Tendermint.

On June 26, 2023, a new version of Peersyst’s EVM sidechain was deployed on Devnet V2. Some dapps, such as identity protocol XRPDomains, have already deployed on the new testnet. Notable additions to this version include:

• Support for XRP, IOU, and ERC-20 token transfers via the bridge
• Proof-of-Authority consensus
• Smart contract verification on the block explorer

Additionally, this EVM sidechain is connected to the XRPL using the same bridge design proposed in the cross-chain bridges (XLS-38d) specification.

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 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 launched on June 14 with a bridge to both XRPL and Ethereum. It is a blockchain-based NFT system with a focus on UX and metaverse, run by Futureverse. Futureverse and Ripple announced in 2022 that the Root Network will leverage the XRPL, specifically using XRP as a native currency. The Root Network:

• Will use XRP as the default gas token
• Will integrate the XRPL’s XLS-20 NFT standard
• Is being built from a fork of Substrate
• Will have EVM support for smart contracts
• Will use a delegated-Proof-of-Stake (dPoS) consensus mechanism
• Will use XRPL DEX to source liquidity
• Will offer staking and governance via the ROOT token
• Will offer users social recovery, management of assets, increased wallet flexibility, and a familiar Web2 experience through the account abstraction solution FuturePass

Flare Network

Flare Network is an EVM-based L1 network that has been awaited by the XRP community for several years. In accordance with FIP-01, 15% of the FLR token supply is being distributed to XRP holders from a 2020 snapshot. Flare’s focus on decentralized data and EVM compatibility should bring new functionality to the ecosystem. Flare Network’s testnet, Songbird, was launched as far back as Q3 2021. Currently, Flare is in Stage 1 of 3 of decentralizing the network by transitioning to a staking model.

Closing Summary

Q2 witnessed a strong focus on ecosystem development within the XRP Ledger. On the XRPL mainnet, this focus materialized through increased activity in various NFT transaction types. Notably, almost all NFT transaction categories experienced upward movement, leading to a 12.7% QoQ increase in average daily total NFT transactions.

Off of XRPL mainnet, sidechains such as Coreum and Root Network have yet to see the same adoption from the community. This is because Coreum and Root Network both recently launched in 2023, while NFTs on mainnet have always been available. Community interest in added mainnet support for NFTs via new transaction types, ecosystem infrastructure, and grants programs for NFT projects all suggest that sidechains will likely attract more users as their ecosystems develop and as interest in them grows.

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