CoinMetrics, a firm that analyzes blockchain data for crypto investors, published a bombshell report this week which tells the story of how Ripple Labs has allegedly misrepresented its escrow system. Ripple has effectively misrepresented the amount of XRP transferred back to escrow at least twice. More importantly, the bank-friendly cryptocurrency’s escrow process diverges significantly from the way it was presented initially.
RIPPLE ESCROW SYSTEM: NOT WORKING AS ADVERTISED
Ripple is supposed to take 1 billion XRP out of its fund every month, liquidate what it needs, and return the remainder to escrow. The recovered funds are supposed to go to the end of the escrow line, and 1 billion XRP should be available to Ripple every month. Over time, additional months will be added, as the company doesn’t use anywhere near that amount.
Trust, but verify. 10ks and 10qs will soon be supplemented by standard on chain audits. This is imminent. The ledger is the ground truth. https://t.co/qI2cYBftHm
— nic carter (@nic__carter) May 16, 2019
However, CoinMetrics found that Ripple moves the funds to an escrow contract designated for unlocking much earlier than you would expect.
- “In February (month 1) they unlocked another 1 billion XRP and used 100 million of it. Instead of locking another 900 million XRP in month 56 (September 2022), the first month in which no escrow was scheduled to release, the remaining 900 million were escrowed in two different contracts: one of 100 million XRP expiring on month 55, putting the XRP escrowed for that month at 1 billion XRP, and another one of 800 million XRP expiring on month 56.”
- “Of particular importance is that month 55 had already previously been designated as a month in which an escrow would be released. According to Ripple’s original description of the escrow mechanism, all of the unused funds in month 1 of the scheme should have been scheduled to release in month 56.”
This differing method of re-escrowing funds functionally accelerates the release of funds by as much as 21 years, depending on how many XRP Ripple liquidates each month.
HOW LONG WILL THE ESCROW ACTUALLY LAST?
Changing crypto market tides could make that figure higher or lower. The XRP price has been relatively stable until the recent overall crypto bull run. We can expect that when prices are higher, Ripple will liquidate less. When prices are lower, they’ll have to liquidate more.
CS spoke to Nic Carter, co-founder of CoinMetrics, who believes the misreporting aspect may be a simple accounting error. He points out that the misrepresentation is “not substantial,” saying:
“The error we found was fairly small in the grand scheme. It may have just been an accounting mistake.”
Ripple declined to comment to CoinMetrics about the report, although it was shared with them prior to its publication. CS has also reached out for comment and will update this article upon receiving a reply.
The CoinMetrics team had to assess Ripple’s blockchain and the company’s escrow as part of adding XRP to its platform. It further finds that an unknown entity receives what amounts to a salary in XRP every month. The funds originated with Ripple and are locked into contracts expiring twice per month for several years. It notes that the majority of the funds find their way to Bitstamp, where they are presumably traded for other assets or fiat.
This is not the first time, nor is it likely to be the last, that researchers have called Ripple Labs’ holdings into question. Starting out with 55% of the tokens you issue will have that effect. XRP fanatics later threatened Ryan Selkis, one of the researchers who determined that Ripple’s market capitalization is vastly overstated.