Ripple Reddit user...ripcurldog (thanks m8)
https://ripple.com/files/xrp_cost_model_paper.pdfVery informative, highly reccomend every Rippler reads this.
*As a digital asset, XRP is a useful trading instrument to reduce spreads and expedite market
thickness. In this paper, we will dive deeper into this concept. We will compare how cross-border
payment processing works in legacy systems versus on Ripple and on Ripple using XRP as a
bridge asset. We will detail an industry-first ROI analysis of distributed financial technology and
digital assets for global interbank transactions.
*
Page 6
The Cost-Cutting Case for Banks - The ROI of Using Ripple and XRP for Global Interbank Settlements
Ripple. All Rights Reserved.
Economic Implications of a Universal
Bridge Asset
Banks currently incur significant infrastructure costs processing cross-border payments.
Employing Ripple and XRP can help banks eliminate or lower these costs:
•
Foreign Exchange:
The cost of spread for the purchase and sale of a currency pair in
the wholesale market at institutional rates. This spread can be between fiat currencies or
between fiat currency and XRP held on the bank’s balance sheet. When XRP is used, the
model assumes that banks hold XRP on their balance sheets and provide their own liquidity
for FX transactions. Third-party market makers can also be used.
•
Currency Hedging:
The cost of hedging a basket of currencies held in nostro accounts
globally.
•
Treasury Operations:
The funding cost required to maintain account minimums, the
overhead of managing currencies and counterparties across accounts, and the cost of
occasionally rebalancing
7
cash between those accounts locally and internationally.
•
Liquidity:
Liquidity costs have two components: the cost of capital locked “in-flight” as an
international wire is processed (typically two days) and the time to fund the local nostro
account (typically one day depending on the local rail). Liquidity cost can be calculated as the
cost of funds applied to the time-weighted average amount of capital locked up.
•
Payment Operations:
The manual intervention cost of exceptions and error handling
requiring headcount and the cost of using local rails.
•
Basel III (LCR)
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:
The opportunity cost to the sending institution of holding lower-yielding,
high-quality liquid assets (as designated by pending Basel III regulations) against credit
exposure during the in-flight period.
For a representative respondent bank
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with $12 billion in annual payment volume (across 5
corridors, 157,000 transactions/month, global average transaction size of $6,300 for international
transactions) and a 6 percent cost of capital
*
page 9
Now let’s evaluate cost savings to our representative bank using Ripple and XRP as a universal
bridge asset. The cost model below assumes our same respondent bank converts 50 percent
of its payments-related float into XRP after implementing Ripple, custodying the XRP itself.
Banks can either source and custody XRP themselves or contract third-party liquidity providers. 
Currency hedging is the only cost with an initial, short-term increase due to the potential higher
volatility of XRP as a new asset. As XRP gains usage, this volatility is expected to trend downward
page 11
This model includes a conservative assumption of hedging costs with initially high volatility of
XRP. However, institutional holdings and active trading of XRP can greatly reduce the volatility of
XRP, significantly lowering the hedging costs. In a low volatility state,
assuming the volatility of
XRP is the same as that of a basket of liquid global currencies, costs can decrease an additional
3.8 bps ($10 billion system-wide)
21 or 60 percent compared to the current system, translating to
total system-wide cost savings of over $33 billion annually with lower volatility of XRP.
An incentive program stimulates XRP adoption in market making by rebating liquidity providers
for quoting against XRP in the immediate term, thereby supporting spread reduction over time
against a new asset. The incentive serves to offset volatility risk for market makers and provides
an algorithmic distribution schedule for XRP. As adoption and use of XRP increases, so does its
liquidity and price stability.
More gd info
https://ripple.com/files/ripple_vision.pdfWhat’s in it for third-party liquidity providers?
Through its novel design, Ripple facilitates competitive bidding on liquidity provisioning.
Third-party market makers, such as hedge funds, enjoy access to an entirely new and ever-
growing opportunity to provide liquidity for global payments, profiting from spreads.
