Ripple CTO David Schwartz recently explained how the upcoming XRPL AMM feature will work regarding the potential for XRP holders to earn passive income.
Schwartz made this clear in a recent exchange regarding X. Notably, Anodos Finance co-founder Panos Mekras initially I took it I gave an analogy to X when I was trying to explain what was going to happen. XRPL AMM (Automated Market Maker).
He compared AMM to a self-sustaining market stall, where prices are determined by supply and demand rather than individual influence.
This mechanism automatically adjusts prices based on trading activity, ensuring constant flow without manual intervention.
In response to Mekras, community members expressed concerns about the risk of losing XRP on AMM. schwartz We have intervened to address these concerns.
He emphasized that as long as there are no bugs in AMM, the invariants will not break and safe investments will be guaranteed.
Ripple CTO destroys AMM system
Schwartz explained that when users provide liquidity to an AMM by depositing into the pool, they receive liquidity tokens specific to the AMM they contributed. Mr. Schwartz detailed a rather unconventional method of measuring the value of these tokens.
Unless there are bugs or flaws in the AMM implementation, it is considered impossible for certain invariants to be violated. According to the (admittedly strange) standard of that invariant, there is no chance of losing.
When you provide liquidity to an AMM and deposit into that account…
— David “JoelKatz” Schwartz (@JoelKatz) January 24, 2024
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This involves calculating the square root of the product of the first and second asset amounts received upon redemption of tokens divided by the number of liquidity tokens owned.
of AMM goals The idea is to increase this calculated value over time, regardless of the price of the underlying asset. This approach aims to turn volatility into a consistent increase in the actual value of the token.
This increase occurs even if the asset's ending price is the same as its starting price during the volatility period.
However, Schwartz cautioned that while this minimizes losses in certain scenarios, it does not guarantee an absolute impact on the decline in value.
Advantages of this system include the supposed impossibility of loss of value due to defined indicators, the ability to convert volatility into yield, and the opportunity to earn yield by using spreads to facilitate trading. It is included. Furthermore, if the value of any of the underlying assets declines, users may not suffer significant losses.
On the contrary, future XRPL AMM can present challenges. Even if asset prices rise, users may not benefit as much as they would if they held the assets directly.
Yields are not guaranteed and there is potential loss if prices decline. Additionally, at least he has exposure to two assets, and even a stable asset like the dollar remains subject to counterparty risk. Schwartz also pointed out that bugs can cause unforeseen consequences.
Passive income potential
In response to a community member's request for a numerical example, Schwartz offered Hypothetical scenario. His scenario was a minimal volatility situation where XRP fell from $0.50 to $0.40 and then back to $0.50, with a pool spread of 0.5%.
In this case, a user who initially put 2 XRP and $1 ($2 total) into the pool ended up with $1.79 worth of liquidity tokens during the drop to $0.40, and $2.0007 worth of liquidity tokens during the rise to $0.50. You ended up holding a dollar worth of liquidity tokens, resulting in a profit even though XRP ended at $0.50. Initial price ($0.50).
Schwartz acknowledged the simplicity of this example and emphasized that scenarios with frequent and small price fluctuations can yield larger profits. He emphasized that these calculations assume full arbitrage without considering the impact of liquidity takers.
on the other hand, XLS-30D modificationWe plan to implement AMM functionality on the XRP Ledger and are trying to achieve validator consensus.Basics of cryptography revealed yesterday The consensus reached 60%, with 21 verifiers voting yes. This number increased to 62% in 22 years.
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