Ripple CTO Explains How AMM Feature Will Enable XRP Holders To Earn Passive Income
January 26 2024 - 4:30PM
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The decentralized open-source blockchain, XRP Ledger, is set to
introduce more innovative solutions to XRP holders through its new
Automated Market Maker (AMM) feature. The XRP community is
currently buzzing with excitement as the Chief Technology Officer
(CTO) of Ripple, David Schwartz, unveils how the AMM offers a
unique avenue for earning passive income. XRPL AMM To Empower XRP
Holders In a recent X (formerly Twitter) post, Schwartz discussed
the ways an XRPL AMM could provide opportunities for XRP holders to
make regular income through the AMM’s distinct trading
mechanism. Related Reading: Bitcoin Whales Go On Buying Spree
As Price Dips, Here’s How Much They Bought When asked by an XRP
enthusiast about the potential risks of losing XRP investments if
they participated in the AMM, Schwartz responded by stating that
“it is not supposed to be possible to lose.” He clarified that the
occurrence of losses would mean there was a flaw or unexpected bug
in the implementation of the AMM. The Ripple CTO provided
details of how investors can make passive income through the AMM’s
liquidity pools. He stated that when a user provides liquidity to
an AMM by making a deposit to its pools, they will receive
“liquidity tokens” specific to the AMM liquidity pool they
deposited to. Illustrating the strategy and mechanics behind
the XRPL AMM, Schwartz revealed that the AMM works by permitting an
increase in the value of a user’s liquidity token. He explained
that this unique strategy was employed because it effectively
converts volatility into a higher value for a token over a period
of time. While the prospect of generating passive income
through the AMM exists, Schwartz emphasized that an AMM does not
prevent or safeguard against a decline in the actual value of your
position. Expatiating his words with an example, Schwartz
pointed out that if a user exchanged 1 XRP for $1 and after
applying the AMM strategy the user received 1.05 XRP worth $1.05,
then the strategy successfully increased the value of the XRP.
However, if the price of XRP in dollars decreases, the overall
value of your position may be lower. Token price reaches
$0.51 | Source: XRPUSD on Tradingview.com Advantages And
Disadvantages Of An AMM In a recent X post, co-founder of Anodos
Finance, Panos Mekras, provided a comprehensive definition of an
AMM and its impact on the XRPL ecosystem. Using an analogy, Mekras
described an AMM as a self-operating store where the price of items
is not fixed by a single entity but determined by the availability
of the item. Mekras revealed that when there is high demand
for an item, active trades increase, and the AMM adjusts the price
of items to reflect an inflated value. Conversely, if there is low
demand, the AMM lowers the price of items to encourage trade. In
essence, the AMM works by balancing the supply and demand system of
an item. Related Reading: Bitcoin Repayments: Mt Gox Starts
Verifying Addresses For 200,000 BTC In Payouts Schwartz also
emphasized the mechanics behind the XRPL AMM by listing out several
advantages and disadvantages of the feature. According to the
Ripple CTO, the benefits of the AMM include turning volatility into
yield, increasing yield by providing people willing to pay a spread
to trade and minimizing the risk of losing the value of your
assets. In contrast, the drawbacks of the XRPL AMM include
the absence of a guaranteed yield, potential financial losses if
the price of the token drops, exposure to counterparty risks, and
susceptibility to potential bugs in the AMM’s implementation.
Featured image from Finbold, chart from Tradingview.com
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