On Tuesday, the bitcoin liquidity protocol Velar unveiled Dharma, an automated market maker (AMM) designed to enhance decentralized finance liquidity within the Bitcoin realm. The inaugural version of Velar’s Dharma is set to function on the Bitcoin layer two (L2) Stacks, featuring an initial pairing of two tokens. Velar’s Strategy to Elevate Bitcoin Within the […]
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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.
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.
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
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.
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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Ripple chief technology officer David Schwartz has advocated for XRP Ledger (XRPL) validators to support an automated market maker (AMM) feature, but only if there is consensus within the community.
On X (formerly Twitter), Schwartz discussed the XRPL’s AMM feature. In his initial post, Schwartz referred to AMMs as an intriguing part of decentralized finance.
The XRP Ledger is a decentralized blockchain with XRP (XRP) as its native asset. It is known for its speed and scalability, making it suitable for various financial applications, including cross-border payments and remittances.
In response to a community member’s question about the timeline for AMMs going live on the XRPL after governance voting, Schwartz stated that if the majority supports the amendment, the changes could be implemented in as little as two weeks.
In general though, validators shouldn’t vote YES individually. The community should make a decision and then validators should nearly all vote YES when they believe the community is on board and enough nodes support the change.
The amendment voting process is intended to…
— David “JoelKatz” Schwartz (@JoelKatz) October 6, 2023
Expanding on the significance of a majority vote, Schwartz emphasized that no validators currently endorse the vote to the best of his knowledge. The introduction of the AMM feature occurred with the release of rippled version 1.12.0, which also brought the potential clawback feature. Adding an AMM is not limited to introducing a new trading engine; it will also enable integration with the XRPL decentralized exchange.
Despite the significance attributed to this feature, Schwartz advised validators against voting independently to promote these modifications. Instead, he emphasized that “the community should reach a consensus first, and then validators should overwhelmingly vote YES when they perceive that the community is in agreement and sufficient nodes endorse the adjustment.“
In addition to his prominent role in Ripple, Schwartz is renowned for his informative articles and commitment to championing decentralization.
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Lately, he dispelled misunderstandings concerning the clawback feature, often seen as an intrusion on XRPL users. He clarified that the feature aims to safeguard developers from potential legal liabilities within the ecosystem.
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