Ripple CTO Reveals How XRP Traders Could Profit with the XRPL AMM

Ripple CTO reveals how XRP traders and liquidity providers could profit from the forthcoming XRP Ledger (XRPL) Automated Market Maker (AMM).

The XRP community remains excited over the XLS-30D proposal, a long-standing initiative aimed at introducing an Automated Market Maker (AMM) to the XRP Ledger (XRPL). 

Recently, David Schwartz, the CTO of Ripple, provided valuable insights into the profit potential that traders and liquidity providers could expect with the implementation of XLS-30D.

Schwartz’s comments came in response to an elaborate thread made by an XRP community figure Lewis Jackson on X (fka Twitter). Jackson had sought to explain the mechanism of the upcoming XRPL AMM but noted that he could not provide valuable information on profitability due to several variants.

XRPL AMM’s Profit Potential

Schwartz highlighted a fascinating invariant that traders could rely on within the AMM. However, he confirmed that traders could rely on this invariant if the AMM has no bugs in its code. Recall that Schwartz had, in the past, explained how the AMM’s trading strategy occurs.

There is an interesting invariant. Assuming no bugs in the code, for a balanced contribution to the pool, you are guaranteed you can redeem your LP tokens for an amount of both assets whose product is equal to, or greater than, the product of the amounts you contributed. 1/2

— David "JoelKatz" Schwartz (@JoelKatz) August 2, 2023

When a trader adds two assets (like XRP and dollars) to a shared pool for trading, they receive LP (Liquidity Provider) tokens in return. These tokens represent the trader’s contribution to the pool. 

According to Schwartz, the native XRPL AMM’s design ensures that the trader can always redeem these LP tokens for an amount of both assets that, when multiplied, will equal the multiplied value of the assets they originally sent to the liquidity pool.

To elaborate further, Schwartz gave an instance. He used a case where XRP trades for $0.50 per token for the hypothetical scenario. 

In this case, he noted that a trader could add 10 XRP ($0.50 each) and $5 to the liquidity pool to get LP tokens. Notably, when the trader redeems the LP tokens he received to get back his XRP and dollars, the product of the resulting XRP and dollars will always be greater than or equal to 50.

Furthermore, the algorithm behind this system continuously works to increase the overall value of the assets in the pool, ensuring that the product of their amounts never goes down. This ensures that a trader always has the opportunity to get back at least the value of what he contributed, if not more.

The XRP Ledger AMM

While the XRP Ledger AMM undoubtedly holds immense potential for profit generation, there are still complexities to consider. As Jackson noted, estimating exact yields from the AMM remains challenging due to factors such as market conditions, trading volume, asset pairs, and fee structures.

In addition, Molly Elmore raised concerns about impermanent loss while responding to Jackson’s commentary. This phenomenon could affect liquidity providers when the value of deposited assets fluctuates while in the liquidity pool. 

Impermanent loss is an issue with liquidity pools. If you only got the assets to participate that’s not always a big deal. But with XRP people may be nervous about getting back less XRP than they put in initially

— Molly Elmore (@mollyelmore22) August 2, 2023

It is essential for traders to be aware of this risk and assess their risk tolerance when participating in the XLS-30D AMM.