Expert Explains How XRP Holders Can Generate Passive Income on XRPL AMM

XRP community figure and prominent financial consultant identifies an attractive passive income opportunity with the upcoming XRP ledger (XRPL) AMM.

Panos Mekras, a notable Financial Consultant and Founder of DigitalGen, recently highlighted an attractive opportunity for XRP community members to leverage the upcoming XRPL Automated Market Maker (AMM) for passive income.

Mekras underscored this opportunity in a recent post on X. He also clarified the concept of Impermanent Loss (IL) and how it is not as dreadful as investors perceive.

Today, we are going to talk about the importance of on-chain liquidity and why everyone should participate in the upcoming #XRPL AMM – #XLS30! ?1/22 pic.twitter.com/6oC5JH2XYf

— Panos ? {X} ? (@panosmek) August 30, 2023

A Passive Income Opportunity

He began by calling attention to the importance of on-chain liquidity and the role of AMMs. Mekras emphasized that liquidity, one of the most significant parts of a market, is crucial in determining asset prices. 

As a result, liquidity pools play a crucial role in decentralized finance, as they help introduce sufficient liquidity. According to him, they function as the backbone of decentralized exchanges, AMMs included.

A liquidity pool is a pool of funds locked in a smart contract. Its purpose is for trading and providing liquidity to decentralized exchanges, enabling users to swap tokens.

Liquidity pools are nothing without liquidity providers (LPs). LPs deposit funds to these liquidity pools to contribute to liquidity and earn a share of the pools’ trading fees. By doing so, they establish a market while simultaneously earning.

Mekras underscored that XRP community members could assume the role of LPs. He highlighted the vital role LPs play in the ecosystem. Due to the prospect of earning from trading fees, this is an attractive passive income opportunity.

Impermanent Loss

While the income-generating strategy appears attractive, most traders shy away from being LPs because of the concept of Impermanent Loss (IL). However, Mekras explained why IL might not be as dreadful as perceived. 

Impermanent Loss occurs when the value of assets in a liquidity pool changes over time, causing the pool’s value to differ from if the assets were simply held. It occurs when the prices of the tokens in the pool move away from their initial ratio.

While perceived as a setback, Mekras clarified that IL can be part of an effective strategy. For instance, LPs can leverage IL as an automated dollar-cost averaging (DCA) approach. 

By providing liquidity to an XRP/stablecoin pair, liquidity providers can accumulate more XRP in the face of price fluctuations.

Addressing the common fear of price surges, Mekras turned to charts to substantiate his claims. Even if XRP surges 200% to 600%, IL remains manageable, with much of it offset by earned fees. 

He demonstrated that IL remains negligible as long as relative prices of assets in a liquidity pool pair stay within a 50% range of the entry point. 

Moreover, he stressed the significance of the XRPL’s unique Continuous Auction mechanism. This concept enhances the AMM experience by distributing winning bid amounts to LPs, reducing impermanent loss exposure.

Mekras confidently predicted that pairs like XRP/USD and XRP/BTC hold the potential to generate substantial income and fees for LPs.