XRP Investor Burns 1M LP Tokens in XRPL AMM Auction Bid

An XRP investor trading on one of the XRPL AMM pools has made a significant move by burning 1 million Liquidity Provider (LP) tokens in a bid for the XRP/USD pool auction. 

Neil Hartner, a Software Engineer at Ripple, called attention to this development in a recent post on X. Hartner emphasized that these 1 million LP tokens, which constituted 3% of the total LP tokens circulating in the pool at the time, was valued at approximately $1,500.

I found a baller XRPL AMM auction bid. 3 days ago, someone bid 1M LP tokens on the AMM auction for the XRP/USD pool. At the time, this bid was 3% of all LP tokens in the pool and worth about $1500. pic.twitter.com/8jqbMxwdL6

— Neil Hartner (@illneil) April 17, 2024

Notably, the XRPL AMM functionality boasts an attractive feature called continuous auction. This feature gives traders, especially arbitrageurs, an opportunity to place auction bids in certain pools for the right to enjoy zero-fee trades within a period of time.

However, when a trader wins such a bid, the pool burns the LP tokens used by the trader to enter the auction. LP tokens are not directly equivalent to XRP, USD, or any other assets but represent a proportional share of the liquidity pool. 

XRP Trader Burns 1M LP Tokens

Hartner confirmed that, at the time of the bid in question, the pool contained about 30 million LP tokens, comprising 50,000 XRP (valued at approximately $25,000) and another $25,000 in USD. This brought the total worth of the 30 million LP tokens in the XRP/USD (GateHub) pool to $50,000.

As a result, the 1 million LP tokens equated to a 3% stake in the pool’s total worth. Interestingly, four days later, the pool size has recorded an astronomical expansion, currently holding 317.11 million LP tokens with over 506K XRP and 242K USD, per XRPScan data.

Due to the design of the XRPL AMM code, the burning of the 1 million LP tokens had a positive impact on the remaining LP tokens in the XRP/USD pool at the time. This represents one of the largest bids in recent times, and Hartner stressed that the trader was not fully informed on how the feature works.

An XRP community figure revealed that the yield of the XRP/USD pool outperformed the XRP/USDC pool on April 15 due to the effects of this auction bid. Hartner himself noted a 3% increase in the value of his tokens within the pool, underscoring the auction’s influence on price.

Yeah, GateHub USD pool. I had a small amount of tokens in the pool for tracking purposes and noticed my tokens went up in value by 3% that day

— Neil Hartner (@illneil) April 18, 2024

The XRPL AMM Continuous Auction Feature

The continuous auction feature in the XRPL AMM system aims to mitigate impermanent loss, a risk faced by liquidity providers when asset prices fluctuate within a liquidity pool. This mechanism incentivizes arbitrageurs to participate in bidding for the opportunity to exploit price disparities between AMM pools and external markets.

To achieve this, arbitrageurs first engage in bidding through the AMMBid transaction, vying for auction slots. The highest bidder secures the slot and can conduct trades with low trading fees, enabling them to capitalize on price differentials while worrying less about fees.

The proceeds from a successful bid are divided between the current slot holder and the pool, while a portion of the LP tokens involved in the bid are burned, thereby augmenting the remaining LPs’ stake in the pool.

Notably, the XRP/USD pool has a trading fee of 0.533%. However, data from XRPScan indicates that this fee has been reduced to 0.053% for the trader who currently holds the auction slot at the reporting time. Meanwhile, the total XRP locked across all pools has increased to 2.35 million, up from the previous 2.2 million.