Panos Mekras, the visionary behind DigitalGen, recently shared insights about a potential avenue for XRP holders to earn passive income on XRP Ledger (XRPL) Automated Market Maker (AMM).
In a recent post on X, Mekras delved into the upcoming XRPL AMM and the opportunity it provides for XRP community members to generate passive income. He also dispelled the misconceptions surrounding Impermanent Loss (IL), showing how it could be used as part of a strategy and making it a more appealing prospect.
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
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The Gateway to Passive Income
Mekras opened by emphasizing the significance of on-chain liquidity and the role of AMMs. He pointed out that liquidity pools are integral to decentralized finance and exchanges and are a key factor influencing asset prices. In his words, “Liquidity is one of the most important aspects of every market and asset.”
Liquidity pools are pools of funds locked in smart contracts and they are essential to AMMs. He described liquidity pools as the backbone of decentralized exchanges. This is because they provide funds to facilitate trading on these exchanges and provide liquidity for swaps between tokens.
The lifeblood of these pools comes from liquidity providers (LPs). They deposit funds to the liquidity pools to help establish the market and earn a share of trading fees while doing so.
Mekras urged XRP holders to take on the vital role of LPs. By doing so, they contribute to liquidity and enjoy the benefit of earning trading fees as passive income.
Cracking the Impermanent Loss Myth
Addressing a common concern, Mekras unravels the mystery of Impermanent Loss (IL). IL occurs when there is a change in the value of assets in the liquidity pool over time, causing divergence from the hypothetical value if people simply hold on to their assets. It is directly linked to token price fluctuations.
Contrary to popular belief, Mekras presented a unique perspective. He suggested leveraging IL strategically, comparing it to an automated dollar-cost averaging (DCA) technique.
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To address the problem of price surges, he demonstrated that IL would remain manageable and most of it mitigated by the fees earned even if XRP skyrocketed 200% to 600%. He highlighted that IL would remain under 2% as long as asset prices remain within 50% of the entry.
He pointed out that IL would not be a factor in the short or medium term with less volatile tokens specifically highlighting XRP/USD and XRP/BTC pairs as pairs that could generate the most income/fees.
Finally, Mekras pointed out that the unique Continuous Auction mechanism of the XRPL can compensate LPs by distributing winning bid amounts for each AMM pool, further mitigating exposure to IL.
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